Technical Analysis A Basic Introduction
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Technical Analysis - Why it works and its limitations Most Common Chart Types - Candle, Line & Bar Charts Support and resistance levels Trend lines - Drawing lines correctly - Recognising trend line breaks and ‘false breaks’ Chart patterns - The major continuation and reversal patterns Moving averages - The different types of moving average lines - Which periods to use - Moving average based trading techniques Oscillators – Most Popular Three - MACD - RSI - Stochastics
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Technical Analysis – Why? ► Technical
analysis is the study of Price Movement, Volume and Price Relationships over time periods. ► We analyse charts because the market repeats itself and if we can see these re-occurring even though they may not be an exact repeat it will help us to anticipate the future price movement. ► Many traders use technical analysis and everyone sees the same patterns and this is a huge psychological factor in the movement of prices.
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Technical Analysis Limitations ► Technical
analysis is subjective – it depends on the person who is doing the analysis. ► They give current and past information and can not predict the future – they can however, indicate a high probability market movement.
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Charts & Chart Types ► Charts
show us the movement of price against a time frame with the historical data. ► Charts allow us to anticipate before hand where prices may be going and help us to plan a high probability transaction. ► Often appearing chart patterns do not always work, but they are indication of a high probability outcome. If we position our selves accordingly we can use extra tools to confirm whether the price is going to move as foreseen or not. Meydan & Co. © www.meydanco.com www.globaltraderclub.com
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Charts & Chart Types â–ş Technical
analysts use different charts for different time periods. There are traders who will trade for an hour or two a day, or day traders that will check the market for 10 minutes place and order and leave it alone.
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Most Common Chart Types - Candle Bar Charts
Bear candle Bull candle
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Most Common Chart Types - Line Charts
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Most Common Chart Types - Bar Charts
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Using Charts ► The
chart a trader uses depends on the trader. Some will use a combination of charts in different time periods and for different currencies or commodities. ► There are traders who sometimes design their own charts from charting tools such as bull and bar charts. ► In any case we need to know how to use them and what to do with them. Meydan & Co. © www.meydanco.com www.globaltraderclub.com
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Support & Resistance
Support - The levels where prices resist falling any further. Resistance – The price levels where prices resist an increase in price.
Resistance
Support
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Break out
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Trend Lines
False Breaks Trend line Determine the direction of the price. Trendlines can be classified as strong & weak. The proper drawing, use and application of trendlines help traders to keep on the right side of the trade.
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Chart patterns
- The major continuation and reversal patterns
â–ş Identification
of chart patterns may reveal the future market behavior basing on the assumption that the way the market forces interact does not change significantly with time and may be analyzed on the historical charts.
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Chart patterns
- The major continuation patterns Rectangle
â–ş
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A Rectangular pattern signals a continuation in the market trend and constitutes a trading range during a pause in the trend. The pattern is easily identifiable by two highs and two lows, that can be connected by two parallel lines, thus forming the top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones or congestion areas.
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Chart patterns
- The major continuation patterns Flags & Penants
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Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move.
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Chart patterns
- The major reversal patterns Head & Shoulders Top
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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 neckline. 16
Chart patterns
- The major reversal patterns Head & Shoulders Bottom
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The Head and Shoulders bottom is sometimes referred to as "an inverse head and shoulders". The pattern shares many common characteristics with the classical H&S formation, but relies more on volume patterns for confirmation.
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As a major reversal pattern, the 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 more shallow. In its most classical form, the two shoulders should be equal in height and width. The neckline that connects the lows forms resistance.
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Chart patterns
- The major reversal patterns Double Bottom
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Although there can be variations, the classic double bottom usually marks an intermediate or long-term change in the underlying trend. Many potential double bottoms can form along the way down, but until the key resistance is broken, a reversal cannot be confirmed. 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. 18
Chart patterns
- The major continuation patterns Symmetrical Triangles
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The symmetrical triangle, also known 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.
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The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that indicate accumulation.
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The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.
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Moving Averages â–ş Trend
lines are the basic indicator of trend, but they are quite subjective, depending on the eye of the beholder. So traders use additional indicators to help determine trends.
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Moving Averages â–ş Moving
Averages - Perhaps the simplest to understand and most widely used technical indicator is a moving average, which smoothes past data to illustrate existing trends or situations where a trend may be ready to begin or is about to reverse. A moving average helps you spot market direction over time rather than being caught up in short-term erratic market fluctuations.
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Moving Averages
There are three main types of moving averages: Simple. Each price point over the specified period of the moving average is given an equal weight. You just add the prices and divide by the number of prices to get an average. As each new price becomes available, the oldest price is dropped from the calculation. ► Weighted. More weight is given to the latest price, which is regarded as more important than older prices. If you used a three-day weighted moving average, for example, the latest price might be multiplied by 3, yesterday’s price by 2 and the oldest price three days ago by 1. The sum of these figures is divided by the sum of the weighting factors – 6 in this example. This makes the moving average more responsive to current price changes. ► Exponential. An exponential moving average (EMA) is another form of a weighted moving average that gives more importance to the most recent prices. Instead of dropping off the oldest prices in the calculation, however, all past prices are factored into the current average. The current EMA is calculated by subtracting yesterday’s EMA from today’s price and then adding this result to yesterday’s EMA to get today’s EMA. An EMA generally produces a smoother line than other forms of moving averages, which can be an important factor in choppy market conditions. ►
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Using Moving Averages A number of different time period moving averages are used on this chart to determine the short term & long term direction of price movement.
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Moving Averages Which Periods To Use
â–ş Moving
Average time periods depends mostly on the trader, the strategy, the time period used to trade and also on the commodity and the currency pair traded. ► Generally traders will use three to four moving average lines with short term and long term levels in order to determine the direction of the trend and locations where the trend is changing. Meydan & Co. Š www.meydanco.com www.globaltraderclub.com
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Moving Averages Moving average based trading techniques
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use combinations such as 5-day, 10day and 20-day moving averages, taking crossovers of the shorter moving average over the longer moving average as a trading signal. ► Still others use additional, longer-term moving average lines as another point of support or resistance. Meydan & Co. Š www.meydanco.com www.globaltraderclub.com
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Moving Averages Moving average based trading techniques If you were using a moving average cross over you would have entered a short transaction here! Depending on your trading strategy you may have exited in a few places with a lot of profit.
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Oscillators – MACD
(Moving Average Convergence / Divergence)
â–ş MACD
is a more detailed method of using moving averages to find trading signals from price charts. MACD plots the difference between a longer-term exponential moving average and a shorter exponential moving average (the chart in the next slide uses 21 days and 9 days). Then a 9-day moving average of this difference is generally used as a trigger line.
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Oscillators – MACD
(Moving Average Convergence / Divergence)
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Oscillators – MACD
(Moving Average Convergence / Divergence) The MACD indicator is used in three ways: ► Crossover signals. When the MACD line crosses below the trigger line, it is a bearish signal; when it crosses above it, it's a bullish signal. Another crossover signal occurs when MACD crosses above or below the zero line. ►
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Overbought-oversold. If the shorter moving average pulls away from the longer moving average dramatically, it indicates the market may be coming over-extended and is due for a correction to bring the averages back together. Divergence. As with other studies, traders look at MACD to provide early signals or divergences between market prices and a technical indicator. If the MACD turns positive and makes higher lows while prices are still going side ways, this could be a strong buy signal. Conversely, if the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal.
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Oscillators – RSI (Relative Strength Index)
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The main purpose of the Relative Strength Index (RSI ) is to measure the market's strength or weakness. A high RSI reading, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI number, below 30, implies an oversold market or dying bear market. However, blindly selling when the RSI is above 70 or buying when the RSI is below 30 can be an expensive trading system. A move to those levels is a signal that market conditions are ripe for a market top or bottom, but it does not, in itself, indicate a top or a bottom. Although you can use the RSI as an overbought and oversold indicator, like many indicators, it works best when a failure swing occurs between the RSI and market prices. For example, the market makes new highs after a bull market setback but the RSI fails to exceed its previous highs – Divergence.
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Oscillators – RSI (Relative Strength Index)
Note how the RSI is indicating a drop in price. You can catch these moves often with RSI.
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Oscillators – RSI (Stochastics)
► The
basic premise of the stochastic indicator revolves around the position of the close relative to the high or low of the day. During periods of price decreases, daily closes tend to accumulate near the extreme lows of the day. During periods of price increases, closes tend to accumulate near the extreme highs of the day. The stochastic study is an oscillator designed to indicate oversold and overbought market conditions.
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Oscillators – RSI (Stochastics)
Note how the stochastic levels are showing the places where prices are turning the other way.
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Its a piece of cake! ANY QUESTIONS ?
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