Technical Analysis Workshop eries ession Two
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Agenda Chart Types Chart Construction upport & Resistance Trendlines & Channels Pivot Points TYPE
Chart Types TYPE
First chartists in U included Charles Dow Allows for study of market price action Reflects tides of greed and fear among traders Each price is a momentary consensus of value of all market participants TYPE
Did you know??? Herman Rorschach, wiss psychiatrist Developed Rorschach Inkblot Test Most people describe what they see but in reality, only inkblots! Most traders use charts as a giant Rorschach test TYPE
LINE TYPE
LINE Represents only closing prices Line connects prices over the time frame Closing prices considered most important price in stock data TYPE
BAR TYPE
BAR Each period s range represented by vertical bar Each bar is a balance of power between bulls and bears hows opening price, closing price, high and low Upward bar (Green) means closing higher than open Downward bar (red) means closing lower than open TYPE
CANDLETICK TYPE
CANDLETICK First used by Japanese rice traders More visually appealing, easier to analyze Body: Distance between open and closing Tip of upper wick/shadow/hair: High Bottom of lower wick/shadow/hair: Low Range (length) of candle stick indicates volatility Upward candlestick usually or green Downward candlestick usually black or red TYPE
BAIC PATTERN (PINNING TOP) Long upper and lower wicks and small bodies Indicates indecision between bulls and bears Body relatively unimportant Long wicks indicate significant price movements but resulted in a standoff pinning tops in uptrend or downtrend could indicated possible reversal in direction TYPE
BAIC PATTERN (MARUBOZU) White marubozu Long white body, no wicks Bullish candle Open equals low, closing equals high Indicates buyers in control during entire period Black marubozu Long black body, no wicks Bearish candle Indicates sellers in control during entire period TYPE
BAIC PATTERN (DOJI) ame open and close or bodies very short Long upper and lower wicks Reflects considerable indecision Long lower, no upper Bearish interpretation Long upper, no lower Bullish interpretation ame open, close, high and low Very rare Low volume situations TYPE
ome uses: BAIC PATTERN (DOJI) Doji formed after long white candlesticks (like white marubozu) Could signal buyers weakening ellers often look for opportunities to enter Doji formed after long black candlesticks (like black marubozu) Could signal sellers weakening Buyers often look for opportunities to enter TYPE
Chart Components: Vertical Axis: Price cale Horizontal Axis: Time Price data (chart type) Volume (and other indicators) TYPE
1. electing chart type: TYPE
2. electing price scale: pace between price points (10, 20, 30, 40) are equal Price sale measure moves in absolute terms pace between price depend on percentage change Price move from 10 to 20 is 100% change while 40 to 50 is 25% change, thus space not the same INTRODUCTION FM & BC MODEL TECHNICAL ANALYI DOW THEORY
2. electing price scale: TYPE
3. electing time horizon: TYPE
4. electing indicators: TYPE
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upport (temporary floor) Price level where buying is strong enough to interrupt/reverse a downtrend Represented by a horizontal line connecting several bottoms Resistance (temporary ceiling) Price level where selling is strong enough to interrupt/reverse an uptrend Represented by a horizontal line connecting several tops TYPE
Effects of market psychology Both exist because people have memories Also attributed to pain and regret TYPE
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Also, notice how support can also CHANGE to resistance (and vice versa): TYPE
ometimes it might be easier to use a line chart first: TYPE
Determining strength of support/resistance: Length of time prices traded within the area and no. of hits Volume How recent trading took place within the area TYPE
ome useful trading rules: Whenever the trend approaches support or resistance, tighten your protective stop upport and resistance areas are more important on long-term charts than short-term e.g. If weekly chart is sailing through a clear zone, the fact that daily chart is hitting resistance is less important upport & resistance areas useful for placing stop-loss and protectprofit orders. NEVER adjust your support & resistance levels Avoid placing orders at round numbers Beware of false breakouts TYPE
Advanced technique: False breakout TYPE
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PRICE MOVE IN TREND TYPE
TREND Trend exists when prices keep rising or falling over time TYPE
TREND Uptrend characterized by higher highs and higher lows TYPE
TREND Trading range characterized by rallies that that stop at about the same high and declines that peter out at same low TYPE
TREND Downtrend characterized by lower highs and lower lows TYPE
TREND TYPE
TRENDLINE Peaks of rallies show where bulls weaken and bears gain control Bottoms of declines show where bears stopped and bulls regained control of market TYPE
TRENDLINE Uptrend line connects two nearby bottoms and shows lowest common denominator of bullish power TYPE
TRENDLINE Downtrend line connects two nearby tops and shows lowest common denominator of bearish power TYPE
TRENDLINE How to draw a trendline: Again, better to draw through edges of congestion areas rather than at extreme high and low points Often subjective; no two people will draw identical slants Most IMPORTANT feature is its angle it identifies the dominant market force Remember that technical analysis is partly a science and partly an ART TYPE
TRENDLINE Rating Trendlines (5 factors) 1. Timeframe of the trendline 2. Length 3. Number of times prices touch it 4. Angle 5. Volume TYPE
Trendline breaks TRENDLINE TYPE
TRENDLINE Trading rules 1. Trade in direction of the slope of a trendline 2. A trendline also provides support or resistance 3. teep trendlines often precede sharp breaks 4. Prices often retest latest extreme before breaking 5. Draw a channel line parallel to trendline to use as target for profit taking TYPE
A channel consists of two parallel lines that contain prices (or where prices trend) TYPE
Uptrend channels are drawn by first drawing an uptrend line across the bottoms of declines, followed by channel line parallel to it across the tops of rallies TYPE
Downtrend channels are drawn by first drawing a downtrend line across the tops of rallies, followed by channel line parallel to it across the bottoms of declines Trend line Channel line TYPE
Trading ideas It pays to trade in the direction of the channel Basic uptrend lines can be used as guide to initiate long positions and downtrend lines for short positions Channel lines can be used for short-term profit taking Go long in the lower quarter or half of a rising channel ell short in the upper quarter or half of a falling channel Breaking of a major trendline indicates change in trend TYPE
Trading ideas Breaking of a rising channel signals the acceleration of existing trend TYPE
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Predictive or leading indicators Originally used by floor traders to set key intraday levels Used to determine directional movement, future support & resistance Besides intraday levels, can be used for any time frame (daily, weekly, monthly) TYPE
Pivot point (P) calculated using prior period s high (H), low (L) & close (C) Further calculations made to set support 1 (1), support 2 (2), resistance 1 (R1) & resistance 2 (R2) with P as the base Equations: P = (H + L + C) / 3 1 = (P x 2) H 2 = P (H L) R1 = (P x 2) L R2 = P + (H L) TYPE
TIME FRAME Pivot points for 5, 10 & 15-min intraday charts use prior day s H, L & C. Once P is set, does not change throughout the day TYPE
TIME FRAME Pivot points for 30 & 60-min intraday charts use prior week s H, L & C. Once P is set, remains fixed for entire week. When week ends, new P can be calculated TYPE
TIME FRAME Pivot points for daily charts use prior month s H, L & C. In this example, points for June are based on H, L & C for May. Remain fixed for entire month of June TYPE
INTRODUCTION FM & BC MODEL TECHNICAL ANALYI DOW THEORY
UMMARY Construct charts based on personal preference and trading time horizon Art of drawing basic indicators ALWAY focus on a good entry INTRODUCTION FM & BC MODEL TECHNICAL ANALYI DOW THEORY
THANK YOU! INTRODUCTION FM & BC MODEL TECHNICAL ANALYI DOW THEORY