technical analysis - what is it? (chart reading?)

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TechnicalAnalysis

TechnicalAnalysis?

What is it?October 2011

Rev 1.1a

© Copyright 2011, Robert B. Brain, Brainy's Share Market Toolbox — www.robertbrain.com

monthly candle chart

pricebreakout

candlestickpatterns

chartpatterns

http://www.robertbrain.com/


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TechnicalAnalysis

Disclaimer➔ CAUTION!!➔ This presentation contains NO advice.➔ It is for general education only.➔ Always consult a trained, trustworthy

professional before investing, to determine if your intended investment might suit your personal individual situation.

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What is Technical Analysis?TechnicalAnalysis


A definitionThe use of market data and

charting skills to anticipate market direction and timing

to make consistent profits.

The use of market data and charting skills to anticipate market

direction and timing to make consistent profits.



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T.A. is: . . .1. Price charts and chart patterns2. Candle patterns3. Chart Indicators

● Moving Average, MACD, RSI, P-SAR, etc.4. Numeric analysis5. Specialist topics:

● Fibonacci, Elliott Wave, W.D.Gann6. Using charting software



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TechnicalAnalysis Price Chart Basics


The Weekly Line Chart

Weekly Chart:-Shows the Closing price at the end of each week.

The weekly Closing prices are joined together by straight lines.



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Up Trends

If only we could spot these trends

and take advantage.

If only we could spot these trends

and take advantage.

Could you have been tempted to buy this stock?

Up 81% in40 weeks.



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Down Trends

Would you be tempted to buy this stock?

(ps: it's Telstra)

Would you be tempted to buy this stock?

(ps: it's Telstra)



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Defining a trend● Identify the Peaks

and Troughs.

● Look for: Higher Peaks (HP) andHigher Troughs (HT)(or Higher Highs and Higher Lows).



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Trend = Higher Highs and LowsGet a feel for what the price is doing.

Identify trends (up, or down), ornon-trending.

Use indicators to help.

Terminology:-Higher High = Higher PeakHigher Low = Higher Trough



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Beware the down trend

Not a good idea to investin a down-trending stock,

until the trend has finished*.

Not a good idea to investin a down-trending stock,

until the trend has finished*.

* — Dow Theory* — Dow Theory



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Chart patterns

Base ConsolidationBase Consolidation



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Chart patterns

The BullishFalling Wedge chart pattern

The BullishFalling Wedge chart pattern



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Chart patterns

The Expanding Triangle (megaphone)chart pattern

The Expanding Triangle (megaphone)chart pattern



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OHLC Bar and Candle...

Each bar on a bar chart, and

each candle on a candle chart

summarises the price action

in any one period(a day, week, month, etc.).



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Support and Resistance

Note: Sometimes a “fat pencil” is appropriate.

ResistanceResistanceSupport linesSupport lines



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Candle body and tails● Their presence or absence is important● Their length (ie. their height) is important.



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Candle patterns — small bodies● With or without a gap from previous candle.● Hanging Man (at tops)

● Shooting Star (2-candle pattern)

● Evening Star (3-candle pattern)

● Doji Star (2-candle pattern)

● Hammer (at bottoms)

● Morning Star (3-candle pattern)



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Patterns — engulfing and piercingReversal patterns in UP Trends:-● Engulfing Bearish — “outside day”

(2-candle pattern)

● Dark Cloud (2-candle pattern)

● Harami Bearish (2-candle pattern)



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Patterns — engulfing and piercingReversal patterns in DOWN Trends:-● Piercing Line (2-candle pattern)

● Engulfing Bullish (2-candle pattern)

● Harami Bullish — “inside day”(2-candle pattern)

● Harami Cross (2-candle pattern)



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TechnicalAnalysis Chart Indicators


Moving Average (MA)● 21 day MA is the

average of all prices for the last 21 price bars*

● Can indicate a trend● Can be used to

interpret buy/sell signals. * - A “bar” - can be:

a daily bar on a daily chart,or a weekly bar

on a weekly chart, etc.or just each point on a line chart.



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Moving Average — how to calculate?

1 2 3 4 5 6 7 84

4.5

5

5.5

6

6.5

7

7.5

8

8.5

4

5

6

7

8 8

7

6

5

6

7

7.67 7.67

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Price3-period MA

Simple calculation of 3-period MA.The first MA value is the average of the first 3 price values:

(4+5+6)3

= 153

=5



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Bollinger BandsA top line,

average lineand bottom line.

A top line, average line

and bottom line.

Weekly candles



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Average True Range (ATR)Useful to understand the notion of ATR

ATR indicatorThis one shows the average variation in price over the

last 14 candles.

ATR indicatorThis one shows the average variation in price over the

last 14 candles.

Weekly candles



Applications, samples, strategiesTechnicalAnalysis

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Stop Loss? — under Support?

Initial Stop Loss positioncould be under recent

support and under recent price action.

Initial Stop Loss positioncould be under recent

support and under recent price action.

Down trend is broken

Down trend is broken




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Stop Loss — using ATRWilson ATR Trailing Stop indicator

ATR = Average True RangeThe stop is set at a multiple of ATR




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Sample Trading Strategies1. Find stocks using fundamental analysis and

time entry with technical analysis2. High dividend yield3. Long term bull market strategy, different to:4. Shorter term bull market strategy5. Different for a bear market.6. Momentum indicator + MA-of-Momentum

(see next slide)




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Sample Strategies

Momentum indicatorand

MA-of-Momentum

Momentum indicatorand

MA-of-Momentum




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Sample Strategies● Use ADX indicator for entry (Chuck le Beau)● Use Parabolic SAR for exits● Price Breakout

(see next slide)




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Price Break Out




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Moving Average Cross-over




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Some successful strategiesThese are in use by some successful traders:● Use the MACD and the RSI indicators.

Look for RSI divergence against the share price.

● Use Stochastic indicator and Directional Movement (ADX) to give joint signals.




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Some more strategiesNote: None of these can be guaranteed!!● Takeover target speculation● Momentum trading● Position trading● Swing trading● Dividend stripping● IPOs● Hedging




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Isn't this gambling?● Some people think that

share trading is just gambling?● Without a proper trading plan and

trading strategy then may be it is.● But if you have a proper, proven and tested

plan, then it is actually calculated risk taking.● Compare with other professions:

– farming, retail business, catering,– tourist trade, tradesman, handy man, etc.




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Trading — Final TipsWatch out for:● Use a stop loss!● Low liquidity● Watch diligently

(don't take your eyes off the ball)● Retracements● Sucker rallies● Profit takers● The 3-period pause in a rally



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TechnicalAnalysis Specialised Topics


Fibonacci Retracement



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TechnicalAnalysis Charting Software


Use good charting software● If you use a basic charting tool, then the

information might be limited to the basics● Use a better tool for greater flexibility and more

informative results.

(in Australia — BullCharts)


http://www.robertbrain.com/bullcharts/index.html


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TechnicalAnalysis Charting Software


Charting software – key features ● Data — Easy access to download data● Price charts in various time frames● Intraday data (optional)● Indicators – draw them on the chart● Watchlists – several lists of stocks to easily

keep an eye on● Scans – Specify selection criteria and scan the

data for stocks that match the criteria● Line studies and annotations on the chart



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Technical Analysis is: . . .1. Price charts and chart patterns2. Candle patterns3. Chart Indicators

● Moving Average, MACD, RSI, P-SAR, etc.4. Numeric analysis5. Specialist topics:

● Fibonacci, Elliott Wave, W.D.Gann6. Using charting software



technical analysis - what is it? (chart reading?)

Economy & Finance

chart indicators

weekly line chart weekly

telstra copyright

higher lows

charting software copyright

trending stock

candle patterns

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