TECHNICAL ANALYSIS

NURALI BARKATALI

Technical Analysis

To non-believers, technical analysis can sound like a lot of focus-pocus!

Technical Analysis
Technical analysis is a science which concentrates on the psychology of market participants and their buying and selling patterns/behaviors.
(Behavioral Finance)

Line charts

Bar charts

Candlestick charts

TECHNICAL ANALYSIS VS FUNDAMENTAL ANALYSIS

Technical Analysis vs. Fundamental Analysis

Technical analysis involves the development of trading rules based on past price and volume data for individual stocks and the overall stock market. Fundamental analysis involves economic, industry, and company analysis that lead to valuation estimates for companies, which can then be compared to market prices to aid in investment decisions.

Do fundamentals drive technical analysis?

Some technical analysts claim they can be extremely accurate a majority of the time. There are many instances of investors successfully trading securities with only the knowledge of its chart and without even understanding what the company does. Technical analysis way to analyze markets, but most agree that it is much more effective when combined with fundamental analysis.

UNDERLYING ASSUMPTIONS

Underlying Assumptions of Technical Analysis

Trading via technical analysis involve a number of assumptions about markets

The market value of any good or service is determined solely by the interaction of supply and demand (which are analyzed in form of charts & different indicators). Supply and demand are governed by numerous factors, both rational and irrational (so Risk Management Techniques are a must & a beauty of Technical Analysis.)

Underlying Assumptions of Technical Analysis

Technical analysis assumptions:

Disregarding minor fluctuations, the prices for individual securities and the overall value of the market tend to move in trends, which persist for appreciable lengths of time Prevailing trends change in reaction to shifts in supply and demand relationships and these shifts can be detected in the action of the market

ADVANTAGES

Advantages of Technical Analysis

Unlike fundamental analysis, technical analysis is not heavily dependent on financial accounting statements

Problems with accounting statements:

Lack information needed by security analysts

Many psychological and other non-quantifiable factors do not show up in financial statements

Advantages of Technical Analysis

Fundamental analyst must process new information and quickly determine a new intrinsic value, but technical analyst merely has to recognize a movement to a new equilibrium Technicians trade when a move to a new equilibrium is underway but a fundamental analyst finds undervalued securities that may not adjust to correct prices as quickly

Higher Return On Investment

Cyclical trades executed by technicians, returns higher ROI. Technical Analysis with proper risk management provide you with courage to short sell (blank sell) and earn both ways. Mutual Fund pays good dividends as they earn good capital gains by utilizing market cycles as opportunities to earn.

Challenges to Technical Analysis

Challenges to technical trading rules

Rules that worked in the past may not be repeated

Patterns may become self-fulfilling prophecies

Typical Stock Market Cycle

Typical Stock Market Cycle

Buy Point Trough

CONTRARY-OPINION RULES

Many analysts rely on rules developed from the premise that the majority of investors are wrong as the market approaches peaks and troughs
Technicians try to determine whether investors are strongly bullish or bearish and then trade in the opposite direction These positions have various indicators

INDICATORS

Mutual fund cash positions

Buy when the mutual fund cash position is high, sell when low

Credit balances in brokerage accounts

Buy when credit balances increase, sell when credit balances fall Buy when advisory firms become more bearish

Investment advisory opinions

ANALYSIS OF TECHNICAL INDICATORS

SUPPORT & RESISTANCE ANALYSIS

Support and resistance levels

Support level: the level that a price is unlikely to decline below; when price reaches the support level, demand surges for the stock Resistance level: the level that a price is unlikely to rise above; when price reaches the resistance level, we observe selling or profit taking Movements below (bearish) and above (bullish) this range provide indicators

Support and Resistance Chart

MOVING AVERAGE

Moving Average

Technicians use moving averages to compute general trends, and evaluate current stock prices relative to those trends.

Moving average lines

Moving average prices are calculated and track for several different time periods When the shorter-term moving average line is consistently above the longer-term line, it is considered a bullish signal

RELATIVE-STRENGTH INDEX (RSI)

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, on a scale of 0-100, indicates that the overbought position is at 70 and the oversold position is at 30. An investor with todays simple-to-use software may choose to reset the indicators' parameters to 80 and 20.

CHART PATTERNS

Once a chart is drawn, technical analysts examine it for various formations or pattern types in an attempt to predict stock price or market direction.

HEAD-AND-SHOULDERS FORMATION (BEARISH)

When the stock price pierces the neckline after the right shoulder is finished, it is time to sell

DOUBLE TOP FORMATION

When the stock price pierces the support after the first top is finished, it is time to sell

HEAD-AND-SHOULDERS FORMATION (BULLISH)

When the stock price pierces the neckline upward after the right shoulder is finished, it is time to buy

DOUBLE BOTTOM FORMATION

When the stock price pierces the support after the first top is finished, it is time to sell

Intraday Trading

THE END
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