basic technical analysis · 2020. 1. 17. · • essential to technical approach • whole purpose...
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Basic Technical Analysis
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What is Technical Analysis?
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• Market Action Discounts Everything
• Anything that can possibly affect the market price
– fundamental, political, psychological, or otherwise
• Prices move in Trends
• Essential to technical approach
• Whole purpose of charting is to identify trends as markets do
trend
• History tends to repeat itself
• The study of Human psychology
• Key to understanding the future lies in the study of the past or
that “The future is just a repetition of the past”
Principles of Technical Analysis
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Market Trends
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Identification of Stock Trends
• Chart Observation
(Higher High and Higher Low or Lower High and Lower Low)
Market Trend
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Downtrend
Lower Lows
Lower Highs
Uptrend
Higher Highs
Higher Lows
Market Trend
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Market Trend
Uptrend has a pattern of
rising peaks and troughs
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Market Trend
Downtrend has a pattern of
declining peaks and troughs
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Market Trend
Sideways has a pattern of
horizontal peaks and troughs
Sideway Trending (Consolidation)
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UptrendDowntrend
Sideway Trend
Market Trend
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Support and Resistance
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Support and Resistance
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Concentration of Buyers
(Demand)
Support (Price / Level / Zone)
Support
Support
Support
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Resistance (Price / Level / Zone)
Concentration of Sellers (Supply)
Resistance
Resistance
Support and Resistance
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Support-turned-Resistance
Support-Turned-
ResistanceSupport
Support Broken
(Sign of weakness)
Support and Resistance
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Resistance-turned-Support
Resistance-Turned-
Support
Resistance Breakout
(Sign of Strength)
Resistance
Support and Resistance
Support
Support
Support
Support
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Resistance
Resistance
Resistance
Resistance
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Support and Resistance
Resistance-turned-support
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Support and Resistance
Support-turned-resistance
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Resistance-turned-support
Support and Resistance
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Moving Average
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� Most popular trend-following indicator
� Calculated by averaging a number of past CLOSING
prices
� Most common time periods are 20, 50 and 200 days
� A longer time period equals less sensitive and smoother
average
1.10 + 1.12 + 1.16 + 1.15 + 1.18
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Oldest Close -----------------------------------------> Latest
5-Day Moving Average =
Moving Average
Moving Average
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Moving Average
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Downward sloping
50-days EMA
Upward sloping
50-days EMA
Moving Average
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Upward sloping
50-day EMA
-> Uptrend
Moving Average
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Moving Average
Downward sloping
50-day EMA
-> Downtrend
Upward sloping
50-day EMA
-> Uptrend
Upward sloping
50-day EMA
-> Uptrend
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Moving Average
Horizontal 50-day EMA
-> Sideway
Uptrend
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Downtrend
UptrendSideway Trend
Moving Average
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3 Types Of Moving Averages
1. Simple Moving Average (SMA)
2. Weighted Moving Average (WMA)
3. Exponential Moving Average (EMA)
Moving Average
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3 Functions of Moving Average
1. Identify The Direction Of The Trend
• Upward, Downward or Sideway Trend (slope of MA)
2. Provide Buy Or Sell Signal
• Moving Average Crossovers
• Price Trading Above / Below Moving Average
3. Act As Moving Support Or Resistance
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Moving Average
Price above moving
average -> uptrend
Price below moving
average -> downtrend
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Moving Average
During uptrend, price tends
to break resistance
Resistance has now
become support
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Moving Average
During downtrend, price
tends to break support
Support has now become
resistance
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Moving Average
Price below moving
average -> downtrend
Price above moving
average -> uptrend
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Moving Average
Price pullback halted at
moving average support
Momentum
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Rally‒ Is distinguished by the way prices continue to move
upwards without any significant retreat
Momentum‒ Measures the strength of the rally
Indicator‒ MACD (Moving Average Convergence Divergence)
Momentum
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MACD
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Definition
Measures the convergence or divergence between
short (eg. 12 days) and long (eg. 26 days) exponential
moving averages, and analyses both price momentum
and trend
MACD
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MACD
Zero Line
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MACD
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MACD
MACD above zero line
-> bullish
-> upward momentum
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MACD
MACD above zero line
-> bullish
-> upward momentum
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When to buy a stock when it is in an upward momentum?
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MACD
MACD Bullish Crossover
-> Buy Signal
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MACD
MACD Bullish Crossover
-> Buy Signal
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MACD
MACD below zero line
-> bearish
-> downward momentum
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MACD
MACD below zero line
-> bearish
-> downward momentum
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When to sell a stock when it is in a downward momentum?
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MACD
MACD Bearish Crossover
-> Sell Signal
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Example
1. MACD > zero line -> bullish
2. Look for bullish MACD crossover for buy signal
3. Look for support & resistance for target and stop loss
Resistance
Support
MACD Bullish Crossover
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Example
MACD Bullish Crossover
Support
Resistance
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Questions and Answers
Thank you
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