Disclaimer: The authors of the articles in this guide are simply offering their interpretation of the concepts. Information, charts or examples

Transcription

1 Disclaimer: The authors of the articles in this guide are simply offering their interpretation of the concepts. Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument.

2 Technical Analysis Tools & Techniques

3 Introduction to Technical Indicators and Oscillators

4 What is Technical Indicator & Oscillator Technical Indicators & Oscillators provides indication about Strength and Direction of the Price Trend Technical indicators and Oscillators are derived by applying mathematical formula to the series of price point data. Price point data can include any combination of the open, high, low or close over a period of time. Some indicators incorporate Volume and Open Interest into the formulas.

5 4.2 Why do we use Technical Indicators and Oscillators Identify Buy & Sell signals generated by technical indicators Marking Overbought & Oversold market sentiments Positive and Negative Divergences indicating trend reversals

6 Broad Functions of Technical Indicators & Oscillators Alert An indicator can act as an alert to study price action a little more closely. If momentum is warning, it may be a signal to watch for a break of support If there is a large positive divergence building, it may serve as an alert to watch for a resistance breakout. Confirm Indicators can be used to confirm other technical analysis tools. If there is a breakout on the price chart, a corresponding moving average crossover could serve to confirm the breakout. If a stock breaks support, a corresponding low in the Volume based indictors could be used confirm the weakness. Predict. Used to predict the direction of future prices.

7 Tips for Using Indicators Indicators indicate. Do NOT ignore the Price Action of a security and focus solely on an indicator Any analysis of an indicator should be taken with the price action in mind. Is the price action getting stronger? Weaker? Indicators filter price action with formulas. They are derivatives and not direct reflections of the price action. This should be taken into consideration when applying analysis Even though it may be obvious when indicators generate Buy and Sell signals, the signals should be taken in context with other technical analysis tools.

8 Indicator Type Indication of volatility What it indicates? Standard Deviation (Volatility) It measures how widely price values are dispersed from the average. The larger the difference between the closing prices and the average price, the higher the standard deviation will be and the higher the volatility The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility. Formula The steps for calculating a 20-period standard deviation are as follows: Calculate the simple average (mean) of the closing price. i.e., Sum the last 20 closing prices and divide by 20. For each period, subtract the average closing price from the actual closing price. This gives us the deviation for each period. Square each period's deviation. Sum the squared deviations. Divide the sum of the squared deviations by the number of periods (20 in our example below). The standard deviation is then equal to the square root of that number. 8

9 4.01 Bollinger Band - John Bollinger The indicator consists of three bands which covers 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) What it indicates? Bollinger Band is an indicator which indicates the volatility. Tight bands indicate low volatility and wide bands indicate high volatility. It shows the relative price levels over a period time. It identify periods when prices are at extreme, and possibly unsustainable, levels Comments The default setting is a 20-day simple moving average with the upper and lower bands set 2 standard deviations above and below. Both settings can be changed and users are encouraged to experiment 9

10 How to read and interpret Double bottom Buy: How to read and interpret A Double Bottom Buy signal is given when prices penetrate the lower band and remain above the lower band after a subsequent low forms. Either low can be higher or lower than the other. The important thing is that the second low remains above the lower band. The bullish setup is confirmed when the price moves above the middle band, or simple moving average. Double Top Sell: A Double Top Sell signal is given when prices peak above the upper band and a subsequent peak fails to break above the upper band. The bearish setup is confirmed when prices decline below the middle band. Usually a sharp price changes can occurs after the bands have tightened and volatility is low.

11 MACD Moving Averages Convergence/Divergence Indicator Type : Trend following Momentum oscillator It incorporates Momentum and Trend in one indicator. What it indicates? MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. Formula The MACD is calculated by subtracting the Fast exponential moving average (12 Day) from the Slow exponential moving average (26 day). A 9 day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative 11 when MACD is below its 9-day EMA.

12 How to read and interpret A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average indicating bullish momentum and vice versa Signal lines crossover Buy & Sell Signals MACD centerline crossovers occur when MSCD line crossovers signal line If the faster signal line crosses above the MACD line then a buy signal is generated and vice versa. Overbought and oversold indicator. The higher above the zero both lines are the more overbought it becomes and the lower below the zero line both lines are the more oversold it becomes. It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold. Divergence. If the MACD is making new lows and the price of the security is not making new lows that is one form of divergence (bullish divergence). If the MACD has made a high and starts to head down but price continues up that is another type of divergence (bearish divergence) and may lead to an indication of a change in direction

13 Indicator Type : Momentum Oscillator What is RSI? RSI (Relative Strength Index) The RSI compares the magnitude of a stock's recent gains and recent losses and converts it into a number that ranges from 0 to 100. It usually takes 14 days as parameter for the calculations How to read and interpret Range above 70 and below 30 indicates overbought and oversold levels respectively. When RSI rises above 30 from bottom, it is bullish indication When RSI falls below 70 from top, it is a bearish signal. Formula RSI = / 1 + RS RS = Average Gain / Average Loss Average Gain = [(previous Average Gain) x 13 + current Gain] / 14 First Average Gain = Total of Gains during past 14 periods / 14 Average Loss = [(previous Average Loss) x 13 + current Loss] / 14 First Average Loss = Total of Losses during past 14 periods / 14 Note: "Losses" are reported as positive values. Comments : Identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points. 13

14 Stochastic Oscillator Stochastic Oscillator is a momentum indicator It shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) Closing levels near the bottom of the range indicate distribution (selling pressure). Readings below 20 are considered oversold and readings above 80 are considered overbought Best signals occurred when the oscillator moves from overbought territory back below 80 and from oversold territory back above 20 Buy and sell signals can also be given when %K crosses above or below %D. 14

15 Money Flow Index MFI is volume-weighted indicator which indicates the strength of money flowing in and out of a security. Typical Price = ( (Day High + Day Low + Day Close) / 3) Money Flow = (Typical Price) x (Volume) The MFI compares the ratio of "positive" money flow and "negative" money flow. If typical price today is greater than yesterday, it is considered positive money. The MFI is based on the ratio of positive/negative money flow (Money Ratio). Money Ratio = (Positive Money Flow / Negative Money Flow) Money Flow Index = (100 / (1 + Money Ratio)) Overbought/Oversold: A stock is considered "overbought" if the MFI indicator reaches 80 and above 20 and below suggests a stock is "oversold" Divergence: If the stock price is falling, but positive money flow tends to be greater than negative money flow, then there is more volume associated with daily price rises than with the price drops. This suggests a weak downtrend that threatens to reverse as money flowing into the security is "stronger" than money flowing out of it.

16 Tools & Techniques Introduction to Stock Market Technical Analysis Technical Analysis Training Course Syllabus Importance & Applications Price Trend, Support, Resistance, Price Channel, Retracement, Breakout etc. Chart reading & interpretation Importance of Price & Volume Pivot Point levels Basics of Dow Theory, Elliot Wave Theory Golden Rules for disciplined Traders & Investors Price Trend Analysis Moving Averages Retracement levels using Fibonacci no. technique Chart Patterns Candlesticks charts Technical Indicators and Oscillators Characteristics of uptrend, downtrend, consolidation Find out Support, Resistance, Price Channel, Breakouts Buy & Sell signals, Support & Resistance levels, Trend direction Price correction, retracement levels, trend reversal levels Buy & Sell opportunities Bullish & Bearish Pattern breakouts Trend reversal & continuation patterns Buy/Sell opportunities through Price breakouts Introduction to Bull/Bear candlestick formations Visually analyze battle between Bull Vs Bear and find out the winner Identify & enter into successful trade early? Buy & Sell signals Overbought and Oversold market scenarios In-depth study of Market Health indicators

17 What you saw in presentation is just a theory! To learn about - How to apply Tech Indicators & Oscillator s signals in your live trading system Where to find them? And most importantly- How to use them for trading purpose? Visit for more info Just Dial to Register 19, Nav Bhavana, Veer Savarkar Marg, Prabhadevi, Dadar, Mumbai , info@marketrahasya.com