Introduction to Technical Analysis

)

2

Schools of Stock AnalysisFundamental analysisTechnical analysis

3

Fundamental AnalysisA fundamental analyst tries to discern

the logical worth of a security based on its anticipated earnings stream

The fundamental analyst considers:Financial statementsIndustry conditionsProspects for the economyEtc.

4

Limitations of Fundamental AnalysisTime ConstraintDifficult to project future growth based on

historical pricesBased on estimates, assumptions &

forecastsSpecific to company & industryBias of AnalystDifficult to estimate fair/ intrinsic value

5

Technical AnalysisA technical analyst attempts to predict the supply and

demand for a stock by observing the past series of stock prices & volumes

Financial statements and market conditions are of secondary importance to the technical analyst

Does not attempt to measure a security's intrinsic value, but instead use charts & other tools to identify patterns that can suggest future activity

Is the process of identifying trend reversal at an early stage to formulate the buying & selling strategy, to gain from such a change

The basic foundations or premises of technical analysis are that a stock's current price discounts all information available in the market, that price movements are not random, and that patterns in price movements, in very many cases, tend to repeat themselves or trend in some direction.

6

Why Technical AnalysisIts versatileCan be learnt by anybody: No finance,

economics or statistician background required

Can be applied to any time frame of analysisCan be applied to Commodity, Currency as

well apart from stocksUsing technical analysis informed decision to

trade/ invest can be taken

Comparison between Technical & Fundamental Analysis

Technical Analysis Fundamental Analysis

Only focuses on past price data

Focuses on financial strength,earning, profitability, economic outlook etc.

More useful in predicting short term price movement

More useful in predicting long term price movement

Not committed to buy or holdpolicy

Committed to buy or holdpolicy

Target price is estimated based on study of price & volume data

Target price is estimated based on study of company financials and business outlook

Use of Technical AnalysisTechnical Analysis highlight price situations thatmay be worth considering in researching aninvestment activity.

Technical Events can be used by investors tomake more informed decisions about when to:

Enter a new position (either a Long position or a Short position)

Close an existing position Wait for a better time to take action

Can we do trading using the data

Can we do trading using the data

Limitations of Technical Analysis

Technical Analysis is truly remarkable, but it has some

imperfections due to the following:

Economic Data Geopolitical Events Natural Calamities & Disasters Internal Conflict or War Acts of Terrorism

Components of Technical Analysis

Technical Analysis is based entirely on Analysis of:

Trend Price Volume Time

TrendIs an indication of basic direction of the

market price movement Careful & timely Analysis of the Trend can

help you earn a lot or can help you minimize your losses

Technical Analysis is based on the assumption that prices move in Trends

Types of TrendUptrend

Sideways

Downtrend

Types of Trend - UptrendA rising trend can be understood as a rising

support level wherein the bulls are in control and are pushing prices Higher

A Trend is said to be up if it is making continuous higher tops and higher Bottoms

A rising trend is defined by successively higher low-prices

Types of Trend - Uptrend

Types of Trend - SidewaysA Flat or a Sideways Trend is a situation

where prices move in a range in horizontal direction for a long period of time

A Sideways trend can be understood as a level wherein supply & demand are equal, prices move sideways as bulls & bears slug it out for control of market direction

Types of Trend - Sideways

Types of Trend - DowntrendA falling trend can be understood as a falling

resistance level wherein the bears are in control & are pushing prices lower

A Trend can be said to be down if there is a series of lower tops & lower bottoms

A falling trend is defined by successively lower high-prices

Types of Trend - Downtrend

Price as an Element of Technical Analysis

Price is an interaction or point where demand & supply meet

Price refers to any combination of the Open, High, Low & Close for a given Security/Index over a specific timeframe

Price of a security depends on the expectations of the buyer & the seller

If the investor expects the price to rise, he will buy the security & if he expects it to fall, he will sell it