Investing in Shares Introduction to Technical Analysis Australian Shareholders Association Tutorial Resource Library
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Outline What is Technical Analysis What is involved? Price Charts Candlesticks & Candlestick Patterns Trendlines Support and Resistance Moving Averages Chart Patterns
What is Technical Analysis Technical analysis is the study of the price and volume movements of a stock or market. It is based on the belief that everything that is known about a stock is reflected in the share price and the volume of shares traded. Technical analysis can give indicators to investors as to when to buy or sell by providing insights into market sentiment and Can be used on all timeframes daily, weekly, monthly Covers many techniques pick a few to add to your technical analysis toolkit.
What s involved in Technical Analysis? Price Charts Candlesticks & Candlestick Patterns Support and Resistance Trendlines Moving Averages Chart Patterns Indicators Fibonacci Dow Theory Elliot Wave, W.D Gann Theory, Cycles... Plus a whole lot more! This presentation will provide an overview of the first six topics listed here.
Price Charts Technical analysis uses data based on price and volume data can be from a daily, weekly, monthly or even shorter timeframe (e.g. hour) open, low, high, and close prices from the set timeframe e.g. one trading day or one trading week, and volume. The data is presented in a chart There are many different types of charts We will look at 3 types of charts line charts bar chart candlestick charts
Price Charts The three charts on the following three slides are of the same stock over the same time period. 1 st is a Line Chart 2 nd is a Bar Chart 3 rd is a Candlestick Chart Look at the difference in detail in each of the charts
Line Chart Usually, based on the close price, cuts out the noise
Bar Chart More detail, can see the open, high, low close so investor can get a feel for sentiment
Candle Chart More visual, easier for investor to see open, high, low close and sentiment
Types of Charts Key Differences Line Chart - usually, based on the close price, cuts out the noise Bar Chart more detail, can see the open, high, low close so can get a feel for sentiment Candlestick Chart more visual, easier to see open, high, low close and sentiment
Candlestick A candlestick is another way of looking at price data more visual as filled in bars represent negative sentiment.
Candle Patterns Candles can have names applied to them, however, you don t need to learn them! It is more important to understand the price action that the candle represents and what it is saying about the buyers and the sellers. You might hear terms describing candles like Doji, Shooting Star, Hammer, Harami, Engulfing, Piercing, Hanging Man, Evening Star. Let s look at a two examples and see what they mean for supply (sellers) and demand (buyers)
Bullish Candle The candle shown here is a normal bullish candle. The body of the candle is not filled so we know that the price opened at the bottom of the body of the candle and closed at the top of the body. Sometime during the day, price traded to the bottom of the lower wick or tail and to the top of the upper wick. From a supply and demand perspective, this candle is showing positive sentiment, buyers were prepared to pay more for this stock and pushed the price up so that it closed near the highs
Doji Candle The candle shown here is called a Doji candle this one has a special name, it is called a Gravestone doji. The price opened and closed at the same price so there is no body to this candle. During the trading period, buyers pushed the price up, but sellers came into the market and pushed the price back down so that the trading session closed on its lows. If this candle occurred after an uptrend, this could indicate a potential change in trend. A Gravestone doji is generally a bearish or negative sentiment candle.
Candlestick Summary Learning about candles and using them on your charts can be a useful investing tool. Candles and candle patterns provide you with a visual representation of market psychology and sentiment. There are lots more types of candles and combinations of candles to make patterns. Do your own research to learn more!
Candlestick Key Points to Remember Length of body long or short, what is it telling you? Length of tails or absence of tails, what does it mean? Can suggest a possible change in trend Candlesticks shouldn t be used in isolation to make buy and sell decisions BUT used with other western technical tools they can add value to your investing toolkit.
Trend Lines Perhaps the simplest form of technical analysis Markets are not random they often move in trends And these trends can be marked on a chart by the drawing of trend lines
Uptrend A series of higher highs and higher lows
Downtrend, sideways & change of trend Downtrend a series of lower highs and lower lows Change of trend when a higher low is made and the previous high is surpassed
Support A support level is the price at which buyers are expected to enter the market in sufficient numbers to take control from sellers. A support line can be horizontal or sloping upward
Resistance A resistance level is the price level at which sellers are expected to enter the market in sufficient numbers to take control from buyers. A resistance line can be horizontal or sloping downward
Support & Resistance In this chart, old resistance becomes new support and a clear break of the support line at the right of the chart was a signal to exit the stock
Moving Averages Moving Averages (MA s) are a way of coping with the problem of random information. MA s are lagging indicators and are the basis of many other indicators MA s take data points and plot them as an average making it easier to discern trends There are many types of moving averages simple, exponential, weighted
Moving Averages One of the most common MA s is the 200 Day Simple Moving Average. It is often quoted as providing support or resistance to price action for various stocks and indices. Because it is so widely used, it may be beneficial to become familiar with it.
Simple Moving Average 200 Day This is a 200 Day simple moving average plotted over BHP.
Multiple Moving Averages Another form of moving averages is the Multiple Moving Averages or MMA s. Developed by Australian trader and investor Daryl Guppy they present a very visual representation of the sentiment of traders and investors. The longer term MMA s are said to represent the action of investors and the shorter term MMA s that of traders. The interaction between the two groups of MMA s can be used to time entries and exits.
Multiple Moving Averages Guppy Multiple Moving Averages plotted on a daily chart.
Chart Patterns Chart patterns reflect human behaviour in a market and can be seen on all timeframe charts. The following chart patterns offer a high probability of future market movement and can be used to select stocks or to time entries into stocks. Continuation patterns The triangle The flag Reversal patterns Double tops Head and shoulders
Reversal or Continuation A continuation and reversal pattern.
Ascending Triangle A series of ascending triangles examples of continuation patterns
Flag Flag continuation patterns investors could look for breakouts from the pattern
Reversal Patterns Reversal patterns can usually be found at the beginning or end of trends. They can form on any timeframe chart, however, the longer the timeframe the more significant the pattern. In some cases the height of the pattern can be used to estimate the price targets if price breaks the pattern.
Double Top A Double top on a weekly chart taking a long time to form, reversing a long term uptrend
Head and Shoulders A Head & Shoulders pattern the neckline can slope in either direction
Bottom Reversal Patterns A Double Bottom pattern
Bottom Reversal Patterns A Reverse Head and Shoulder pattern
Summary Technical Analysis does not provide a forecast. It provides tools to gauge the probability that a future event may occur. Always be aware of the time frame look at the longest time frame charts first to get the big picture. Generally signals in longer time frames are more reliable than those in shorter time frames.
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