sample book

3rd Edition

Handbook for Basic Technical Analysis www.stockbangladesh.com

STOCK BANGLADESH LIMITED

TECHNICAL ANALYSIS

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2www.stockbangladesh.com

About Stock Bangladesh Limited

Mission Our mission is simple - to make you a better investor so that you can invest conveniently at Bangladesh Capital Market. Our Stock Bangladesh tool lets you create the web's best looking financial charts for technical analysis. Our Scan Engine shows you the Bangladesh share market's best investing opportunities.

In today's world, if you rely on fundamental analysis, brokers advise, share price information, newspaper articles or business channels for your investing or trading decisions, you are asking for a painful experience in the markets.

Whether you are a first time investor, a seasoned pro, an "in and out" day trader or a long term investor at Dhaka stock exchange, StockBangladesh.com will provide you with the necessary information you need for maximum profits and success in today's dynamic markets. Initially we are covering Dhaka Stock Exchange.

Goal Our goal is to help traders and investors of Bangladesh share market to achieve above-average returns from the markets by providing them with profitable trading signals and at the same time protect their trading capital from large drawdowns with our sound money management principles.

The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.

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Table of Contents About Stock Bangladesh Limited .............................................................................................. 2

Mission ................................................................................................................................... 2Goal ........................................................................................................................................ 2

Chapter 1 .................................................................................................................................. 15Capital Market ......................................................................................................................... 16Supply & Demand.................................................................................................................... 16Market Analysis ....................................................................................................................... 17

Three Types of Market Analysis .......................................................................................... 17Random Walk Theory .............................................................................................................. 18Efficient Market Hypothesis .................................................................................................... 18Fundamental Analysis .............................................................................................................. 19Technical Analysis ................................................................................................................... 20

The Market Discounts Everything ....................................................................................... 20Price Moves in Trends ......................................................................................................... 20History Tends To Repeat Itself ............................................................................................ 20Criticism of Technical Analysis........................................................................................... 21

Dow Theory ............................................................................................................................. 22The Basic Principles of Dow Theory ................................................................................... 24Dow Theory Criticism ......................................................................................................... 26

Chapter 2 .................................................................................................................................. 28History and Construction of Charts ......................................................................................... 29Benefits of Using Chart ........................................................................................................... 29History of Charting .................................................................................................................. 30Type of Charts.......................................................................................................................... 31

Early Charts ......................................................................................................................... 31Line Charts ........................................................................................................................... 31Bar Charts ............................................................................................................................ 32Candlestick Charts ............................................................................................................... 33Point & Figure Chart ............................................................................................................ 34Equivolume Chart ................................................................................................................ 35

Support and Resistance ............................................................................................................ 36Identification and Psychology behind Support and Resistance ........................................... 37Support & Resistance Zone ................................................................................................. 38Support Become Resistance or Vice Versa ......................................................................... 39

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Trend Line ................................................................................................................................ 40Drawing Trend Line ............................................................................................................. 43Tentative Versus the Valid Trend line ................................................................................. 43How to use the Trend Line................................................................................................... 44How to Determine the Significance of a Trend Line ........................................................... 46How Trend Lines Reverse Roles ......................................................................................... 46Measuring and Implication of Trend Line ........................................................................... 48Accelerating Trend Lines ..................................................................................................... 49

Channel .................................................................................................................................... 51Liner Regression Channel .................................................................................................... 52

Candlesticks ............................................................................................................................. 53A Potted history ................................................................................................................... 53Construction of Candlestick Charts ..................................................................................... 54Candlesticks vs. Traditional Bar Charts ............................................................................... 54The Anatomy of the Candles ............................................................................................... 56

The Psychology of Charts and Trading ................................................................................... 58Candlestick Patterns ................................................................................................................. 58

Bullish Pattern ...................................................................................................................... 59Bullish Candlesticks............................................................................................................. 59Bearish Candlestick ............................................................................................................. 63Reversal Candlestick ............................................................................................................ 68Neutral Candlestick .............................................................................................................. 72Heikin Ashi Candlesticks ..................................................................................................... 76

Reasons to Use Heikin Ashi ............................................................................................ 76Heikin Ashi Calculation ................................................................................................... 77Interpretation .................................................................................................................... 78

Doji and Spinning Tops ....................................................................................................... 79Chapter 3 .................................................................................................................................. 81Introduction to Chart Pattern: .................................................................................................. 82Chart Pattern ............................................................................................................................ 82

Common Pattern Characteristics .......................................................................................... 82Types of Pattern ................................................................................................................... 82Preliminary Points Common to All Reversal Patterns ......................................................... 83

Reversal Pattern ....................................................................................................................... 83The Head and Shoulders Reversal Pattern ........................................................................... 83The inverse Head and Shoulders .......................................................................................... 86Double Top .......................................................................................................................... 87

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Double Bottom ..................................................................................................................... 88Triple Bottom ....................................................................................................................... 89Triple Top ............................................................................................................................ 91Rounding Top ...................................................................................................................... 92Rounding Bottom ................................................................................................................. 93

Continuation Patterns ............................................................................................................... 94Triangles .............................................................................................................................. 94Symmetrical Triangle ........................................................................................................... 95Ascending Triangle .............................................................................................................. 96Descending Triangles ........................................................................................................... 97Wedge and Climax ............................................................................................................... 98Flag and Pennant ................................................................................................................ 100Rectangle............................................................................................................................ 103Diamond Pattern ................................................................................................................ 103Measure Move ................................................................................................................... 104

Gaps ....................................................................................................................................... 105Breakaway (or Breakout) Gaps .......................................................................................... 106Runaway Gaps (or Measuring Gaps) ................................................................................. 107Exhaustion Gaps ................................................................................................................ 107

Elliot Wave Theory ................................................................................................................ 108Impulse Waves ................................................................................................................... 109Impulse ............................................................................................................................... 110Truncation .......................................................................................................................... 111Corrective Waves ............................................................................................................... 112Zigzags ............................................................................................................................... 112Flats .................................................................................................................................... 113Triangles ............................................................................................................................ 114

The Fibonacci sequence ......................................................................................................... 115The Golden Ratio ............................................................................................................... 115Fibonacci Retracement ....................................................................................................... 116Fibonacci Retracement in Uptrend .................................................................................... 116Fibonacci Retracement in Downtrend ............................................................................... 117Fibonacci Fan ..................................................................................................................... 118Fibonacci Arcs ................................................................................................................... 119

Chapter 4 ................................................................................................................................ 121Indicators and Oscillators ...................................................................................................... 122

Lagging Indicators ............................................................................................................. 122

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Leading Indicator ............................................................................................................... 122Moving Averages ............................................................................................................... 123Types of Moving Averages ................................................................................................ 124

Simple Moving Average (SMA) .................................................................................... 124Weighted Moving Average (WMA) .............................................................................. 125Exponential Moving Average (EMA) ........................................................................... 126

Differences between SMA, EMA and WMA .................................................................... 127Interpreting Moving Averages ........................................................................................... 128Determining Trend Direction ............................................................................................. 128Determining Trend Reversals ............................................................................................ 129Determining Support and Resistance ................................................................................. 130Moving Average Convergence Divergence (MACD) ....................................................... 131

Interpreting MACD ........................................................................................................ 132Moving Average Crossover ........................................................................................... 132Centerline/Zero Line Crossover ..................................................................................... 133MACD Histogram .......................................................................................................... 134

Average Directional Index (ADX) ..................................................................................... 135Interpreting Average Directional Index (ADX) ............................................................. 138DI or DMI Crossover ..................................................................................................... 138Peak of The Trend .......................................................................................................... 139Minor Crossover ............................................................................................................ 139ADX Line....................................................................................................................... 140Determining Trend Direction and Strength ................................................................... 141

Parabolic SAR .................................................................................................................... 142Volume Based Indicators ....................................................................................................... 143

Principles of Volume ......................................................................................................... 143Money Flow Index ............................................................................................................. 150

Introduction .................................................................................................................... 150Calculation ..................................................................................................................... 150

On Balance Volume ........................................................................................................... 153Calculation ..................................................................................................................... 153

Accumulation Distribution Line ........................................................................................ 156Calculation ..................................................................................................................... 156

Chapter 5 ................................................................................................................................ 159Volatility Indicators ............................................................................................................... 160

Bollinger Bands ................................................................................................................. 160Calculation ..................................................................................................................... 160

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Signal: W-Bottoms......................................................................................................... 161Signal: M-Tops .............................................................................................................. 162Bollinger Bounce ........................................................................................................... 162Bollinger Squeeze .......................................................................................................... 163

Percentage Bands or Envelopes ......................................................................................... 164Calculation ..................................................................................................................... 164Trend Identification ....................................................................................................... 165

Average True Range (ATR) ............................................................................................... 166True Range ..................................................................................................................... 166Calculation ..................................................................................................................... 167Absolute ATR ................................................................................................................ 168

Keltner Channels ................................................................................................................ 169Calculation ..................................................................................................................... 169

Momentum Indicators ............................................................................................................ 170Relative Strength Index (RSI) ............................................................................................ 170

Calculation ..................................................................................................................... 171Interpreting RSI ............................................................................................................. 172

Stochastics.......................................................................................................................... 173Calculation ..................................................................................................................... 173

StochRSI ............................................................................................................................ 175Calculation ..................................................................................................................... 175Overbought/Oversold ..................................................................................................... 176Calculation ..................................................................................................................... 176Overbought and Oversold Crossovers ........................................................................... 176Centerline Crossovers .................................................................................................... 177Positive and Negative Divergences ............................................................................... 177Strong Trend .................................................................................................................. 177

Commodity Channel Index (CCI) ...................................................................................... 177Calculation ..................................................................................................................... 178Emerging New Trend ..................................................................................................... 178Overbought/Oversold ..................................................................................................... 179

Rate of Change (ROC) ....................................................................................................... 180Overbought/Oversold Situation ..................................................................................... 180

William %R ....................................................................................................................... 182Calculation ..................................................................................................................... 182Overbought Oversold ..................................................................................................... 183

Ultimate Oscillator ............................................................................................................. 184

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Calculation ..................................................................................................................... 184Composite indicators ............................................................................................................. 186

Guppy Multiple Moving Averages .................................................................................... 186Interpretation .................................................................................................................. 187Trend Direction .............................................................................................................. 187Trend Reversal ............................................................................................................... 188Trend Strength ............................................................................................................... 189........................................................................................................................................ 190Pullbacks ........................................................................................................................ 190Breakouts ....................................................................................................................... 190Tactics ............................................................................................................................ 191Rules .............................................................................................................................. 192Advantages ..................................................................................................................... 192Disadvantages ................................................................................................................ 192

Ichimoku Chart .................................................................................................................. 193Interpretation .................................................................................................................. 194Trend direction ............................................................................................................... 194Trend Reversal ............................................................................................................... 195Trend Strength ............................................................................................................... 195Pullbacks ........................................................................................................................ 196Breakout ......................................................................................................................... 197

Divergence Study ................................................................................................................... 1981. Regular Divergence ....................................................................................................... 1992. Hidden Divergence ........................................................................................................ 2013. Exaggerated Divergence ................................................................................................ 203

Divergence Trading Strategy ................................................................................................. 205Indicators Used .................................................................................................................. 205Entry ................................................................................................................................... 205Exit ..................................................................................................................................... 205Stop Loss ............................................................................................................................ 205

Chapter 6 ................................................................................................................................ 206Behavioral Finance ................................................................................................................ 207Common Mental Mistakes ..................................................................................................... 207Overconfidence ...................................................................................................................... 208

Examples of Overconfidence ............................................................................................. 208Anchoring .............................................................................................................................. 209

Examples of Anchoring ..................................................................................................... 209

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Metal Accounting ................................................................................................................... 209Examples of Mental Accounting ....................................................................................... 210

Confirmation .......................................................................................................................... 210Examples of Confirmation ................................................................................................. 210

Hindsight Bias ........................................................................................................................ 211Examples of Hindsight Bias ............................................................................................... 211

Herd Behavior ........................................................................................................................ 211Examples of Hard Behavior ............................................................................................... 211

Applying Behavioral Finance ................................................................................................ 211Classification of Capital Market Participants ........................................................................ 212

Institutional Investors......................................................................................................... 212Speculators ......................................................................................................................... 212Retail Investors .................................................................................................................. 213Long Term Investors .......................................................................................................... 213Short Term Traders ............................................................................................................ 213High Frequency Traders .................................................................................................... 213

Zero Sum Game ..................................................................................................................... 214Capital Market Bubble ........................................................................................................... 214

Examples of Bangladesh Capital Market Bubbles ............................................................. 214Investors Psychological Behavior ........................................................................................ 216Chapter 7 ................................................................................................................................ 219Technical Analysis Platform .................................................................................................. 220How to Install Amibroker ...................................................................................................... 220Chapter 8 ................................................................................................................................ 242Trading Strategy ..................................................................................................................... 243Instrument Selection .............................................................................................................. 243Market Timing ....................................................................................................................... 243Money Management .............................................................................................................. 244Position Sizing ....................................................................................................................... 244Stop Loss ................................................................................................................................ 244Exit Strategy........................................................................................................................... 245

Fixed Stop .......................................................................................................................... 245Trailing Stop Loss .............................................................................................................. 245Indicator Based Stop/Dynamic Stop .................................................................................. 245

Trading Psychology ............................................................................................................... 245Knowing Yourself .................................................................................................................. 246There is no Holy Grail ........................................................................................................ 246

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Independent Thinking ............................................................................................................ 246Patience is a Profitable Virtue................................................................................................ 247Sticking With the Plan ........................................................................................................... 247Psychological Problems in Trading ....................................................................................... 247

Fear .................................................................................................................................... 247Greed .................................................................................................................................. 248Pride ................................................................................................................................... 248

Overcoming Psychological Problems in Trading .................................................................. 248Complete Trading Strategies .................................................................................................. 251

Trading the W Patterns ...................................................................................................... 251Entry Conditions ............................................................................................................ 255Stop Loss ........................................................................................................................ 256

Trading Pullbacks .............................................................................................................. 256Entry Conditions ............................................................................................................ 257Exit Conditions .............................................................................................................. 257Stop Loss ........................................................................................................................ 257

Reference ............................................................................................................................... 259Appendix ................................................................................................................................ 260

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Table of Figure

Figure 1.1: Supply & Demand ................................................................................................. 17Figure 1.2: Dow Theory Trend | HEIDELBCEM ................................................................... 23Figure 1.3: Dow Theory Up Trend | BATBC .......................................................................... 25Figure 2.1: Line Chart | BEXIMCO ........................................................................................ 32Figure 2.2: Bar Chart | TITASGAS ......................................................................................... 33Figure 2.3: Candlestick Chart | TITASGAS ............................................................................ 34Figure 2.4: Point and Figure Chart .......................................................................................... 35Figure 2.5: EquiVolume Chart ................................................................................................. 36Figure 2.6: Support & Resistance | FLEASEINT .................................................................... 37Figure 2.7: Support & Resistance Zone | FLEASEINT ........................................................... 38Figure 2.8: Support & Resistance | FLEASEINT .................................................................... 39Figure 2.9: Support Become Resistance .................................................................................. 40Figure 2.10: Support Become Resistance | FEDERALINS ..................................................... 40Figure 2.11: Trend Line | Up Trend ......................................................................................... 41Figure 2.12: Trend Line | Uptrend line at work | LANKABAFIN .......................................... 42Figure 2.13: Trend Line | Down Trend .................................................................................... 42Figure 2.14: Trend Line | Down trend line at work | DSEGEN (Feb 2012 - Jul 2012) ........... 43Figure 2.15: Trend Line | Braking up trend line ...................................................................... 44Figure 2.16: Trend Line | Braking up trend line | DSEGEN (Feb 2012 - May 2012) ............. 45Figure 2.17: Trend Line | Braking down trend line ................................................................. 45Figure 2.18: Trend Line | Braking down trend line | DSEGEN ............................................... 46Figure 2.19: Trend & Support Resistance ................................................................................ 47Figure 2.20: Trend & Support Resistance | MEGHNACEM .................................................. 47Figure 2.21: Trend & Support Resistance ................................................................................ 48Figure 2.22: Trend & Support Resistance | BDAUTO ............................................................ 48Figure 2.23: Trend Line | Accelerating .................................................................................... 49Figure 2.24: Trend Line | Accelerating .................................................................................... 50Figure 2.25: Channel | MITHUNKNIT ................................................................................... 51Figure 2.26: Linear Regression Line | ABBANK .................................................................... 53Figure 2.27: Bar Chart Construction ........................................................................................ 54Figure 2.28: Candlestick Formation ........................................................................................ 55Figure 2.29: Bar Chart (factual, but uninspiring) .................................................................... 55Figure 2.30: Candlestick Chart (factual, and emotive) ............................................................ 56Figure 2.31: Candlestick Formation ........................................................................................ 57Figure 2.32: Candlesticks Terminology ................................................................................... 58Figure 2.33: Long White (empty)/ Green Line Candlestick | BEXIMCO ............................... 60Figure 2.34: Bullish Candlestick | Hammer | BEDL ............................................................... 60Figure 2.35: Bullish Candlestick | | Piercing Line | BEDL ..................................................... 61Figure 2.36: Bullish Candlestick | Bullish Engulfing | EASTLAND ...................................... 62Figure 2.37: Bullish Candlestick | Morning Star | POWERGRID ........................................... 62Figure 2.38: Bullish Candlestick | Bullish Doji | POWERGRID ............................................ 63Figure 2.39: Bearish Candlestick | Bearish Long Black/Red line | EBL ................................. 64Figure 2.40: Bearish Candlestick | Hanging Man | BEACHHATCH ...................................... 65Figure 2.41: Bearish Candlestick | Dark Cloud Cover | DESHBANDHU .............................. 65Figure 2.42: Bearish Candlestick | Bearish Engulfing | DESHBANDHU .............................. 66Figure 2.43: Bearish Candlestick | Evening Star | SINGERBD .............................................. 67Figure 2.44: Bearish Candlestick | Shooting Star | DSEGEN .................................................. 68

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Figure 2.45: Reversal Candlestick | Long Legged Doji | FUWANGCER ............................... 69Figure 2.46: Reversal Candlestick | Dragonfly Doji | ASIAPACINS ..................................... 70Figure 2.47: Reversal Candlestick | Gravestone Doji | ONEBANKLTD ................................ 70Figure 2.48: Reversal Candlestick | Star | MIDFIN ................................................................. 71Figure 2.49: Reversal Candlestick | Doji Star | NAVANACNG ............................................. 72Figure 2.50: Neutral Candlestick | Marubozu | DSEGEN ....................................................... 73Figure 2.51: Neutral Candlestick | Spinning Tops | ACIFORMULA ...................................... 74Figure 2.52: Neutral Candlestick | Doji | BDLAMPS ............................................................. 74Figure 2.53: Neutral Candlestick | Harami | RUPALIINS ....................................................... 75Figure 2.54: Neutral Candlestick | Harami Cross | ICBISLAMIC .......................................... 76Figure 2.55: Heiken Ashi Candle | FEDERALINS ................................................................. 78Figure 2.56: Doji and Spinning Tops ....................................................................................... 79Figure 2.57: Heiken Ashi Candle | GP ..................................................................................... 80Figure 3.1: Example of Head and Shoulder Top ..................................................................... 84Figure 3.2: Head and Shoulder Top | DSEGEN ...................................................................... 85Figure 3.3: Head and Shoulder Bottom | DSEGEN ................................................................. 87Figure 3.4: Double Top or M Pattern....................................................................................... 87Figure 3.5: Double Top or M Pattern| CITYBANK ................................................................ 88Figure 3.6: Double Bottom or W pattern ................................................................................. 89Figure 3.7: Double Bottom or W pattern| MIDASFIN ............................................................ 89Figure 3.8: Triple Bottom Pattern ............................................................................................ 90Figure 3.9: Triple Bottom Pattern | SINOBANGLA ............................................................... 90Figure 3.10: Triple Top Pattern ............................................................................................... 91Figure 3.11: Triple Top Pattern | BXSYNTH .......................................................................... 92Figure 3.12: Rounding Top Pattern | AL-HAJTEX ................................................................. 93Figure 3.13: Rounding Bottom | ISLAMIBANK .................................................................... 94Figure 3.14: Bullish Symmetrical Triangle ............................................................................. 95Figure 3.15: Ascending Triangle ............................................................................................. 95Figure 3.16: Descending Triangle ............................................................................................ 95Figure 3.17: Symmetrical Triangle | EHL ............................................................................... 96Figure 3.18: Ascending Triangle | MERCANBANK .............................................................. 97Figure 3.19: Falling Wedge | MEGHNACEM ........................................................................ 99Figure 3.20: Rising Wedge | JAMUNABANK ..................................................................... 100Figure 3.21: Flag & Pennant .................................................................................................. 100Figure 3.22: Bullish Flag Pattern | MICEMENT ................................................................... 101Figure 3.23: Bearish Flag | SONARBAINS .......................................................................... 102Figure 3.25: Bearish Pennant | BEDL .................................................................................... 102Figure 3.26: Rectangle or Box Pattern | METROSPIN ......................................................... 103Figure 3.27: Diamond Pattern | RAHIMAFOOD .................................................................. 104Figure 3.28: Measured Moves | DSEGEN ............................................................................. 105Figure 3.29: Downward Gap | TAKAFULINS ...................................................................... 106Figure 3.30: Breakaway or Breakout Gap | EASTERNINS .................................................. 106Figure 3.31: Measuring or Running GAP | EASTERNINS .................................................. 107Figure 3.32: Exhaustion GAP | NPOLYMAR ....................................................................... 108Figure 3.33: Ideal Elliott Waves within an Upward Motive Impulse Wave ......................... 109Figure 3.34: Diagonal leading or ending (in upward trend) .................................................. 111Figure 3.35: Truncated Five in Uptrend ................................................................................ 112Figure 3.36: Single and double zigzag Corrective Pattern .................................................... 113Figure 3.37: Single and Double Corrective Pattern ............................................................... 114Figure 3.38: Fibonacci in Uptrend | DSEGEN ...................................................................... 116

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Figure 3.39: Fibonacci Retracement Example | DSEGEN .................................................... 117Figure 3.40: Downward Fibonacci | DSEGEN ...................................................................... 117Figure 3.41: Fibonacci Fan Downtrend | DSEGEN ............................................................... 118Figure 3.42 Fibonacci Fan Uptrend| GP ................................................................................ 119Figure 3.43: Fibonacci Arc | DSEGEN .................................................................................. 119Figure 3.44 Fibonacci Arc | BDFINANCE ............................................................................ 120Figure 4.1: Moving Average | (SMA10) | DSEGEN ............................................................. 124Figure 4.2: Moving Average | (SMA30) | DSEGEN ............................................................. 125Figure 4.3: Moving Average | (WMA 30) | DSEGEN .......................................................... 126Figure 4.4: Moving Average | (EMA30) | DSEGEN ............................................................. 127Figure 4.5: Moving Average | SMA 30, EMA 30 and WMA 30 | DSEGEN ........................ 128Figure 4.6: Moving Average | WMA30 Trend line | CONFIDCEM ..................................... 129Figure 4.7: Moving Average | SMA10 and EMA30 Crossover | CONFIDCEM .................. 130Figure 4.8: Moving Average | SMA 30 Support and Resistance | AFTABAUTO ................ 131Figure 4.9: MACD | MICEMENT ......................................................................................... 132Figure 4.10: MACD MA Crossovers | MICEMENT ............................................................. 133Figure 4.11: MACD Centerline Crossovers | ARAMITCEM ............................................... 134Figure 4.12: MACD Histogram Study | MICEMENT ........................................................... 135Figure 4.13: ADX Lines | DESCO ........................................................................................ 137Figure 4.14: ADX DI Crossover | DSEGEN. ........................................................................ 138Figure 4.15: ADX Peak of The Trend | DESCO ................................................................... 139Figure 4.16: ADX Minor Crossover | DESCO ...................................................................... 140Figure 4.17: ADX Line | DESCO .......................................................................................... 141Figure 4.18: ADX Determining Trend Strength and Direction DESCO ............................... 142Figure 4.19: Parabolic SAR | DSEGEN ................................................................................ 143Figure 4. 21: Volume Histogram ........................................................................................... 144Figure 4.22: Volume Leads Price .......................................................................................... 144Figure 4.23: Bearish Volume Configuration ......................................................................... 145Figure 4.24: Bearish Volume Configuration ......................................................................... 145Figure 4.25: Volume | Parabolic Blow off ............................................................................. 146Figure 4.26: Volume | Selling Climax ................................................................................... 146Figure 4.27: Low Volume on Test ......................................................................................... 147Figure 4.28: Bearish Volume Configuration ......................................................................... 147Figure 4.29: Volume | Churning ............................................................................................ 148Figure 4.30: Volume | Accumulation ..................................................................................... 148Figure 4.31: Volume | Temporary Exhaustion ...................................................................... 149Figure 4.32: Volume| Bearish Top Configuration ................................................................. 149Figure 4.33: MFI | JAMUNAOIL .......................................................................................... 152Figure 4.34: MFI & RSI | NBL .............................................................................................. 152Figure 4.35: OBV | BEXIMCO ............................................................................................. 155Figure 4.36: OBV | GP ........................................................................................................... 155Figure 4.37: ADL, OBV | BEXIMCO ................................................................................... 158Figure 5.1: Bollinger Bands | DSEGEN ................................................................................ 160Figure 5.2: Bollinger Bands W Pattern | DSEGEN ............................................................... 161Figure 5.3: Bollinger Bands M Pattern | FUWANGFOOD ................................................... 162Figure 5.4: Bollinger Band Bounce | DUTCHBANGL ......................................................... 163Figure 5.5: Bollinger Bands Squeeze and Expansion | DUTCHBANGL.............................. 164Figure 5.6: Envelopes or Percentage Bands | DSEGEN ........................................................ 165Figure 5.8: Envelopes or Percentage Bands Strength | DSEGEN ......................................... 166Figure 5.9: Average True Range ............................................................................................ 167

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Figure 5.10: ATR | NTC ........................................................................................................ 168Figure 5.11: ATR | PREMIERBAN ...................................................................................... 169Figure 5.12: Keltner Bands | MPETROLEUM ..................................................................... 170Figure 5.13: RSI Overbought & Oversold | BEXIMCO ........................................................ 172Figure 5.14: Stochastic Overbought & Oversold | SUMITPOWER ..................................... 174Figure 5.15: StochRSI | DSEGEN ......................................................................................... 176Figure 5.16: Commodity Channel Index (CCI) | BEXIMCO ................................................ 179Figure 5.17: Commodity Channel Index (CCI), Overbought Oversold| BEXIMCO ............ 180Figure 5.18: Rate of Change (ROC), Oversold | MPETROLEUM ....................................... 181Figure 5.19: William % R | MPETROLEUM ....................................................................... 182Figure 5.20: William % R Overbought Oversold | MPETROLEUM .................................... 184Figure 5.21: Ultimate Oscillator | DSEGEN .......................................................................... 185Figure 5.22: Guppy MMA | BEXIMCO ................................................................................ 186Figure 5.23: Guppy MMA Trend Direction | BEXIMCO ..................................................... 187Figure 5.24: Guppy MMA Trend Reversal | NHFIL ............................................................. 188Figure 5.25: Trend Strength ................................................................................................... 189Figure 5.26: Pullbacks ........................................................................................................... 190Figure 5.27: Breakouts ........................................................................................................... 191Figure 5.28: Tactics ............................................................................................................... 191Figure 5.29: Ichimoku | DSEGEN ......................................................................................... 193Figure 5.30: Ichimoku Trend Direction | ARAMITCEM. ..................................................... 194Figure 5.31: Ichimoku Trend Reversal | DSEGEN ............................................................... 195Figure 5.32: Ichimoku Trend Strength | ARAMITCEM ....................................................... 196Figure 5.33: Ichimoku Pullback | ASIAPACINS .................................................................. 197Figure 5.34: Ichimoku Breakout | HEIDELBCEM ............................................................... 198Figure 5.35: Bullish Regular Divergence | ACIFORMULA ................................................. 200Figure 5.36: Regular Bearish Divergence | BEXIMCO ........................................................ 200Figure 3.37: Hidden Bullish Divergence | ISLAMICFIN ..................................................... 202Figure 5.38: Hidden Bearish Divergence | DSEGEN ............................................................ 202Figure 5.39: Exaggerated Bullish Divergence | FASFIN ...................................................... 204Figure 5.40: Exaggerated Bearish Divergence | DESCO ...................................................... 204Figure 6.1: Dhaka Stock Exchange 1987 Bubble .................................................................. 215Figure 6.2: Dhaka Stock Exchange 1996 Bubble .................................................................. 215Figure 6.3: Dhaka Stock Exchange 2010 Bubble .................................................................. 216Figure 6.4: Investor's Psychological Behavior ...................................................................... 217Figure 8.1: Trading Strategy | W Pattern and Semi-W Patterns Shape ................................. 252Figure 8.2: Trading Strategy | W Patterns Trend Line Breakout | APEXADELFT .............. 253Figure 8.3: W Patterns Resistance Line Breakout | APEXADELFT ..................................... 254Figure 8.4: Trading Strategy | Semi W Pattern Trend Line Breakout | DESCO ................... 254Figure 8.5: Trading Strategy | Semi W Pattern Resistance Line Breakout | DESCO ............ 255Figure 8.6: Trading Strategy | Swing Point High, Swing Point Low .................................... 256Figure 8.7: Pullbacks | 1st Pullback after MA Crossover | DHAKABANK ......................... 258Figure 8.8: Trading Strategy | Pullbacks | Pullback after Breakout DHAKABANK ............ 258

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15 www.stockbangladesh.com

Chapter 1

Learning Objectives

To understand the operations, trading and investing of stock market

Understand Demand and Supply of a particular stock

Knowledge about Efficient Market hypothesis and Random walk theory

Fundamental Analysis

Technical Analysis

Principles of Technical Analysis

Dow Theory

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Chapter 2

Learning Objectives

After Completing Types of Chart an investor /trader will get concept of various types of chart, formation of chart, and uses of chart to Understand and determine overall

market trend

Candlesticks are the most popular way of visualizing price movements, demand & Supply. After Completing Candlestick chart an investor /trader will get idea about

buyers & sellers trading psychology, Emotion of the market, Indication of market

turning points, Furnish unique market insights and Get trigger before buying / selling

any stock

From Bullish Candlestick Pattern investors/Traders will get indications of a change of trend from bearish to bullish or confirmation a continuing bullish trend. From Bearish

Candlestick Pattern investors/Traders will get indications of a change of trend from

Bullish to Bearish or confirmation a continuing Bearish trend. From Neutral

Candlestick Pattern investors/Traders will get idea when he/she has to observe the

market or not take any buy or sell decision. Reversal Pattern will help

investors/traders to identify the possible changes of the current trend. So it allows a

trader to take position very early of a new trend

Support and resistance lines are key components of the market memory. After learning support and resistance level, Investors particularly traders will able to identify psychological level of price. By using Support and Resistance level an

investor or a trader can take buy or sell decision and this is very popular trading

strategy for Breakout Trader

After trend line analysis an investor/Trader will easily understand the support and resistance level of a rising or falling stock. Trend line helps investors/traders to take

the appropriate position. Basically trend line breakout or break down is the starting of

new trend. So it helps to take Buy or Sell decision and the Breakout Traders basically

follow this trading style

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Figure 2.21: Trend & Support Resistance

Figure 2.21 shows very often a down Trend will become a support line once it's been broken

on the upside.

Figure 2.22: Trend & Support Resistance | BDAUTO

Now situation is different. In this situation previous down trend line now is working as

support level. See the Figure 2.22 of BDAUTOCA 2012. From January 2012 to February

2012 we have seen a downtrend and drawn downward trend line. On 3rd

February 2012 price

broke the downtrend trend line. Again when the price was declined that time previous

downtrend line worked as a support level and price bounced back from that level.

Measuring and Implication of Trend Line

Trend line can be used to help determine price objectives. We will have a lot more to say

about price objectives in the next chapter on price patterns. In fact, some of the rice

objectives addressed that are derived from various price patterns are similar to the one we

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make because on quote boards prices are often displayed either as red (black) or green

(white) depending on whether the market is higher or lower compared to the previous close.

Figure 2.31: Candlestick Formation

If, for example, a stock closed at 52 taka yesterday, then opened today at 56 taka, but by

afternoon trade had sold off to close at 54 taka, it would still be up 2 taka on the day.

However, the candlesticks real body would be big and red (Black) because the stock opened at 56 taka then closed at 54 taka. We have illustrated this in Figure 2.29.

Lets finish off this walk through the construction by adding some terminology into the equation.

The figure below shows the other terminology you need to be aware of with respect to the

different elements of an individual candlestick.

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Bullish engulfing lines. Engulfing patterns consist of two bodies and where

the second body engulfs the first. This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It

occurs when a small bearish (filled-in) line is engulfed by a large bullish

(empty) line.

Figure 2.36: Bullish Candlestick | Bullish Engulfing | EASTLAND

Morning star: The morning Star pattern is a bullish reversal signal after a

downtrend. The first bar has a long black body, the second body gaps down

from the first (the shadows may still overlap) and may be filled or hollow.

This is a bullish pattern signifying a potential bottom. The "star" indicates a

possible reversal and the bullish (empty) line confirms this.


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Chapter 3

Learning Objectives

Chart patterns are useful to measure the level of momentum, support and resistance,

and other indications of strength or weakness in a stock. After completing Chart

patterns it will help traders to determine market direction, traders psychology as well

as time of entries and exits. Not only that a trader will be able to identify chart

patterns properly

By studying Elliot wave an investor or trader can understand the various waves of a

particular stock or market very easily

Fibonacci Study help to understand the different price level from where price may

retrace or pullback

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Figure 3.6: Double Bottom or W pattern

Again move to the Dhaka Stock Exchange. See the Figure 3.7. We can see a chart of

MIDFIN form December 2011 to May 2012. In 9th

February 2012 we can see MIDFIN got

support and started to increase but again decline because of Resistance line. Again 12th

March

2012 MIDFIN got support from the support zone and started to increased and broke the

resistance line in 25th

March 2012.

Figure 3.7: Double Bottom or W pattern| MIDASFIN

Both Top and Bottom patterns form over a number of monthseven yearsand are thus longer-term. They are more observable in charts using weekly and monthly data and mostly

in retrospect.

Triple Bottom

The surprising thing about triple bottoms is their lack of surprises. More about that in a

moment. In a bull market, triple bottoms have a low failure rate and a high average rise. In a

bear market, the results are about what you would expect from a bullish pattern in a bear


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market. Almost two out of three triple bottoms will throw back, so consider that before you

trade. If price continues down after the throwback, then your trade may well end up with a

loss. If it rebounds, the numbers suggest that performance will suffer. In other words, the best

performers are triple bottoms without throwbacks. Another surprise is that narrow patterns

perform better than wide ones. Usually, width is not a good indicator of performance but

height is. The reason for that unusual behavior is unclear. Of one thing we are certain, triple

bottoms in a bear market act differently than those in a bull market. Often the results are

opposite. For example, when the last bottom is above the middle bottom, performance excels

in a bull market but underperforms in a bear market. Figure 3.8 shows a format of Triple

Bottom pattern.

Figure 3.8: Triple Bottom Pattern

Again move to our real market example. Figure 3.9 shows an example of a triple bottom of

SINOBANGLA. Chart shows Prices descend to the 33 Taka to 32 Taka area three times and

each time, they turn away; the level marks a zone of support preventing future declines. The

sharp V-shaped recession, especially during the last valley, is typical for triple bottoms. The

rounded-looking rise from the first valley to the second is also characteristic of triple bottoms

but not a strict requirement.

Figure 3.9: Triple Bottom Pattern | SINOBANGLA


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one, totaling to two. Then there are three corrective waves and five impulse waves, totaling

eight waves. Each of these numbers is part of the Fibonacci sequence. If we take the

progression further and include smaller and smaller waves, the number of waves continues in

a Fibonacci sequence. Although this relation to Fibonacci numbers is interesting, it is

portraying the ideal. But remember if you take any two whole numbers and add them

together, then add to the sum the previous highest number, eventually you will arrive at phi,

the Fibonacci ratio (1.618), between the highest number and the previous highest number.

Thus, the ratio is the universal relation rather than the numbers themselves. It is the ratio and

derivatives of it that are applied to stock markets.

Fibonacci Retracement

The first thing you should know about the Fibonacci

tool is that it works best when the market is trending.

The idea is to go long (or buy) on a retracement at a

Fibonacci support level when the market is trending

up, and to go short (or sell) on a retracement at a

Fibonacci resistance level when the market is trending

down.

In order to find these retracement levels, you have to

find the recent significant Swing Highs and Swings

Lows. Then, for downtrends, click on the Swing High and drag the cursor to the most recent

Swing Low.

For uptrend, do the opposite. Click on the Swing Low and drag the cursor to the most recent

Swing High. Now, let's take a look at some examples on how to apply Fibonacci retracements

levels in the markets.

Fibonacci Retracement in Uptrend

Figure 3.38: Fibonacci in Uptrend | DSEGEN

Fibonacci Retracement: it

works as a support or

resistance level and shows

the possible retracement

level of price.


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Chapter 4

Learning Objectives

Moving averages smooth out market rate fluctuations that often occur with each

reporting period in a price chart. Moving averages can be used to identify the

direction of the trend or define potential support and resistance levels

MACD confirms trend and trend reversals. The MACD chart generates signal of

picking and dumping points

Price based indicators are useful to understand the market and price movement from

different angles and views. Combination of indicators can detect exact reaction points

of the market. Individual range bound indicators and free indicators generate trading

signals through the crossover of levels

Price and volume based indicators will help to Clear understand the actual direction of

the market. Volume based indicators show weakness and strength of the market more

accurately than any other indicators

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Figure 4.8: Moving Average| SMA30 Support and Resistance | AFTABAUTO

Moving Average Convergence Divergence (MACD)

It is an oscillator technique that uses 2 exponential moving averages. The Moving Average

Convergence Divergence indicator, or simply MACD, was developed by Gerald Appel. What

makes this indicator so useful is that it combines some

of oscillator principles with a dual moving average

crossover approach. You will see only two lines on

your computer screen although three lines are actually

used in its calculation. The faster line (called the

MACD line) is the difference between two

exponentially smoothed moving averages of closing

prices (usually the last 12 and 26 days or weeks). The

slower line (called the signal line) is usually a 9 period

exponentially smoothed average of the MACD line.

Appel originally recommended one set of numbers for buy signals and another for sell

signals. Most traders, however, utilize the default values of 12, 26 and 9 in all instances.

Later Thomas Aspray added histograms in MACD to measure the distance between MACD

line and signal line.

MACD is a very popular

and widely used indicator

which can detect both

trend and momentum.


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Chapter 5

Learning Objectives

Volatility indicators help to understand the fluctuation or volatility of a stock or

market. After completing volatility indicators an investor or trader can easily

understand which stock is more volatile and which stock is less volatile

Momentum indicators help to detect early trend reversal signals and price movement

direction. Also help to determine short term entry and exit. Momentum indicators help

to identify changes of momentum in a major trend

Composite indicators allow investors to detect various entry signals from a single

indicator

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True Range

Wilder started with a concept called True Range (TR), which is defined as the greatest of the

following:

Method 1: Current High less the current Low

Method 2: Current High less the previous Close (absolute value)

Method 3: Current Low less the previous Close (absolute value)

Absolute values are used to ensure positive numbers. After all, Wilder was interested in

measuring the distance between two points, not the direction. If the current period's high is

above the prior period's high and the low is below the prior period's low, then the current

period's high-low range will be used as the True Range. This is an outside day that would use

Method 1 to calculate the TR. This is pretty straight forward. Methods 2 and 3 are used when

there is a gap or an inside day. A gap occurs when the previous close is greater than the

current high (signaling a potential gap down or limit move) or the previous close is lower

than the current low (signaling a potential gap up or limit move). The image below shows

examples of when methods 2 and 3 are appropriate.

Figure 5.8: Average True Range

Example A: A small high/low range formed after a gap up. The TR equals the absolute value

of the difference between the current high and the previous close.

Example B: A small high/low range formed after a gap down. The TR equals the absolute

value of the difference between the current low and the previous close.

Example C: Even though the current close is within the previous high/low range, the current

high/low range is quite small. In fact, it is smaller than the absolute value of the difference

between the current high and the previous close, which is used to value the TR.

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Chapter 6

Learning Objectives

To understand the behavior of market

Introduction of market participants and their activities

Investor common psychological behavior the way to act like a professional

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Examples of Bangladesh Capital Market Bubbles

Figure 6.1: Dhaka Stock Exchange 1987 Bubble

Figure 6.2: Dhaka Stock Exchange 1996 Bubble



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Chapter 7

Learning Objectives

Introduction to the technical analysis platform

Manage and use of information in an organize way

Uses of various indicators

Customize own indicators

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1. Go To http://www.stockbangladesh.com/download_stock_data.php (Download section)

daily after 4 PM.

2. Click on Download last trading day data all together in a file. It will open http://www.stockbangladesh.com/download_last_day_data.php page.

3. Select CSV format and click Download.

4. Save the Downloaded file in your computer

5. Now from amibroker select File>Import wizard

6. Pick file from your computer that you have downloaded from stockbangladesh.com

7. Click Next

8.Click Next

9. Click Finish

Data updating is completed.

Using Amibroker

Let's now take a look at

the user interface:

As you can see the in the

center we have chart area

in which price chart with

moving average and

Bollinger bands is plotted

(you can control the

apperance of built-in

charts from Tools-

>Preferences window).

In the bottom of the chart

you can see date axis

(marked with red color),

and below scroll bar and

chart sheets tab control.

Scroll bar can be used to

display past quotes, while

sheet tab allows to view

different chart

pages/sheets.

To the right you can see Y-axis area (marked with blue color) that shows Y-scale and value

labels. Value labels are color fields that display precisely the "last value" of plots. "Last

value" is the value of the indicator (or price) for the last currently displayed (rightmost) bar.

Y-axis area is used also to move/size chart vertically.

Next to the right is a drawing objects toolbar that allows you to choose from available

drawing types (note that only most popular tools are shown here, complete set is available

from Insert menu). A special tool called "Select" (red arrow) is used to select/move/resize

already drawn objects and to select quotes from the chart.

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Chapter 8

Learning Objectives

Know the best possible time to take entry and exit

Understanding trading strategy and its components

Learn the method to select trading instrument

Learn to average in a profitable way

Understanding what is money management, importance of money management,

components of money management

Learning the way to secure own investment

Understanding what is stop loss and its necessity

Learning how to use stop loss

Knowing which is appropriate percentage for own trading system/strategy

Learning the way to realize the gains

Learning different ways to exit while in profit

Understanding the importance of position sizing

Learn to minimize risk by diversifying portfolio

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sample book

Documents

fundamental analysis

basic technical analysis

bangladesh capital market

stock bangladesh tool

dhaka stock exchange

time investor

trading capital

better investor