Introduction to TECHNICAL ANALYSIS

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Introduction to
Technical Analysis
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What to Expect?
• Not even T of Technical Analysis ?
(3 Hours is too less a time to expect anything
w.r.t Technical Analysis, there’s too much out
there…)
• Expect just an introduction to what is technical
analysis
• Get yourself convinced by end of the
presentation that technical analysis is good
enough to buy and sell stocks
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What Is Technical Analysis
in two words?
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Price & volume

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What wiki says?
Technical analysis is a security
analysis discipline for forecasting the
future direction of prices through the
study of past market data, primarily
price and volume.
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Different Kind of Charts used:
• Line charts

• Bar charts

• Candlestics
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Line Charts
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Bar Charts
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Candlesticks
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An Example…
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How to use Candle Sticks?
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Is That all?? No ?
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Dow Theory
• Market Discounts everything

• The 3 Trends
-> Primary Trends
-> Secondary Trends
-> Minor Trends
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Primary Trends and Secondary Trends
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• Primary Trends : They run for years

• Secondary Trends : Few weeks to months
1/3 , 50% , 2/3 retracements

• Minor Trends : Day to day moments which are of
not importance to dow theory.
Continued…
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Continued…
• The Bull market
-> Accumulation
-> Public Participation phase
-> Excess

• The Bear Market
-> Distribution
-> Public Participation phase
-> Panic
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Continued…
• The 2 Averages must confirm
-> Industrial Average
-> Rail Average

• Volumes goes with the trend

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Continued…
• A trend be assumed to continue in effect until
such time as its reversal has been definitely
signaled

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Some Examples…
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Support and Resistance
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Role Reversals
• Support becomes Resistance and vise versa
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Real world Example…
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Chart Patterns
• Reversal Patterns
Ex: Head and Shoulders, Rounding tops and
bottoms, Triangles, Rectangles, Double and
triple tops and bottoms, diamonds, wedges etc

• Continuation Patterns
Pennants and flags etc
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Head and Shoulders

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Double tops and bottoms

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Triangles

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Flags and Pennants

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Some Examples…

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Bullish Flag

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Falling wedge

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Right Angles Triangle

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Head and Shoulders breakout

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Head and Shoulder formation

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Triangular Consolidation breakout

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Averages
• Simple moving average (20 DMA, 50 DMA,
100DMA)
• Exponential moving average(20 EMA, 50 EMA)
• Triangular moving average
• Volume adjusted moving average
• Weighted moving average
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Simple Moving Average
DAY PRICE SUM OF 3 DAYS 3
rd
COLUMN / 3
1 10
2 11
3 12 33 11
4 13 36 12
5 14 39 13
6 15 42 14
7 16 45 15
8 17 48 16
9 18 51 17
10 19 54 18
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Exponential Moving Average
• Exponential Percentage = 2
----------------------------
Time Periods + 1

Ex: for 3 day EMA,

E % = 2/(3 + 1)
E % = 2/4 = 0.5
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3 DAY EMA
A B C D E
DAY PRICE PRICE * 0.5 YESTERDAY E * 0.5 C + D
1 10 10.000
2 11 5.5 5 10.500
3 12 6 5.25 11.250
4 13 6.5 5.625 12.125
5 14 7 6.062 13.062
6 15 7.5 6.531 14.031
7 16 8 7.015 15.015
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Moving Averages as Support
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Use of major moving average as support
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Indicators
• Leading Indicators Ex: RSI, CCI, Stochastic, etc

• Lagging Indicators Ex: MACD, moving averages
etc

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Bollinger Bands
• Shown in 3 bands

• Middle Band = SMA
• Upper Band = Middle band + 2 Standard
Deviations
• Lower Band = Middle band – 2 Standard
Deviations
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RSI
• Relative Strength Index

• Usage
-> Tops and Bottoms (70 and 30)
-> Chart Formations
->Support and Resistance
-> Divergance
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Calculation
• 100 - (100 / (1 + (U/D)))

U -> Upward Price Change
D -> Downward Price Change

Ex : 3 day RSI

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Continued…
A B C D E
Closing Price Upward Price Change Smoothed B Down word Price Change Smoothed D
10
11 1 0
9 0 2
13 4 1.66 0 0.66
10 0 1.33 3 1.33
14 4 2.66 0 1
C E F G H I = RSI
C E C/F F + 1 100/G 100 - H
1.66 0.66 2.51 3.51 28.5 71.5
1.33 1.33 1 2 50 50
2.66 1 2.66 3.66 27.3 72.7
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Some Examples…
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MACD
• Moving Average Convergence and Divergence

• Calculation
12 EMA – 16 EMA

• Usage
-> Crossovers
-> Overbought/Oversold
-> Divergence

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Examples…
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Other Technical Indicators
• Absolute Breadth Index
• Accumulation/Distribution Line
• Advance/Decline Line and Ratio
• Arms Index (TRIN)
• AROON
• Chalkin Oscillator
• CCI
• KST
• OBV (There are 1000s of indicators ?)

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Pivot Points
• PP = (H + L + C) / 3

• R1 = (2*PP) - L
• R2 = PP + (H - L)
• R3 = H + 2*(PP-L)

• S1 = (2*PP) - H
• S2 = PP - (H - L)
• S3 = L - 2*(H - PP)

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Other Important Things not Discussed
• Elliott Wave Theory
• Fibonacci Studies
• Gann angles

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Q&A
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Thank You

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