E-Book Technical Analysis

8/8/2019 E-Book Technical Analysis

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Technical AnalysisTechnical Analysis

A Basic IntroductionA Basic Introduction

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Meydan & Co.Meydan & Co. © © 22

ContentsContents

Technical AnalysisTechnical Analysis 33-- Why it works and its limitations

Why it works and its limitations

Most Common Chart TypesMost Common Chart Types 55

-- Candle, Line & Bar Charts

Candle, Line & Bar Charts Support and resistance levelsSupport and resistance levels 1111

Trend linesTrend lines 1212-- Drawing lines correctly

Drawing lines correctly-- Recognising trend line breaks andRecognising trend line breaks and ‘‘false breaksfalse breaks’’

Chart patternsChart patterns 1313-- The major continuation and reversal patterns

The major continuation and reversal patterns

Moving averagesMoving averages 2020-- The different types of moving average lines

The different types of moving average lines-- Which periods to useWhich periods to use-- Moving average based trading techniquesMoving average based trading techniques

OscillatorsOscillators – – Most Popular ThreeMost Popular Three 2727-- MACDMACD

-- RSIRSI

-- StochasticsStochastics





Technical AnalysisTechnical Analysis – – Why?Why?

Technical analysis is the study of PriceTechnical analysis is the study of Price

Movement, Volume and Price Relationships overMovement, Volume and Price Relationships overtime periods.time periods.

We analyse charts because the market repeatsWe analyse charts because the market repeats

itself and if we can see these reitself and if we can see these re--occurring evenoccurring eventhough they may not be an exact repeat it willthough they may not be an exact repeat it willhelp us to anticipate the future price movement.help us to anticipate the future price movement.

Many traders use technical analysis andMany traders use technical analysis andeveryone sees the same patterns and this is aeveryone sees the same patterns and this is ahuge psychological factor in the movement ofhuge psychological factor in the movement of

prices.prices.





Technical Analysis LimitationsTechnical Analysis Limitations

Technical analsis is subjectiveTechnical analsis is subjective – – itit

depends on the person who is doing thedepends on the person who is doing theanalyses.analyses.

They give current and past informationThey give current and past informationand can not predict the futureand can not predict the future – – they canthey can

however, indicate a high probability markethowever, indicate a high probability market

movement.movement.





Charts & Chart TypesCharts & Chart Types

Charts show us the movement of price against aCharts show us the movement of price against a

time frame with the historical data.time frame with the historical data. Charts allow us to anticipate before hand whereCharts allow us to anticipate before hand where

prices may be going and help us to plan a highprices may be going and help us to plan a high

probability transaction.probability transaction. Often appearing chart patterns do not alwaysOften appearing chart patterns do not always

work, but they are indication of a high probabilitywork, but they are indication of a high probability

outcome. If we position our selves accordinglyoutcome. If we position our selves accordinglywe can use extra tools to confirm whether thewe can use extra tools to confirm whether theprice is going to move as foreseen or not.price is going to move as foreseen or not.





Charts & Chart TypesCharts & Chart Types

Technical analysts use different charts forTechnical analysts use different charts for

different time periods. There are tradersdifferent time periods. There are traderswho will trade for an hour or two a day, orwho will trade for an hour or two a day, or

day traders that will check the market forday traders that will check the market for

10 minutes place and order and leave it10 minutes place and order and leave it

alone.alone.





Most Common Chart TypesMost Common Chart Types

-- Candle Bar ChartsCandle Bar Charts

Bear candle

Bull candle






-- Line ChartsLine Charts






-- Bar ChartsBar Charts





Using ChartsUsing Charts

The chart a trader uses depends on theThe chart a trader uses depends on the

trader. Some will use a combination oftrader. Some will use a combination ofcharts in different time periods and forcharts in different time periods and fordifferent currencies or commodities.different currencies or commodities.

There are traders who sometimes designThere are traders who sometimes designtheir own charts from charting tools suchtheir own charts from charting tools such

as bull and bar charts.as bull and bar charts.

In any case we need to know how to useIn any case we need to know how to usethem and what to do with them.them and what to do with them.





Support & ResistanceSupport & ResistanceSupportSupport -- The levels where prices resist falling any further.The levels where prices resist falling any further.

ResistanceResistance – – The price levels where prices resist an increase in price.The price levels where prices resist an increase in price.

Support

Resistance

Break out





Trend LinesTrend Lines

Trend line

Determine the direction of the price. Trendlines can be classified as strong& weak. The proper drawing, use and application of trendlines help tradersto keep on the right side of the trade.

False Breaks





Chart patternsChart patterns

-- The major continuation and reversal patternsThe major continuation and reversal patterns

Identification of chart patterns may revealIdentification of chart patterns may reveal

the future market behavior basing on thethe future market behavior basing on theassumption that the way the market forcesassumption that the way the market forces

interact does not change significantly withinteract does not change significantly with

time and may be analyzed on the historicaltime and may be analyzed on the historical

charts.charts.






-- The major continuation patternsThe major continuation patterns

A Rectangular pattern signals aA Rectangular pattern signals a

continuation in the market trend andcontinuation in the market trend and

constitutes a trading range during aconstitutes a trading range during a

pause in the trend. The pattern ispause in the trend. The pattern is

easily identifiable by two highs and twoeasily identifiable by two highs and two

lows, that can be connected by twolows, that can be connected by twoparallel lines, thus forming the top andparallel lines, thus forming the top and

bottom of a rectangle. Rectangles arebottom of a rectangle. Rectangles are

sometimes referred to as tradingsometimes referred to as trading

ranges, consolidation zones orranges, consolidation zones or

congestion areas.congestion areas.

Rectangle







Flags and Pennants are shortFlags and Pennants are short--term continuation patterns thatterm continuation patterns that

mark a small consolidation beforemark a small consolidation before

the previous move resumes.the previous move resumes.

These patterns are usuallyThese patterns are usuallypreceded by a sharp advance orpreceded by a sharp advance or

decline with heavy volume, anddecline with heavy volume, and

mark a midmark a mid--point of the move.point of the move.

Flags & Penants






-- The major reversal patternsThe major reversal patterns

Head and ShouldersHead and Shouldersreversal pattern formsreversal pattern forms

after an uptrend, and itsafter an uptrend, and itscompletion marks a trendcompletion marks a trendreversal. The patternreversal. The patterncontains three successivecontains three successive

peaks with the middlepeaks with the middlepeak (head) being thepeak (head) being thehighest and the twohighest and the twooutside peaks (shoulders)outside peaks (shoulders)

being low and roughlybeing low and roughlyequal. The reaction lowsequal. The reaction lowsof each peak can beof each peak can beconnected to formconnected to form

support, or a neckline.support, or a neckline.

Head & Shoulders Top







The Head and Shoulders bottom isThe Head and Shoulders bottom issometimes referred to as "an inversesometimes referred to as "an inversehead and shoulders". The patternhead and shoulders". The patternshares many common characteristicsshares many common characteristicswith the classical H&S formation, butwith the classical H&S formation, butrelies more on volume patterns forrelies more on volume patterns forconfirmation.confirmation.

As a major reversal pattern, the HeadAs a major reversal pattern, the Headand Shoulders bottom forms after aand Shoulders bottom forms after adowntrend, and its completion marks adowntrend, and its completion marks achange in trend. The pattern containschange in trend. The pattern containsthree successive troughs with thethree successive troughs with themiddle trough (head) being themiddle trough (head) being the

deepest and the two outside troughsdeepest and the two outside troughs(shoulders) being more shallow. In its(shoulders) being more shallow. In itsmost classical form, the two shouldersmost classical form, the two shouldersshould be equal in height and width.should be equal in height and width.The neckline that connects the lowsThe neckline that connects the lowsforms resistance.forms resistance.

Head & Shoulders Bottom







Although there can beAlthough there can bevariations, the classic doublevariations, the classic double

bottom usually marks anbottom usually marks anintermediate or longintermediate or long--termtermchange in the underlying trend.change in the underlying trend.Many potential double bottomsMany potential double bottomscan form along the way down,can form along the way down,but until the key resistance isbut until the key resistance isbroken, a reversal cannot bebroken, a reversal cannot beconfirmed. The double bottomconfirmed. The double bottomis a major reversal pattern thatis a major reversal pattern thatforms after an extendedforms after an extendeddowntrend. As its namedowntrend. As its nameimplies, the pattern is made upimplies, the pattern is made upof two consecutive troughs thatof two consecutive troughs thatare roughly equal, with aare roughly equal, with a

moderate peak in between.moderate peak in between.

Double Bottom







The symmetrical triangle, also known as a coil,The symmetrical triangle, also known as a coil,usually forms during a trend as a continuationusually forms during a trend as a continuationpattern. The pattern contains at least two lowerpattern. The pattern contains at least two lower

highs and two higher lows. When these points arehighs and two higher lows. When these points areconnected, the lines converge as they are extendedconnected, the lines converge as they are extendedand the symmetrical triangle takes shape.and the symmetrical triangle takes shape.

The ascending triangle is a bullish formation thatThe ascending triangle is a bullish formation thatusually forms during an uptrend as a continuationusually forms during an uptrend as a continuationpattern. There are instances when ascendingpattern. There are instances when ascendingtriangles form as reversal patterns at the end of atriangles form as reversal patterns at the end of adowntrend, but they are typically continuationdowntrend, but they are typically continuationpatterns. Regardless of where they form, ascendingpatterns. Regardless of where they form, ascendingtriangles are bullish patterns that indicatetriangles are bullish patterns that indicateaccumulation.accumulation.

The descending triangle is a bearish formation thatThe descending triangle is a bearish formation thatusually forms during a downtrend as a continuationusually forms during a downtrend as a continuation

pattern. There are instances when descendingpattern. There are instances when descendingtriangles form as reversal patterns at the end of antriangles form as reversal patterns at the end of anuptrend, but they are typically continuation patterns.uptrend, but they are typically continuation patterns.Regardless of where they form, descendingRegardless of where they form, descendingtriangles are bearish patterns that indicatetriangles are bearish patterns that indicatedistribution.distribution.

Symmetrical Triangles





Moving AveragesMoving Averages

Trend lines are the basic indicator of trend,Trend lines are the basic indicator of trend,

but they are quite subjective, dependingbut they are quite subjective, dependingon the eye of the beholder. So traders useon the eye of the beholder. So traders use

additional indicators to help determineadditional indicators to help determine

trends.trends.






Moving AveragesMoving Averages -- Perhaps the simplestPerhaps the simplest

to understand and most widely usedto understand and most widely usedtechnical indicator is a moving average,technical indicator is a moving average,which smoothes past data to illustratewhich smoothes past data to illustrate

existing trends or situations where a trendexisting trends or situations where a trendmay be ready to begin or is about tomay be ready to begin or is about toreverse. A moving average helps you spotreverse. A moving average helps you spot

market direction over time rather thanmarket direction over time rather thanbeing caught up in shortbeing caught up in short--term erraticterm erraticmarket fluctuations.market fluctuations.








Using Moving AveragesUsing Moving AveragesA number of different time period moving averagesare used on this chart to determine the short term &long term direction of price movement.





Moving AveragesMoving AveragesWhich Periods To UseWhich Periods To Use

Moving Average time periods dependsMoving Average time periods depends

mostly on the trader, the strategy, the timemostly on the trader, the strategy, the timeperiod used to trade and also on theperiod used to trade and also on thecommodity and the currency pair traded.commodity and the currency pair traded.

Generally traders will use three to fourGenerally traders will use three to fourmoving average lines with short term andmoving average lines with short term andlong term levels in order to determine thelong term levels in order to determine thedirection of the trend and locations wheredirection of the trend and locations wherethe trend is changing.the trend is changing.

M i AM i A






Moving average based trading techniquesMoving average based trading techniques

Some use combinations such as 5Some use combinations such as 5--day,day,

1010--day and 20day and 20--day moving averages,day moving averages,taking crossovers of the shorter movingtaking crossovers of the shorter moving

average over the longer moving averageaverage over the longer moving average

as a trading signal.as a trading signal.

Still others use additional, longerStill others use additional, longer--termterm

moving average lines as another point ofmoving average lines as another point ofsupport or resistance.support or resistance.

M i AM i A






Moving average based trading techniquesMoving average based trading techniques

If you were using a moving average cross over

you would have entered a short transaction here!

Depending on your trading strategyyou may have exited in a few placeswith a lot of profit.





OscillatorsOscillators – – MACDMACD

(Moving Average Convergence / Divergence)(Moving Average Convergence / Divergence)

MACD is a more detailed method of usingMACD is a more detailed method of using

moving averages to find trading signalsmoving averages to find trading signalsfrom price charts. MACD plots thefrom price charts. MACD plots thedifference between a longerdifference between a longer--termterm

exponential moving average and a shorterexponential moving average and a shorterexponential moving average (the chart inexponential moving average (the chart inthe next slide uses 21 days and 9 days).the next slide uses 21 days and 9 days).

Then a 9Then a 9--day moving average of thisday moving average of thisdifference is generally used as a triggerdifference is generally used as a triggerline.line.






(Moving Average Convergence / Divergence)(Moving Average Convergence / Divergence)

O C






(Moving Average Convergence / Divergence)(Moving Average Convergence / Divergence)The MACD indicator is used in three ways:The MACD indicator is used in three ways:

Crossover signals.Crossover signals. When the MACD line crosses below the triggerWhen the MACD line crosses below the triggerline, it is a bearish signal; when it crosses above it, it's a bline, it is a bearish signal; when it crosses above it, it's a bullishullishsignal. Another crossover signal occurs when MACD crosses abovesignal. Another crossover signal occurs when MACD crosses aboveor below the zero line.or below the zero line.

OverboughtOverbought--oversold.oversold. If the shorter moving average pulls awayIf the shorter moving average pulls away

from the longer moving average dramatically, it indicates the mafrom the longer moving average dramatically, it indicates the marketrketmay be coming overmay be coming over--extended and is due for a correction to bringextended and is due for a correction to bringthe averages back together.the averages back together.

Divergence.Divergence. As with other studies, traders look at MACD to provideAs with other studies, traders look at MACD to provideearly signals or divergences between market prices and a technicearly signals or divergences between market prices and a technicalal

indicator. If the MACD turns positive and makes higher lows whilindicator. If the MACD turns positive and makes higher lows whileeprices are still going side ways, this could be a strong buy sigprices are still going side ways, this could be a strong buy signal.nal.Conversely, if the MACD makes lower highs while prices are makinConversely, if the MACD makes lower highs while prices are makinggnew highs, this could be a strong bearish divergence and a sellnew highs, this could be a strong bearish divergence and a sellsignal.signal.

OO ill SRSI





OscillatorsOscillators – – RSIRSI

(Relative Strength Index)(Relative Strength Index) The main purpose of the Relative Strength Index (RSI ) is toThe main purpose of the Relative Strength Index (RSI ) is to

measure the market's strength or weakness.measure the market's strength or weakness.

A high RSI reading, above 70, suggests an overbought orA high RSI reading, above 70, suggests an overbought orweakening bull market. Conversely, a low RSI number, below 30,weakening bull market. Conversely, a low RSI number, below 30,implies an oversold market or dying bear market. However, blindlimplies an oversold market or dying bear market. However, blindlyyselling when the RSI is above 70 or buying when the RSI is belowselling when the RSI is above 70 or buying when the RSI is below30 can be an expensive trading system. A move to those levels is30 can be an expensive trading system. A move to those levels is aasignal that market conditions are ripe for a market top or bottosignal that market conditions are ripe for a market top or bottom, butm, butit does not, in itself, indicate a top or a bottom.it does not, in itself, indicate a top or a bottom.

Although you can use the RSI as an overbought and oversoldAlthough you can use the RSI as an overbought and oversoldindicator, like many indicators, it works best when a failure swindicator, like many indicators, it works best when a failure swingingoccurs between the RSI and market prices. For example, the markeoccurs between the RSI and market prices. For example, the markett

makes new highs after a bull market setback but the RSI fails tomakes new highs after a bull market setback but the RSI fails toexceed its previous highsexceed its previous highs – – Divergence.Divergence.

O illO ill t RSIRSI






(Relative Strength Index)(Relative Strength Index)

Note how the RSI is indicatinga drop in price. You can catchthese moves often with RSI.

O illO ill t RSIRSI






(Stochastics)(Stochastics)

The basic premise of the stochastic indicatorThe basic premise of the stochastic indicator

revolves around the position of the close relativerevolves around the position of the close relative

to the high or low of the day. During periods ofto the high or low of the day. During periods of

price decreases, daily closes tend to accumulateprice decreases, daily closes tend to accumulate

near the extreme lows of the day. During periodsnear the extreme lows of the day. During periodsof price increases, closes tend to accumulateof price increases, closes tend to accumulate

near the extreme highs of the day. Thenear the extreme highs of the day. The

stochastic study is an oscillator designed tostochastic study is an oscillator designed toindicate oversold and overbought marketindicate oversold and overbought market

conditions.conditions.

O ill tO ill t RSIRSI






(Stochastics)(Stochastics)

Note how the stochastic levels

are showing the places whereprices are turning the other way.




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E-Book Technical Analysis