s1_fundamental of technical analysis and algorithmic trading

8/13/2019 S1_Fundamental of Technical Analysis and Algorithmic Trading

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Saeed Ebrahimijam

Spring 2013

Faculty of Business and EconomicsDepartment of Banking and Financeu kdeniz niversitesi

FINA417


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Principal of Stock Market Investment The Basic Principals

Technical analysis defined

Adaptability to Different Market andInvestment Time Horizons

Dow Theory

Fundamental of Technical Analysisand Algorithmic Trading 2


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Generally there are two viewpoints of analyzing:

Fundamental: The stock market has nomemory and prices are changed randomlyaccording to economic and financial variables,reports and news.

Technical: The market has undergone a pseudopsychological mode and history is always

repeatable. Like: RSI, MACD, %K, Fibonacci,

Fundamental analysts believe, Technical analysis basedon the weak principles.



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Sellon good news.Why ???

Because if the actual news is as expected, it

is, of course, already discounted andreflected in the market price. Therefore, youwould expect no further rise in price basedon that news.


A related paper:Buy on bad news sell on good news: How insider trading analysis can benefitfrom textual analysis of corporate disclosures Hagenau et all.http://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers%5Cwise12_submission_36.pdf
http://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers/wise12_submission_36.pdfhttp://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers/wise12_submission_36.pdfhttp://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers/wise12_submission_36.pdfhttp://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers/wise12_submission_36.pdfhttp://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers/wise12_submission_36.pdfhttp://www.krannert.purdue.edu/faculty/kkarthik/wise12/papers/wise12_submission_36.pdf


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Technical analyzers believe that all theimportant information of company(lose/profit report, balance sheet,),economical, political, psychological andconditions are all reflects in the stockprices.



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As a rule, people will act the same way theyhave in the past.

The stock market is a reflection of the actionsof people, technicians study it to determinehow people will react under certainconditions and, thus, how security prices willmove.



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The real value of a share of stock or other marketinstrument at any point is determined solely bysupply and demand as reflected in tradingactivity.

Price movements and fluctuations are simply thereflection of changes in supply and demand.

The technician does not care what the underlyingforces of a shift in supply and demand are.

The study of market prices is all that isnecessary.



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Consider:

Stock prices are determined solely by theinteraction of demand and supply.

Stock prices tend to move in trends.

Shifts in demand and supply cause reversalsin trends.

Shifts in demand and supply can be detectedin charts.

Chart patterns tend to repeat themselves.Fundamental of Technical Analysis

and Algorithmic Trading 13


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From a technical analyst's perspective, a trend is adirectional movement of prices that remains in effectlong enough to be identified and still be playable.Anything less makes technical analysis useless.

If a trend is not identified until it is over, we cannot

make money from it. If it is unrecognizable until too late, we cannot makemoney from it.

In retrospect, looking at a graph of prices, forexample, many trends can be identified of varyinglength and magnitude, but such observations are

observations of history only. A trend must be recognized early and be long enough

for the technician to profit from it.Fundamental of Technical Analysis

and Algorithmic Trading 14


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A rising trend, or "uptrend," occurs whenprices reach higher peaks and higher troughs.

A declining trend, or "downtrend," is theoppositewhen prices reach lower troughsand lower peaks.



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The trend is your friend, is true because,once begun, a trend is likely to continue. Byfollowing it, you increase your probability ofmaking money.



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The price changes are function of specifictrends. The trends are always consistent anddontchange without any reasons.

Moving car on the road!!!



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First, they begin in one direction, up or down,creating a trend. That trend persists until theprice movement slows and gives warningbefore finally reversing and moving in the

opposite direction. At that point a new trendis initiated.

As illustrated in Figure, trends can be easilyspotted on charts. The chart patterns showthe balance of supply and demand for aparticular stock or other market instrument.



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In its basic form, technical analysis is thestudy of past market data, primarily price andvolume data; this information is used to maketrading or investing decisions.

Technical analysis is rooted in basiceconomic theory?



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Giving consideration to the principlesdiscussed above, technical analysis can bedefined as simply the study of individualsecurities and the overall market based on

supply and demand. Technicians record, usually in chart form,

historical price and volume activity anddeduce from that pictured history theprobable future trend of prices.



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it can be applied effectively to virtually anytrading medium and investment time horizon.

A technician can analyze stocks, bonds,options, mutual funds, commodities, and

many other forms of investments(Gold, Oil,real states,) for buy and sell opportunities.

one can do so by examining tic-by-tic,intraday, daily, weekly, monthly, or some

other interval of time to use technical analysisfor a wide range of time horizonsfrom veryshort-term to very long-term perspectives.



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Technical analysis is used in two major ways: Predictive

Reactive



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Those who use technical analysis for predictivepurposes use the analysis to make predictionsabout future market moves.

Generally, these individuals make money by

selling their predictions to others. Market letterwriters in print or on the web and the technicalmarket gurus who frequent the financial news fallinto this category.

The predictive technical analysts include the

more well-known names in the industry; theseindividuals like publicity because it helps markettheir services.



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On the other hand, those who use technicalanalysis in a reactive mode are usually notwell-known.

Traders and investors use techniques oftechnical analysis to react to particularmarket conditions to make their decisions.

For example, a trader may use a moving

average crossover to signal when a longposition should be taken.



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There are several requirements needed to convertpure technical analysis into money. The first and most important, of course, is to

determine when a trend is beginning or ending. Themoney is made by "jumping" on the trend as early aspossible. Theoretically, this sounds simple,consistently is not so easy.

The indicators and measurements that technicalanalysts use to determine the trend are not crystalballs that perfectly predict the future. Under certainmarket conditions, these tools may not work. Also, a

trend may suddenly change direction withoutwarning. Thus, it is imperative that the technicalinvestor be aware of risks and protect against suchoccurrences causing losses



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From a strategic standpoint, then, the technicalinvestor must decide two things:

- First, when to enter a position,

- Second, when to exit a position.

Choosing when to exit a position is composed oftwo decisions:

1- when to capture profit (take profit).2- when to exit from position at a loss (stop loss)



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The wise investor is aware of the risk that thetrend may differ from what she expected.

Making the decision of what price level tosell and cut losses before even entering into a

position is a way in which the investorprotects against large losses.



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In sum, the basic ways to make money usingtechnical methods are

"The trend is your friend"play the trend.

Don't losecontrol risk.

Manage your moneyavoid ruin.

when the analysis is wrong and the position

must be closed.



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Adam smith:If you dont know who you are, the stock

market is an expensive place to find out



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Technical analysis method should be differentby characteristics of the person. Level ofStress, behaviors and wealth.

Complementary of persons characteristics

and investment philosophy.



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Obviously, those whose time, nerves, andcapital are limited will want to pass up veryshort-term trading opportunities (such asintraday trading of stock index futures) and,

perhaps, use longer-term technical analysisderived buy and sell signals for stocks,exchange traded funds (ETFs), or mutualfunds.



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Joseph Kennedy: Waiting for the ceiling price to sell shares is

what silly people do.



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Joseph Kennedy was a stock market investor in the late 1920's. One day, in theSummer of 1929, he overheard an elevator boy boasting about how much moneyhe had made in the stock market. Joseph Kennedy reasoned that if totally-uneducated low-income employees have now been attracted to the stock market,then the prices must be at their all-time highest. So, he raced to the floor of thestock exchange and famously yelled: SELL! For months, his friends laughed at himas prices kept rising and rising and rising. Then, one day, October 29, 1929, themarket crashed. Joseph Kennedy and his family were safe. They had no moneywhatsoever in the market.

Joseph Kennedy waited. Prices fell. He waited. Prices fell. Then, one day, in 1932, afull three years later, he bought a chain of department stores at 5 on the dollar.He bought the real estate, the buildings, the inventory, the goodwill - everythingat a 95% discount. He then parlayed that brilliant purchase into a fortune thatspawned a political dynasty of famous and politically successful Kennedy's,including one President John Kennedy. His wealth and his influence will last forcenturies - because he had the courage to go against the conventional wisdom. Heplayed the INNER game instead of just reading the newspaper headlines.

Joseph Kennedy SOLD when everyone was buying Then, he BOUGHT when theDepression was at its very worst. He made a gigantic fortune BECAUSE of TheGreat Depression. We are not in a Depression now, but we are in a seriousRecession. And, you can make your fortune right now - BECAUSE of the Recession.



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Charles Dow never formalized the Dow Theory. But his work has formed the basis for modern-

day technical analysis.

Despite the many changes that have occurred in

the securities markets over the past century,much of Dow's basic work and ideas remainpertinent today.

Although Dow might be surprised at the analysis

that more advanced tools and computer powerallow, his classic work provides the basic theorythat these contemporary models build upon.



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The market has three movements:1. main movement primary movement: may last from less than a year to several years

2. "medium swing", secondary reaction: may last from ten days to three months

3. "short swing" or minor movement varies with opinion from hours to a month or more

Market trends have three phases1. accumulation phase

2. public participation (or absorption) phase,

3. distribution phase.

The stock market discounts all news

Stock market averages must confirm each other

Trends are confirmed by volume

Trends exist until definitive signals prove thatthey have ended

http://en.wikipedia.org/wiki/Dow_theory

Fundamental of Technical Analysis
http://en.wikipedia.org/wiki/Dow_theoryhttp://en.wikipedia.org/wiki/Dow_theory

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