Axis Direct offers a introductory course on Technical Analysis. It will cover the background and basic aspects of technical analysis
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What is Technical Analysis ?
• A method of evaluating securities by relying on the assumption that market data, such as
charts of price, volume, and open interest, can help predict future (usually short-term) market
• Technical analysis does not result in absolute predictions about the future. Instead, technical
analysis can help investors anticipate what is "likely" to happen to prices over time.
• Technical analysis uses a wide variety of charts that show price over time.
• Technical analysts believe that the historical performance of stocks and markets are
indications of future performance.
Technical Analysis vs. Fundamental Analysis?
• While fundamental analysis may tell you when you’ve found a solid company, its
weakness is getting you into that stock on a timely basis as far as when to enter
and exit the stock.
• This is where technical analysis comes in. Its great asset is that it’s a better
‘Timing’ tool. So the fundamentals tell you “What” to buy, and technical analysis
tells you “When” it might be a higher probable time to buy / sell that stock. As you
can see from this, they both can be complimentary to one another.
• After all, if you have a choice to trade a stock with horrible earnings or a stock with
favorable earning projections, of course you should trade the one that’s more
• A chart is simply a graphical representation of a series of prices over a set time
• For example, a chart may show a stock's price movement over a one-year period,
where each point on the graph represents the closing price for each day the stock
What is a chart ?What is a chart ?
Different Kind of Charts usedDifferent Kind of Charts used
• Line charts
• Bar charts
Candle Stick Charting (Continued)
• Green is an example of a bullish
pattern, the stock opened at (or near)
its low and closed near its high
• Red is an example of a bearish
pattern. The stock opened at (or
near) its high and dropped
substantially to close near its low
• What is Volume?
• Volume is simply the number of shares or contracts that trade over a given period of time,
usually a day. The higher the volume, the more active the security.
• Why Volume is Important ?
• It is used to confirm trends and chart patterns.
• Movement influences by higher and lower volumes.
• Many interpretations of volume expansion and contraction
• A price decline on high volume might “confirm weakness” Or it could indicate
buyer depth and signal hidden strength
• A price advance on low volume might be a “Suspect move” OR it could indicate illiquidity on the
sell-side and signal upside potential
The Importance of Volume
Volume is an important aspect of technical analysis because it is used to confirm
trends and chart patterns. Any price movement up or down with relatively high volume
is seen as stronger, more relevant move than a similar move with weak volume.
• The Bull market
• Public Participation phase
• The Bear Market
• Public Participation phase
Be Fearful When Others Are Greedy and Greedy When Others Are
Fearful - Warren Buffett
Trends & Trend Lines
• The 3 Trends
• Primary Trends
• Secondary Trends
• Minor Trends
• Primary Trends : They run for years
• Secondary Trends : Few weeks to months
• Minor Trends : Day to day basis
• There are three basic kinds of trends:
• An Up trend where prices are generally
• A Down trend where prices are generally
• A Trading Range.
• Drawing Trendlines
• Connect high to high, low to lows
• Draw through congestion areas
• Ignore “tails” or “spikes”
• Trends are stronger
• The longer the trendline
• The more contacts between prices and the trendline
• When Volume expands in the direction of the trend
• Price where buying power is sufficient to halt downtrend
• Bears are hurting, start buying
• Price where selling power is sufficient to halt uptrend
• Bulls are hurting,, start selling
• Support & Resistance Lines
• Draw horizontal lines through congestion areas
• At upper and lower limits of trading range
When prices move out of the trading range, it signals that either supply or demand has started to
get the upper hand. If prices move above the upper band of the trading range, then demand is
winning. If prices move below the lower band, then supply is winning.
Support & Resistance
• Levels are strongest
• The longer they continue
• The more contacts between prices & the level
• The wider the range
• The greater the volume at the level
• If you are riding a trend
• Tighten protective stops as prices near levels
• Shows the average price during a given time window
• E.g. a 5-day MA shows the average price over the last 5 days
• 20-day MA shows the average price over the last 20 days
• Average the price series to smooth out effect of extreme highs or lows
• Reveals underlying trend
• Longer MA’s show longer term trend
• Shorter MA’s react more quickly to recent prices
• The moving average may be the most widely used indicator. The Moving Average line
calculates and plots a simple, exponential or weighted average of prices, specified by the
input Price, from each of the most recent number of bars specified by the input Length.
• A moving average is generally used for trend identification. Attention is given to the direction
in which the average is moving and to the relative position of prices and the moving average.
• Rising moving average values (direction) and prices above the moving average (position)
would indicate an uptrend. Declining moving average values and prices below the moving
average would indicate a downtrend
Using the Moving Average
The most commonly used averages are of 20,30,50, 100 and 200 days
The longer the time span, the less sensitive is the moving average to daily price changes.
Moving averages are used to emphasize the direction of a trend and smooth out price and volume
Using Moving Averages in Trading
As Trend Indicators
• Trend direction indicated by the slope of the MA
• Short, medium, or long term trend
• Similar trading rules as for trendlines
• Trade with the MA trend
• Buy on pullbacks to moving average
Moving average crossover system
• Plot short and long term MA on same chart
• Example: 9 day MA and 21 day MA
• Trading Signals
• Buy when short MA crosses above long MA
• Sell when short MA crosses below long MA
• When to use
• Works well in trending markets
• Loses money in whipsaw markets
• You can find the “optimal” short and long MA
Exponential Moving Averages
• Similar to simple moving average
• Gives more weight to recent observations
• W is the “weight”
• Large w gives more weight to current price
• Makes EMA more responsive
• Typical W: 2/(N+1) where N is length of MA
• EMA is more responsive to ‘recent trends’ than simple MA
• The channel line runs parallel to the basic trendline, joining the support levels in an
upward trend and the resistance levels in a downward trend. If the price of the
Stock continuously oscillates between the trendline and the channel line then one
can assume that a valid channel exists.
• The channel is one of the most useful analytical patterns.
Channel Line Pattern
Trend line Breakout
• A trend line is formed when you can draw a diagonal line between two or more price pivot
points. They are commonly used to judge entry and exit investment timing when trading
• A trend line is a bounding line for the price movement of a security. A support trend line is
formed when a securities price decreases and then rebounds at a pivot point that aligns with
at least two previous support pivot points.
• Similarly a resistance trend line is formed when a securities price increases and then
rebounds at a pivot point that aligns with at least two previous resistance pivot points. The
following chart provides an example of support and resistance trend lines.
RSI (Relative Strength Index)
• A comparison between the days a stock finishes up against the days it finishes down
• A technical momentum indicator that compares the magnitude of recent gains to recent
losses in an attempt to determine overbought and oversold conditions of an asset.
• The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches
the 70 level, meaning that it may be getting overvalued and is a good candidate for a
pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting
oversold and therefore likely to become undervalued.
• The symmetrical triangle, which can also be referred to as a coil, usually forms
during a trend as a continuation pattern. The pattern contains at least two lower
highs and two higher lows. When these points are connected, the lines converge
as they are extended and the symmetrical triangle takes shape.
• Important Consideration :
• Two Trendline
• Consolidation after rally
• Trendline Beakout or Breakdown (either up or down)
Double Top Pattern (Reversal)
• The double top is a major reversal pattern that forms after an extended uptrend. As
its name implies, the pattern is made up of two consecutive peaks that are roughly
equal, with a moderate trough in-between.
• Important Consideration :
• First Peak
• Second Peak
• Support Break
• Price Target
Double Bottom Pattern (Reversal)
• The double bottom is a major reversal pattern that forms after an extended
downtrend. As its name implies, the pattern is made up of two consecutive troughs
that are roughly equal, with a moderate peak in-between.
• Important Consideration :
• First Trough
• Second Trough
• Resistance Break
Head & Shoulder Pattern
A Head and Shoulders reversal pattern forms after an uptrend, and its completion
marks a trend reversal. The pattern contains three successive peaks with the middle
peak (head) being the highest and the two outside peaks (shoulders) being low and
roughly equal. The reaction lows of each peak can be connected to form support, or a
Inverse Head & Shoulder (Reversal)
Head and Shoulders Bottom forms after a downtrend, and its completion marks a
change in trend. The pattern contains three successive troughs with the middle trough
(head) being the deepest and the two outside troughs (shoulders) being shallower.
Ideally, the two shoulders would be equal in height and width. The reaction highs in
the middle of the pattern can be connected to form resistance, or a neckline.