Technical Analysis introduction

What is Technical Analysis?

In simple words, technical analysis can be defined as predicting the future price of a stock by looking at the past trends of similar stocks prevailing in the market. This includes analysis of the market data, price analysis, and the volume traded. The principles that govern the technical analysis are made by observing the stock market trends for hundreds of years. Technical analysts don’t look at the intrinsic value (the true value of the stock based on the assets owned by the company) of the stock, they look at the prevailing market factors determining the overall market sentiment. Another factor they look at is the supply and demand factors prevailing in the market. After careful analysis, they extrapolate these past and present trends to stretch them for future predictions.

Technical analysis depends mainly on mathematical calculations to reach these trend conclusions. Let’s have a look at a very simple example of how technical analysis helps stock marketers make key decisions regarding their investments.

Let us assume that Mr. A wants to buy a stock XYZ of company D. He talks to his broker about his interest in that particular stock. He then asks him for the advice. The broker looks at all the past trends for the stock XYZ and tries to establish patterns set by the stock. For example, he’ll look at the six-month performance in past, for instance how the price of stock started going down from January to June and in June it hits the bottom. After that, it started rising again and swelled to its maximum price in December. He’ll ask Mr. A to buy the stock at the end of June or at the start of July. He’ll also recommend Mr. A to sell the stock in December.

That was a typical example of stock technical analysis. The stock broker just looked at the stock’s price and its trends in the past. It gave him a pattern that particular stock has been following and helped him in advising his customer. Technical analysis of this sort is for long term investment. There are, however, very short trends analyzed as well. These trends may be of months, days, hours or seconds. Technical analysis can be done for any set of time. Tighter the timelines, tougher it will get for the analysts to predict with more reasonability and accuracy.

Technical Tools

Technical Analysis is used by Traders and investors worldwide for future predictions and for historical references. History repeats itself and this is what technical analysts believe. They look for chart patterns and make predictions based on technical tools. As the name suggests Technical analysis is an analysis of a security by means of some technical reasoning or tools.

Few of the tools are

Technical indicators:

  • Average Directional Movement (ADX)
  • Accumulation/Distribution (AD)
  • Average True Range (ATR)

Oscillators:

  • Relative Strength Index
  • Stochastic Oscillator
  • Etc.

There are thousands of tools out there and traders are using them in millions of ways. A novice trader actually makes his first mistake here. He thinks more is better. He tries to learn each and every technical tool and hops on from one tool to another in search of a sure shot tool for success in trading. If you are in this position, let me make it clear.“There is no sure-shot tool and more is not good surely”. Like weather prediction, you can set probabilities, but you can never be 100% sure what will happen in future.

Where and how to learn technical analysis?

There are lots of online tutorials, reading materials which can give you a lot of information. Going thru all those without any guidance can be painful and you might feel lost and de-motivated after some time.

To cut the learning curve short, I would recommend that find a mentor or attend a professional trading course. You might feel that why should I pay when I can get all the information for free?

Trading is not like a simple math equation (2+2 =4), It’s an art and your tool is technical analysis. You might get the tools online, but you can’t be an artist without a guru. Self-experience is also a guru, but it would take lots of your time and effort.

I would recommend a book for learning technical analysis for both novice and experienced traders. It helped me a lot in becoming a professional Technical analyst. It will surely help you too. The link is given at bottom of the article.

Please buy it and feel like you are buying an asset. It is a small investment for your bright future.

Trading using Channels

Trading using Channels:

The Channel is an area or space created by Scrip movements in space/range which is having resistance indicated by tops and support indicated by low of an asset. Channels are the simplest of chart patterns to identify. All we have to do is sketch a line joining tops of a stock and same with the bottoms of stock. The Lines would roughly be parallel to each other or can be in the shapes of wedges. When you start joining tops & bottoms with Lines then you would realize that all the tops & bottoms you just joined make some sense. Yes, If you have discovered this, then you are on right track. See image below (Self-explanatory).
Up and down channels
Channels

Buy at supports and sell at resistance

See few Live trading examples using Channel trading. Few of you must have worked on these calls and surely reaped profits out of it. But, before that, let’s see what happens when the so-called ” Trading Channel ” is broken by price. See Image below. Upper Part of an image shows a Price BREAKOUT
Entry (My style):  The breakout from range should be with high volume. I enter/buy half Qty. On breakout. The stock will come back to retest the resistance it broke (which now becomes support).
Our stop-loss is just below the Entry line (Minor support level). If the stock holds the line and starts moving up from the Entry line. I buy the rest of the position.
Targets: The simple way is to just measure the breadth of the channel and then assume target equal to that.
The lower part of the image shows a Price Breakdown.
Entry, stop-loss and Targets Vice versa as explained above.
Trading using Channels
channel break
Buy on breakout, Sell on breakdown
Channels can be very powerful tools in the arsenal of a technical trader.Now, Let’s see TRADING EXAMPLES for Trading using Channels.

Trade examples

Few Trade examples

Price action is supreme. Simplest analysis is based on simple price action following, but is it so?

Price in itself creates too much noise and challenges individuals to predict correctly the future move of a security. Trendlines can help to visually analyze a trend easily. Just try to connect two or more points in a chart and you get something to look for. However, It is not as easy as it sounds because we have to keep in mind that price is driven by forces of supply and demand. We cannot ignore the support and resistance made up on the chart.

Whenever you try to draw a trend-line, always try to find nearest support and resistance levels on that chart and try to draw in sync with those. You will surely get success. Try to look into multiple time frame and conflicting price zones. You can draw trend lines joining tops or bottoms of a stock. Draw a line where the price takes support too often or a price zone where it fails to cross most of the times. The point on exact Trend-line should not be used as a stop loss or for Buy bid because the price is noisy and there are chances it will hit your stop loss or buy order and then move into opposite direction. So, always wait for trend-line confirmation and for signs of price action in your favor.

Below I have shared few examples of trend-line based trades. Please have a look.

Also, visit the post for Channel Trading here.

HEROMOTOCORP original Buy call was given on 5th December in cash segment:
SHORT TERM CALL: BUY HEROMOTOCORP at 1820-1830, stop loss 1795 closing basis, TGT 1869-1895-1920-1950
The stock took support on a trendline and formed a base.

Result: 1912 High. All targets almost hit.

Hero Trade examples
 Another Trade examples, Satyam
trade examples

Triangles

Triangles

Triangles
Types of triangles
There are mainly three types of triangles chart patterns.
  1. Symmetrical Triangle : formed in both uptrend and downtrend. Price generally moves on the side of which the break has happened.
  2. Ascending Triangle : formed in uptrend usually and is a bullish pattern.
  3. Descending Triangle : formed in downtrend usually and is a bearish pattern.
These are very strong chart patterns in Trading. In laymen terms, and Triangles are nothing more but like a catapult, storing potential energy that energy is released with what we know as breakouts or breakdowns. The price of a stock just catapults/accelerates after leaving the triangle zone. Due to this phenomenon these are favorite of traders who follow breakouts or breakdowns. Coiled spring is the name used mostly with the symmetrical triangle.

Psychology of Technical Analysis

Psychology of Technical Analysis

Technical Analysis is the science of analyzing securities based on various patterns and indicators. A technical analyst usually trades by analyzing the history and predicting the future.

Psychology of Technical Analysis

You must be aware of the term Psychology. As you all know,  It is a study of human mental functions and behavior. Psychology has the goal of understanding individuals and groups by both establishing general principles and researching specific cases. In respect to the profession of trading, a professional practitioner or researcher who reads is called a technical analyst. Over the years various analysts have developed various tools and indicators which are based on their study of traders psychology.Which is ever increasing and developing with every second.

With the advent of computers, the technical analysis has widened over to thousands of oscillators, systems and indicators like MACD, RSI, Bollinger bands and many many others?

But, Isn’t with the advent of computers the studies would have been refined and lowered in numbers by eliminating those with less to no profitability. So, Why is it so that after so much automation, still the quench for the holy grail has not stopped.

The reason is the Psychology of Technical analysis and the traders.

Why is Traders psychology so important that they have done some much research on it. The answer is that we humans in markets are driven by common forces like greed and fear, optimism and pessimism. Humans act in a predictable pattern and technical analysts have formed descriptions of these emotional patterns that are seen in the price action. This applies to both rational as well as erratic market gyrations. A consensus among market forces is seen as a ‘trend’. Incorrect expectations and failures are considered a ‘breakout or breakdown’. The market highs and lows are really a graphic representation of human desires and fears in action.

Types of Charts

Types of Charts

There are as many types of Charts and ideas as there are chartist and profitable traders who make money from their squiggly lines on graph paper.

 

 Line Charts

lineThe simplest is the basic line chart which we see in the newspaper each day. Generally, these use only the closing price for the day, week or month as a representative sample of the time period being looked at. With daily charts, the closing price also carries increased significance as this is the settlement price which has to be paid at the end of each trading day for the parcel of shares or contracts.

Continue reading “Types of Charts”

Technical Analysis course

COURSE: – Technical Analysis course LEVEL 1  – Tenure: 32 lectures

Technical Analysis Course

Note: Please visit again as we are uploading all chapters gradually.For Educational Purposes Only

The Level 1 Course builds know-how of 6 basics of technical analysis:
1) Terms used in technical analysis
2) Various types of charting
3) Determination of price trends/basics of pattern exploration
4) How to find, price targets
5) Stock market analysis
6) Applying technical analysis to securities, currencies, derivatives

Chapters :

1   Psychology of Technical Analysis
2   Charts
3   The Dow Theory
4   Important Reversal Patterns
5   Important Reversal Patterns – Continued
6   Important Reversal Patterns – The Triangles
7   Important Reversal Patterns – Continued
8   Consolidation Formations
9   Gaps
10   Support and Resistance
11   Use of Support and Resistance
12   Trendlines and Channels
13   Major Trendlines
14   Trendlines in Action
15   Individual Momentum Indicators I
16   Individual Momentum Indicators II
17   Candle Charts
18   Elliott, Fibonacci, and Gann
19   Volume: General Principles
20   Volume Oscillators
21   Stop Orders
22   What Is A Bottom – What Is A Top?
23  Money and Risk Management
24  Advancements in Investment Technology
25  Choosing and Managing High-Risk Stocks
26  Not All in One Basket
27  Balanced and Diversified
28  Trial and Error
29  How Much Capital to Use in Trading
30  Application of Capital in Practice
31  Portfolio Risk Management
32  Stick to Your Guns

Symmetrical Continuation Triangle

Symmetrical Continuation Triangle-Classic Pattern

A Symmetrical Continuation Triangle (Bullish) is seen as a bullish signal, indicating that the current uptrend may continue. (Bearish) is seen as a bearish signal, indicating that the current downtrend may continue.
Symmetrical Continuation Triangle
Symmetrical Continuation Triangle
Image showing Breakout and breakdown showing Breakout and breakdown showing Breakout and breakdown showing Breakout and breakdown

Description

A Symmetrical Continuation Triangle shows two converging trendlines, the lower one is ascending, the upper one is descending. The pattern occurs because prices are reaching both lower highs and higher lows. The pattern will display two highs touching the upper (descending) trend line or above the upper (descending) trend line.trendline.This pattern is valid when the price goes out of the triangle pattern to close below the bottom (ascending) trend line or above the upper (descending) trendline..trend line.
Tracking the Volume is important. Normally, the volume takes after a solid example: volume ought to lessen as the cost swings forward and backward between an inexorably
Important Characteristics
Few important characteristics of the pattern.

Event of a Breakout

Specialized investigators give careful consideration to what extent the Triangle takes to create to its peak. The general decide is that costs should break out – plainly enter one of the trend lines – somewhere close to 75% and 66% of the flat width of the development. The breakout, at the end of the day, ought to happen a long time before the example achieves the zenith of the Triangle. The nearer the breakout strikes the zenith the less solid the arrangement.

Duration of the Symmetrical Continuation Triangle
The Symmetrical Continuation Triangle is a relatively short-term pattern. While long-term triangles do form, the most reliable triangles take one to three months time to develop.
Volume
Financial specialists should see volume diminishing as the example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume.example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume.example advances.example advances.example advances.example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume..example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume..example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume.
Trading Considerations

Length of the Pattern

Consider the length of the example and its relationship to your exchanging time skylines. The span of the example is thought to be a marker of the length of the impact of this example. The more extended the example the more it will take at the cost to move to the objective cost. The shorter the example the sooner the value move. In the event that you are thinking about a fleeting exchanging opportunity, search for an example with a brief length. In the event that you are thinking about a more drawn out term exchanging opportunity, search for, an example with a more drawn out length.

Target Price

The objective cost gives an imperative sign about the potential value move that this example shows. Consider whether the objective cost for this example is adequate to give sufficient returns after your costs, (for example, commissions) have been considered. A decent general guideline is that the objective cost must show a potential return of more noteworthy than 5% preceding an example ought to be viewed as helpful. Nonetheless, you should consider the present cost and the volume of offers you expect to exchange. Additionally, watch that the objective cost has not as of now been accomplished.

Inbound Trend

The inbound pattern is an imperative normal for the example. A shallow inbound pattern may demonstrate a time of union before the value move showed by the example starts. Search for an inbound pattern that is longer than the term of the example. A decent general guideline is that the inbound pattern ought to be no less than two times the span of the example.

Confirm the Breakout
To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout signals that the price is ready to move. A key sign of a possible false move is low volume. If there’s no pick up in volume around the breakout, investors should be wary. Typically, a good breakout from a Symmetrical Continuation Triangle formation will be accompanied by a definite surge in volume.
Criteria that Support
Support and Resistance
Search for an area of help or resistance around the objective cost. A district of value combination or a solid Support and Resistance Line at or around the objective cost is a solid marker that the cost will move to that point.
Price moves below Support Level or above the resistance level.
You can also check that the prices following the pattern have also crossed above/below a support level such as a 200-day moving average. This would provide extra confirmation that the trend is poised to continue uptrend/downward.
Volume
A strong volume spike upon the arrival of the example affirmation is a solid marker in the help of the potential for this example. The volume spike ought to be altogether over the normal of the volume help of the potential for this example. The volume spike ought to be altogether over the normal of the volume for the span of the example. What’s more, the volume amid the term of the example ought to be declining all things considered.

Avoid pattern break in following cases:

No Volume Spike on Breakout

The absence of a volume spike upon the arrival of the example affirmation means that this example may not be dependable. Also, if the volume has stayed consistent, or was expanding, over the term of the example, at that point this example ought to be viewed as less dependable.

Short Inbound Trend

An inbound pattern that is fundamentally shorter than the example length means that this example ought to be viewed as less dependable.

Symmetrical triangle Breakout on upside

Bajaj Auto Symmetrical Continuation Triangle example

Cup and Handle pattern

I) Cup and Handle Formation

Also a reversal pattern, but more obvious at the bottom rather than at the top
Basically looks like a coffee cup and a handle
There is a basing stage, accumulation phase (cup), then a breakout, followed by a pullback, forming what looks like a handle
Breaking out of the top of the cup is confirmation of a change in trend
C&H pattern
Cup & Handle

Cup & Handle

Few criteria
The cup should be more rounded than a “V”
The handle should be in the top part of the cup, not too deep
Cup pattern should take at least 7weeks to form
Volumes should contract in the handle and expand on b/out
Trading-Wise -> ENTRY
From a trade perspective, the buy is the area where the top of the cup is taken out
TARGET
Measure the distance to the low of the cup.Add that to the breakout area
STOP
At the low of the handle

I.a) Reverse Cup and Handle

Occurs at the top, rest all reverse of the above
LIVE EXAMPLE: CUP and HANDLE PATTERN:
Stock:     DCM
Pattern confirmed on 23rd March @ 83 CMP: 93 TARGET: 140+ Today I am posting a Live example of This pattern. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil. Now trading in 180’s
BEML cup and handle formation
Cup and handle

 Contd. to Head & Shoulders pattern.