Technical Analysis - What is it? (chart reading?)

Technical
Analysis

Technical
Analysis?
candlestick
What is it? chart
patterns
patterns October 2011

price
breakout

monthly candle chart

© Copyright 2011, Robert B. Brain,
Brainy's Share Market Toolbox — www.robertbrain.com 1
Rev 1.1a

Technical
Analysis

Disclaimer
➔ CAUTION!!
➔ This presentation contains NO advice.
➔ It is for general education only.
➔ Always consult a trained, trustworthy
professional before investing,
to determine if your intended investment
might suit your personal individual situation.

2

Technical
Analysis What is Technical Analysis?

A definition
The use of market data and
The use of market data and
charting skills to anticipate market
charting skills to anticipate market
direction and timing
direction and timing
to make consistent profits.
to make consistent profits.


Technical

T.A. is: . . .
1. Price charts and chart patterns
2. Candle patterns
3. Chart Indicators
● Moving Average, MACD, RSI, P-SAR, etc.
4. Numeric analysis
5. Specialist topics:
● Fibonacci, Elliott Wave, W.D.Gann
6. Using charting software

Technical
Analysis Price Chart Basics

The Weekly Line Chart

Weekly Chart:-
Shows the Closing price
at the end of each week.
The weekly Closing prices are
joined together by straight lines.


Technical

Up Trends
Could you have been tempted to buy this stock?

If only we could
If only we could
spot these trends
spot these trends
and take advantage.
and take advantage.

Up 81% in
40 weeks.


Technical

Down Trends

Would you be tempted
Would you be tempted
to buy this stock?
to buy this stock?
(ps: it's Telstra)
(ps: it's Telstra)


Technical

Defining a trend
● Identify the Peaks
and Troughs.

● Look for:
Higher Peaks (HP)
and
Higher Troughs (HT)
(or Higher Highs and
Higher Lows).


Technical

Trend = Higher Highs and Lows
Get a feel for what the
price is doing.

Identify trends
(up, or down), or
non-trending.

Use indicators to help.
Terminology:-
© Copyright 2011, Robert B. Brain, Higher High = Higher Peak
Brainy's Share Market Toolbox — www.robertbrain.com Higher Low = Higher Trough 9

Technical

Beware the down trend

Not a good idea to invest
Not a good idea to invest
in a down-trending stock,
in a down-trending stock,
until the trend has finished*.
until the trend has finished*.
Brainy's Share Market Toolbox — www.robertbrain.com
**— Dow Theory
— Dow Theory 10

Technical

Chart patterns

Base Consolidation
Base Consolidation


Technical

Chart patterns
The Bullish
The Bullish
Falling Wedge
Falling Wedge
chart pattern
chart pattern


Technical

Chart patterns

The Expanding Triangle
The Expanding Triangle
(megaphone)
(megaphone)
chart pattern
chart pattern


Technical

OHLC Bar and Candle...

Each bar on a
bar chart, and

each candle on
a candle chart

summarises the
price action
in any one period
(a day, week, month, etc.).

Technical

Support and Resistance

Support lines
Support lines
Resistance
Resistance

Note: Sometimes a
Brainy's Share Market Toolbox — www.robertbrain.com “fat pencil” is appropriate. 15

Technical

Candle body and tails
● Their presence or absence is important
● Their length (ie. their height) is important.


Technical

Candle patterns — small bodies
● With or without a gap from previous candle.
● Hanging Man (at tops)
● Shooting Star (2-candle pattern)
● Evening Star (3-candle pattern)
● Doji Star (2-candle pattern)
● Hammer (at bottoms)
● Morning Star (3-candle pattern)


Technical

Patterns — engulfing and piercing
Reversal patterns in UP Trends:-
● Engulfing Bearish — “outside day”
(2-candle pattern)
● Dark Cloud (2-candle pattern)
● Harami Bearish (2-candle pattern)


Technical

Patterns — engulfing and piercing
Reversal patterns in DOWN Trends:-
● Piercing Line (2-candle pattern)
● Engulfing Bullish (2-candle pattern)
● Harami Bullish — “inside day”
(2-candle pattern)
● Harami Cross (2-candle pattern)


Technical
Analysis Chart Indicators

Moving Average (MA)
● 21 day MA is the
average of all prices
for the last 21 price
bars*
● Can indicate a trend
● Can be used to
interpret buy/sell
signals. * - A “bar” - can be:
a daily bar on a daily chart,
or a weekly bar
on a weekly chart, etc.
© Copyright 2011, Robert B. Brain, or just each point on a line chart.
Brainy's Share Market Toolbox — www.robertbrain.com . 20

Technical

Moving Average — how to calculate?
Simple calculation of 8.5

3-period MA. 8 8 8
7.67 7.67
7.5
The first MA value is 7 7 7 7 7
the average of the
6.5
first 3 price values:
6 6 6 6

(4+5+6) 15 5.5
Price
= =5 5 3-period MA
3 3
5 5

4.5

4
4
1 2 3 4 5 6 7 8


Technical

Bollinger Bands
A top line,
A top line,
average line
average line
and bottom line.
and bottom line.

Weekly
candles Share Market Toolbox — www.robertbrain.com
Brainy's . 22

Technical

Average True Range (ATR)
Useful to understand the notion of ATR

ATR indicator
ATR indicator
This one shows the average
This one shows the average
variation in price over the
variation in price over the
last 14 candles.
last 14 candles.

Weekly
candles


Technical
Analysis Applications, samples, strategies

Stop Loss? — under Support?

Initial Stop Loss position
Initial Stop Loss position
could be under recent
could be under recent
support and under
support and under
recent price action.
recent price action.

Down trend
Down trend
is broken
is broken

Technical

Stop Loss — using ATR
Wilson ATR
Trailing Stop
indicator

ATR = Average
True Range
The stop is set at
a multiple of ATR


Technical

Sample Trading Strategies
1. Find stocks using fundamental analysis and
time entry with technical analysis
2. High dividend yield
3. Long term bull market strategy, different to:
4. Shorter term bull market strategy
5. Different for a bear market.
6. Momentum indicator + MA-of-Momentum
(see next slide)


Technical

Sample Strategies

Momentum indicator
Momentum indicator
and
and
MA-of-Momentum
MA-of-Momentum

Technical

Sample Strategies
● Use ADX indicator for entry (Chuck le Beau)
● Use Parabolic SAR for exits
● Price Breakout
(see next slide)


Technical

Price Break Out


Technical

Moving Average Cross-over


Technical

Some successful strategies
These are in use by some successful traders:
● Use the MACD and the RSI indicators.
Look for RSI divergence against
the share price.
● Use Stochastic indicator and
Directional Movement (ADX)
to give joint signals.


Technical

Some more strategies
Note: None of these can be guaranteed!!
● Takeover target speculation
● Momentum trading
● Position trading
● Swing trading
● Dividend stripping
● IPOs
● Hedging

Technical

Isn't this gambling?
● Some people think that
share trading is just gambling?
● Without a proper trading plan and
trading strategy then may be it is.
● But if you have a proper, proven and tested
plan, then it is actually calculated risk taking.
● Compare with other professions:
– farming, retail business, catering,
– tourist trade, tradesman, handy man, etc.

Technical

Trading — Final Tips
Watch out for:
● Use a stop loss!
● Low liquidity
● Watch diligently
(don't take your eyes off the ball)
● Retracements
● Sucker rallies
● Profit takers
● The 3-period pause in a rally

Technical
Analysis Specialised Topics

Fibonacci Retracement


Technical
Analysis Charting Software

Use good charting software
● If you use a basic charting tool, then the
information might be limited to the basics
● Use a better tool for greater flexibility and more
informative results.

(in Australia — BullCharts)


Technical
Analysis Charting Software

Charting software – key features
● Data — Easy access to download data
● Price charts in various time frames
● Intraday data (optional)
● Indicators – draw them on the chart
● Watchlists – several lists of stocks to easily
keep an eye on
● Scans – Specify selection criteria and scan the
data for stocks that match the criteria
● Line studies and annotations on the chart

Technical

Technical Analysis is: . . .
1. Price charts and chart patterns
2. Candle patterns
3. Chart Indicators
● Moving Average, MACD, RSI, P-SAR, etc.
4. Numeric analysis
5. Specialist topics:
● Fibonacci, Elliott Wave, W.D.Gann
6. Using charting software

Technical Analysis - What is it? (chart reading?)

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