Demystify Techncial Analysis Final4

8/14/2019 Demystify Techncial Analysis Final4

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1 Technical Analysis

Agenda

Different Kinds of Indicator.


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Techncial AnalysisTechncial Analysis

Demystify Technical Analysis

Leading IndicatorsLagging Indicators

Moving Averages .What is moving averages ?

Different Types of Moving Averages. Simple Exponential Weighted.Properties of good Moving AverageStrategies of Moving Average .

Benefits and Drawback of Indicators

Lagging IndicatorsMoving Averages

MACDAverage Directional Index

Leading Indicators

Relative Strenth IndexStochastic

Rate of Change.

Volatility Indicators.Bollinger Bands

GAPSCommon GapsBreakout GapsRunaway Gaps

Exhaustion Gaps

Money ManagementMartingale System


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What does a Technical Indicator Offer?

Technical indicator offers a different perspective from which to analyze the price action.

Some, such as moving averages, are derived from simple formulas and the mechanicsare relatively easy to understand. Others, such as Stochastics, have complex formulasand require more study to fully understand and appreciate. Regardless of the complexityof the formula, technical indicators can provide unique perspective on the strength anddirection of the underlying price action.

A simple moving average is an indicator that calculates the average price of a securityover a specified number of periods. If a security is exceptionally volatile, then a moving

average will help to smooth the data. A moving average filters out random noise andoffers a smoother perspective of the price action. When is market is in Trading rangezone RSI would tell you the condition of the market such as Overbought and Oversoldlevel.
http://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryS.htmlhttp://stockcharts.com/education/GlossaryS.htmlhttp://stockcharts.com/education/GlossaryM.html


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Why Use Indicators?

Indicators serve three broad functions: to alert, to confirm and topredict.

An indicator can act as an alert to study price action a little moreclosely. If momentum is waning, it may be a signal to watch for a

break of support. Or, if there is a large positive divergence building, itmay serve as an alert to watch for a resistance breakout.

Indicators can be used to confirm other technical analysis tools. Ifthere is a breakout on the price chart, a corresponding movingaverage crossover could serve to confirm the breakout. Someinvestors and traders use indicators to predict the direction of futureprices.


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My Two Friends

Friend 1 : Tells me whatever you do I am with you. Right orWrong I am with you and I will follow you.

Lagging Indicator : Moving Averages, MACD , ADX

Friend 2 : Tells me Dont do this Dont do that.

Leading Indicator : Market is overbought dont buy , Market is

oversold dont sell it . RSI, Stochastic, ROC.


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Lagging Indicator

As their name implies, lagging indicators follow the price action and are commonly

referred to as trend-following indicators. Rarely, if ever, will these indicators lead the

price of a security. Trend-following indicators work best when markets or securities

develop strong trends. They are designed to get traders in and keep them in as long

as the trend is intact. As such, these indicators are not effective in trading or

sideways markets. If used in trading markets, trend-following indicators will likely

lead to many false signals and whipsaws. Some popular trend-following indicatorsinclude moving averages (exponential, simple, weighted, variable) and MACD.
http://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryM.html


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Lagging Indicators

Moving Averages

MACD

Average Directional Index


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What is Moving Averages?

A simple moving average is formed by computing the average (mean) price of a security over a specified

number of periods. While it is possible to create moving averages from the Open, the High, and the Lowdata points, most moving averages are created using the closing price. For example: a 5-day simple movingaverage is calculated by adding the closing prices for the last 5 days and dividing the total by 5.


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Moving Averages


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Different Kinds of Moving Averages

Simple Moving Average

Weighted Moving Average

Exponential Moving Average


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Simple Moving Average

A simple moving average is formed by computing the average (mean) price of a security over a specified

number of periods. While it is possible to create moving averages from the Open, the High, and the Lowdata points, most moving averages are created using the closing price. For example: a 5-day simple movingaverage is calculated by adding the closing prices for the last 5 days and dividing the total by 5.


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Weighted Moving Average

A weighted moving average is simply a moving average that isweighted so that more recent values are more heavily weighted

than values further in the past.

ne

11 18 25 2

July

9 16 23 30 6

August

13 20 27 3 10 17

September

24 1 8

October

15 2 2 29 5 12

November

19 26 3 10 17

Decemb er

24 31 7

2008

14 21 28 4 11

February

18 25 3 10

March

17 24

13500

14000

14500

15000

15500

16000

16500

17000

17500

18000

18500

19000

19500

20000

20500

21000

21500

* BSE - SENSEX (15,46 7.39, 15,798.42, 15,331.35, 15,760.52, +403.170)
http://moneyterms.co.uk/moving-average/http://moneyterms.co.uk/weighted-average/http://moneyterms.co.uk/weighted-average/http://moneyterms.co.uk/moving-average/


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Exponential Moving Average

In order to reduce the lag in simple moving averages, techniciansoften use exponential moving averages (also called exponentially

weighted moving averages). EMA's reduce the lag by applying more

weight to recent prices relative to older prices. The weighting applied

to the most recent price depends on the specified period of the

moving average. The shorter the EMA's period, the more weight thatwill be applied to the most recent price.

The formula for an exponentialmovingaverage is:

EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) +EMA(prev)

(2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)


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Which one is better ?


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Properties of Good moving Average

Moving averages are portable trendline , So goodmoving average should act as good Support levels.


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Properties of Moving Averages


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Moving Averages

When two moving averages are used the longer is fortrend identification and the shorter for timing

It is the interplay between the two which gives you the

timing

Classics are 5 and 20 day and 10 and 40 day

On stocks, 7 and 21 work well


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Right Moving Average Period


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2 Moving Average Cross over

Market signalBullish When short term moving Average ( i.e 5 Day

) crosses Long term Moving Average (i.e 20 Day )andgoes up . Its a Golden Coress

Bearish When short term moving Average (i.e 5 Day )crosses Long Term Moving Average (i.e 20 Day ) andgoes Down . Its Death Cross


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Guppy Moving Averages


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Benefits and Drawbacks of Moving Averages

Benefits :

As it is a lagging indicator you will always be able to capture the bigmoves when it come along.

It act as a good support and Resistance .

It also shows the underlying Trend

Drawback :

All the lagging indicator gives many whipsaws when it comes to sideways market.

Some time there is significant amount of money is left on the tableas it gives late signals. Although some lag can be removed by usingExponential MA


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Moving Average Convergence Divergence

IntroductionDeveloped by Gerald Appel, Moving Average Convergence/Divergence (MACD) isone of the simplest and most reliable indicators available. MACD usesmoving averages, which are lagging indicators, to include some trend-followingcharacteristics. These lagging indicators are turned into a momentum oscillatorby subtracting the longer moving average from the shorter moving average.

MACD Formula The most popular formula for the "standard" MACD is the

difference between a security's 26-day and 12-day exponentialmoving averages. Using shorter moving averages will produce aquicker, more responsive indicator, while using longer movingaverages will produce a slower indicator, less prone to whipsaws.

Of the two moving averages that make up MACD, the 12-day EMAis the faster and the 26-day EMA is the slower. Closing prices areused to form the moving averages. Usually, a 9-day EMA of MACDis plotted along side to act as a trigger line. A bullish crossoveroccurs when MACD moves above its 9-day EMA and a bearishcrossover occurs when MACD moves below its 9-day EMA
http://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryM.html


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Calculation of MACD


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MACD Signals

MACD generates bullish or Bearish signals from threemain sources:

Positive divergence

Bullish moving average crossover

Bullish centerline crossover


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Bullish Divergence

When Prices are falling on remain same but the Indicator

moves up then it is called Bullish Divergence


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What is Positive Divergence and Negative Divergence

When Prices are going up or remaining same but

Indicator is coming down is called Negative Divergence.


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MACD Cross Over

Buy : When MACD Crosses above its Average .

Sell : When MACD Crosses below its Average.


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Centerline Crossover


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MACD Benefits

One of the primary benefits of MACD is that it incorporates aspects ofboth momentum and trend in one indicator. As a trend-followingindicator, it will not be wrong for very long. The use ofmoving averagesensures that the indicator will eventually follow the movements of theunderlying security.

MACD can be applied to daily, weekly or monthly charts. MACDrepresents the convergence and divergence of two moving averages.The standard setting for MACD is the difference between the 12 and26-period EMA. However, any combination of moving averages can beused. The set of moving averages used in MACD can be tailored foreach individual security. For weekly charts, a faster set of moving

averages may be appropriate. For volatile stocks, slower movingaverages may be needed to help smooth the data. No matter what thecharacteristics of the underlying security, each individual can set MACDto suit his or her own trading style, objectives and risk tolerance.
http://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryM.html


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MACD Drwaback

Can Be Applied on Any Time Frame : MACD can be applied to daily, weekly or monthly

charts. MACD represents the convergence and divergence of two moving averages. Thestandard setting for MACD is the difference between the 12 and 26-period EMA. However,any combination of moving averages can be used. The set of moving averages used inMACD can be tailored for each individual security. For weekly charts, a faster set ofmoving averages may be appropriate. For volatile stocks, slower moving averages may beneeded to help smooth the data. No matter what the characteristics of the underlyingsecurity, each individual can set MACD to suit his or her own trading style, objectives and

risk tolerance.

Can not be applied to see historical levels : MACD calculates the absolute differencebetween two moving averages and not the percentage difference. MACD is calculated bysubtracting one moving average from the other. As a security increases in price, thedifference (both positive and negative) between the two moving averages is destined to

grow. This makes its difficult to compare MACD levels over a long period of time,especially for stocks that have grown exponentially.


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Average Directional Index

Wells Wilder introduced this revolutionary concept in New Concept inTechnical Trading System .

+ DI is greater then DI add that Amount to +DI and Deduct the sameamount from DI ,

If DI is greater than + DI then add to DI and deduct that amount from DI


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Trading using +DI and DI

Buy : When + DI crosses above DI

Sell : When DI crosses above + DI


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Is the Market is Trading or Trending ???????????????

Average Directional Index is nothing but the Absolute difference between + DI

and DI .

When ADX is above 25 it is considered to be Trending Market . When it is below25 it is considered Trading . ( Note : Threshold value may vary fromCommodity to Security ) .


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Trending and Trading Market


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Average Directional Index (ADX)


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Benefits and Drawbacks of Lagging Indicators

One of the main benefits of trend-following indicators is the ability to catch amove and remain in a move. Provided the market or security in questiondevelops a sustained move, trend-following indicators can be enormouslyprofitable and easy to use. The longer the trend, the fewer the signals and lesstrading involved.

The benefits of trend-following indicators are lost when a security moves in a

trading range. Another drawback of trend-following indicators is that signals tendto be late. By the time a moving average crossover occurs, a significant portionof the move has already occurred.


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Leading IndicatorMany leading indicators come in the form of momentum oscillators. Generally

speaking, momentum measures the rate-of-change of a security's price. As the

price of a security rises, price momentum increases. The faster the securityrises (the greater the period-over-period price change), the larger the increase in

momentum. Once this rise begins to slow, momentum will also slow. As a

security begins to trade flat, momentum starts to actually decline from previous

high levels. However, declining momentum in the face of sideways trading is not

always a bearish signal. It simply means that momentum is returning to a more

median level.


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Leading Indicator

Relative Strenth Index ( RSI )

Stochastic

Rate of Change


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Relative Strength Index

Developed by J. Welles Wilder and introduced in his 1978 book,

New Concepts in Technical Trading Systems, the RelativeStrength

Index (RSI) is an extremely useful and popular momentum oscillator.

The RSI compares the magnitude of a stock's recent gains to the

magnitude of its recent losses and turns that information into a number

that ranges from 0 to 100. It takes a single parameter, the number of time

periods to use in the calculation. In his book, Wilder recommends using14 periods.
http://store.yahoo.com/stockcharts/newcointean.htmlhttp://store.yahoo.com/stockcharts/newcointean.html


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Divergence

Bearish Divergence- when prices are making higher highs but the indicatoris making lower highs. Upmove is weakening.

Bullish Divergence- when prices are making lower lows but the indicator ismaking higher lows. Downmove is weakening.


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RSI Bullish/Bearish Divergence


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RSI Bearish Divergence


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RSI Overbought and Oversold

Overbought : RSI when enters 70 level the market is considered to be

overbought .

Oversold : RSI when enters 0 level the market is considered to be oversold

Important point :Only trade when trade when they are exiting Overbought andOversold levels.


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Properties of RSI

Normal Technical Analysis can aslo be applied to RSI like Trendline,

Fibonacci Retracement or Projection etc.


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Stochastic

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is amomentum indicator that shows the location of the current close relative to thehigh/low range over a set number of periods. Closing levels that are consistentlynear the top of the range indicate accumulation (buying pressure) and those nearthe bottom of the range indicate distribution (selling pressure).


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Stochastic Buying and Selling

17 24 1 8

October

15 22 29 5 12

November

19 26 3 10

December

17 24 31

2008

7 14 21 28 4

February

11 18 25 3 10

March

17 24

10

20

30

40

50

6070

80

90

100

O O

Stochastic Oscillator (39.3942)

4300

4400

4500

4600

4700

4800

4900

5000

5100

5200

5300

5400

5500

5600

5700

5800

5900

6000

6100

6200

6300

6400

O

O

O

P

P

P

- NSE50 - 1 MONTH (4,566.00, 4,759.00, 4,566.00, 4,746.95, +149.650)


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Stochastic strategy


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Rate of Change

ROC is a momentum indicator that measures velocity and also leads the price action.

Rate of Change, ROC, can be very useful, because it is a leading indicator (ROC changes directionbefore the underlying price).

Divergences

Divergences can provide warnings or alerts of weaknesses in market trends, but do notrepresent actual buy or sell signals. It is essential to wait for a confirmation from the price

itself that the overall trend has reversed.Zero-line crossings

Although the long-term price trend is still the overriding consideration, a crossing upwardthrough the zero line can confirm a buy signal and a crossing downward through the zero

line, a sell signal.

Trendline Violations

The trendlines on the ROC chart are broken sooner than those on the price chart. Thevalue of the momentum indicators is that it turns sooner than the market itself, making it aleading indicator.


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Rate of Change ( ROC )

6 3

December

10 17 24 31

2008

7 14 21 28 4

February

11 18 25 3

March

10 17 24 3

-600-550-500-450-400-350-300-250-200

-150-100-50

050

100150200250300350400

O O O

P

Price ROC (-195.600)

1000

1050

1100

1150

1200

1250

1300

1350

1400

14501500

1550

1600

1650

O

OO

P

PP

TATA POWER COMP (1,163.00, 1,188.00, 1,100.50, 1,160.45, -3.10010)


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Benefits and Drawbacks of Leading Indicators

There are clearly many benefits to using leading indicators. Early

signaling for entry and exit is the main benefit. Leading indicatorsgenerate more signals and allow more opportunities to trade. Earlysignals can also act to forewarn against a potential strength orweakness. Because they generate more signals, leading indicatorsare best used in trading markets. These indicators can be used intrending markets, but usually with the major trend, not against it. In amarket trending up, the best use is to help identify oversold conditionsfor buying opportunities. In a market that is trending down, leadingindicators can help identify overbought situations for sellingopportunities.

With early signals comes the prospect of higher returns and withhigher returns comes the reality of greater risk. More signals and

earlier signals mean that the chances of false signals and whipsawsincrease. False signals will increase the potential for losses.Whipsaws can generate commissions that can eat away profits andtest trading stamina.
http://stockcharts.com/education/GlossaryW.htmlhttp://stockcharts.com/education/GlossaryW.html


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Bollinger Bands

Introduction

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatilityand relative price levels over a period time. The indicator consists of three bands designed toencompass the majority of a security's price action.

A simple moving average in the middle

An upper band (SMA plus 2 standard deviations)

A lower band (SMA minus 2 standard deviations)

Standard deviation is a statistical term that provides a good indication of volatility. Using the standard

deviation ensures that the bands will react quickly to price movements and reflect periods of high andlow volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of thebands.
http://stockcharts.com/education/GlossaryV.htmlhttp://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryS.htmlhttp://stockcharts.com/education/GlossaryS.htmlhttp://stockcharts.com/education/GlossaryM.htmlhttp://stockcharts.com/education/GlossaryV.html


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Formula


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Signaling System

Buy : After Prolonged Selling the Candel gives closing outside the band and next candel isinside band than amove above highes high is Buying signal .

Sell : After Prolonged Buying spree candelstick move above BB and Next Daxt Day candelcomes in BB then A move below Lowest Low of Candel is your Short Signal.


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Bollinger Bands

Sideways consolidation Breakouts.


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Bollinger Band Breakout


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Band Envelop and Bollinger Bands


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Conclusion

To identify periods of high and low volatility

To identify periods when prices are at extreme,and possibly unsustainable, levels.

As stated above, securities can fluctuatebetween periods of high volatility and low

volatility. Being able to identify a period of lowvolatility can serve as an alert to monitor theprice action of a security. Other aspects oftechnical analysis, such as momentum, movingaverages and retracements, can then beemployed to help determine the direction of thepotential breakout


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GAPS

Gaps are nothing but the vacuum left by the Prices.

Upside Gap : when Todays low is higher than previous Days High .

Down Side Gap : When Todays High is Lower than Previous Days

Low .

Mi d th G


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Mind the Gap

Common gap occur in low volume caused by lack of

interest. (sometimes filled but be careful)

Breakaway gap occur in heavy volume when trendlinesbreak or patterns complete. (often filled)

Runaway gap occur in moderate volume during a trend.(generally filled and will provide support on reversal)

Exhaustion gap occurs in heavy volume near the end ofa market move. (pretty much always filled)

Mi d th G


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Mind the Gap

NAS NAS/NMS COMPSITE, Last Trade [Hi/Lo/Cl Bar] Daily16Nov00 - 08Feb01

P


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21Nov00 28Nov 05Dec 12Dec 19Dec 26Dec 02Jan 09Jan 16Jan 23Jan 30Jan 06Feb

Pr

USD

2300

2400

2500

2600

2700

2800

2900

3000

3100

NAS NAS/NMS COMPSITE , Last Trade, Hi/Lo/Cl Bar

19Jan01 2841.25 2752.06 2770.38

.BSESN, Last Trade [O/H/L/C Bar] Daily FREEZE11Feb05 - 30Jun05

Pr

INR.BSESN , Last Trade, O/H/L/C Bar
http://www.reuters.com/home.jhtml;jsessionid=NUFJIVWYROMY2CRBAELCFEYhttp://www.reuters.com/home.jhtml;jsessionid=NUFJIVWYROMY2CRBAELCFEY


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66 Technical Analysis11Feb05 18Feb 25Feb 04Mar 11Mar 18Mar 25Mar 01Apr 08Apr 15Apr 22Apr 29Apr 06May 13May 20May 27May 03Jun 10Jun 17Jun 24Jun

INR

6150

6200

6250

6300

6350

6400

6450

6500

6550

6600

6650

6700

6750

6800

6850

6900

01Jun05 6729.39 6763.28 6721.22 6745.83

G


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Gaps

M M t


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Money Management

The most Important part of your Trading Career.

Two Types of Money Management Systems Martingle System

Anti Martingle System

Martingale System

Anti Martingale System

TABLE OF TRADES


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TABLE OF TRADES

20201000

17189(1)1

14168(2)2

11147(3)3

8126(4)4

5105(5)5

284(6)6

(1)63(7)7

(4)42(8)8

(7)21(9)9

(10)00(10)10

Total Inflow/

Outflow

Amt of

WinningTrades

No of Winning

Trades

Amt of Lossing

Trades

No of Lossing

Trades

M ti l S t


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Martingale System

You make a bet and if you lose you double your bet. If you lose again

you double your bet. You keep doing this until you win and then go back

to your original bet.

You bet Rs 5 and you lose.

Your next bet is Rs. 10. If you lose:

Your next bet is Rs 20. If you lose:




If you win you will get back 320 so net inflow is your original Rs 5

Is it a Good bet.

A ti M ti l S t


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Anti Martinalge System

Anti Martingale System tells to Invest double in a winningstreak and either slow down or remain constant on your

bets during the losing periods.

Yo r Val able Feedback


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Your Valuable Feedback

[email protected]

Food Time


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Food Time

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Demystify Techncial Analysis Final4