Brain Teasers

You have 8 red and 16 blue socks. There’s no light in your room, so you have to choose your socks in the dark. What’s the minimum # of socks you need to choose to ensure you have at least a matching pair.

Answer

Three Two socks can be different, but a third must

match one of the first two

Technicals + Algo. Trading

3

What is Technical Analysis (TA)

What determines the price of ____? Fundamental vs. Technical Analysis

Fundamentals = Valuations Technicals = Market Action

TA is probabilistic Says that this is “likely” to happen

4

Assumptions

Prices SOMETIMES move in trends “Markets may witness extended periods

of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal is to identify those periods” –Shcwager

History repeats itself Because of market psychology

Market efficiency

5

Charting Patterns

Visualize price movements Can be simple “eyeballing intuition”

or looking for specific patterns Many charts use Candlesticks

6

Eyeballing

Trade on up/downtrends Breaks support/resistance

7

Head and Shoulders

8

Head and Shoulders

Target = High/low point -/+ neckline The more level the neck, the more

reliable the pattern

9

Double Top/Bottom

Have to keep tight stops in case support/resistance is broken

10

Combination Patterns

Strong signal

11

Hook Reversal

Most reliable after strong trends

12

Hammers

13

RSI

Momentum indicator Shows breakouts or trend reversals

Leading indicator RSI=Avg closes up / Avg closes down 14,16,9,25 day lookback

14

MACD Momentum indicator Lagging indicator MACD = difference b/w fast and slow moving

averages Generally 12, 26 period EMA’s

Signal line 9 period EMA

Can turn into leading indicator Works best when used with another indicator

15

MACD

16

Bollinger Bands

Price/Volatility levels over time Consists of 3 bands

Usually 20 bar SMA, 2 std devs

Gives a relative level of high/low Multiple ways of trading

Most effective is range trading during low vol periods

Options implications too

17

Bollinger Bands

18

When to use TA

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Buffet

Entry/Exit prices Algorithmic Traders (computers) Markets

Currencies = Great Futures = Great Stocks = Decent

19

Algorithmic Trading

All you know is prices Understandable why algorithms almost

always are technicals based

All algos have a thesis behind them (when X happens, Y is likely to happen)

Can be very hard to code ideas sometimes

20