demystify techncial analysis final4
TRANSCRIPT
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1 Technical Analysis
Agenda
Different Kinds of Indicator.
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Techncial AnalysisTechncial Analysis
Demystify Technical Analysis
Leading IndicatorsLagging Indicators
Moving Averages .What is moving averages ?
Different Types of Moving Averages. Simple Exponential Weighted.Properties of good Moving AverageStrategies of Moving Average .
Benefits and Drawback of Indicators
Lagging IndicatorsMoving Averages
MACDAverage Directional Index
Leading Indicators
Relative Strenth IndexStochastic
Rate of Change.
Volatility Indicators.Bollinger Bands
GAPSCommon GapsBreakout GapsRunaway Gaps
Exhaustion Gaps
Money ManagementMartingale System
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3 Technical Analysis
What does a Technical Indicator Offer?
Technical indicator offers a different perspective from which to analyze the price action.
Some, such as moving averages, are derived from simple formulas and the mechanicsare relatively easy to understand. Others, such as Stochastics, have complex formulasand require more study to fully understand and appreciate. Regardless of the complexityof the formula, technical indicators can provide unique perspective on the strength anddirection of the underlying price action.
A simple moving average is an indicator that calculates the average price of a securityover a specified number of periods. If a security is exceptionally volatile, then a moving
average will help to smooth the data. A moving average filters out random noise andoffers a smoother perspective of the price action. When is market is in Trading rangezone RSI would tell you the condition of the market such as Overbought and Oversoldlevel.
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4 Technical Analysis
Why Use Indicators?
Indicators serve three broad functions: to alert, to confirm and topredict.
An indicator can act as an alert to study price action a little moreclosely. If momentum is waning, it may be a signal to watch for a
break of support. Or, if there is a large positive divergence building, itmay serve as an alert to watch for a resistance breakout.
Indicators can be used to confirm other technical analysis tools. Ifthere is a breakout on the price chart, a corresponding movingaverage crossover could serve to confirm the breakout. Someinvestors and traders use indicators to predict the direction of futureprices.
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5 Technical Analysis
My Two Friends
Friend 1 : Tells me whatever you do I am with you. Right orWrong I am with you and I will follow you.
Lagging Indicator : Moving Averages, MACD , ADX
Friend 2 : Tells me Dont do this Dont do that.
Leading Indicator : Market is overbought dont buy , Market is
oversold dont sell it . RSI, Stochastic, ROC.
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6 Technical Analysis
Lagging Indicator
As their name implies, lagging indicators follow the price action and are commonly
referred to as trend-following indicators. Rarely, if ever, will these indicators lead the
price of a security. Trend-following indicators work best when markets or securities
develop strong trends. They are designed to get traders in and keep them in as long
as the trend is intact. As such, these indicators are not effective in trading or
sideways markets. If used in trading markets, trend-following indicators will likely
lead to many false signals and whipsaws. Some popular trend-following indicatorsinclude moving averages (exponential, simple, weighted, variable) and MACD.
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7 Technical Analysis
Lagging Indicators
Moving Averages
MACD
Average Directional Index
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8 Technical Analysis
What is Moving Averages?
A simple moving average is formed by computing the average (mean) price of a security over a specified
number of periods. While it is possible to create moving averages from the Open, the High, and the Lowdata points, most moving averages are created using the closing price. For example: a 5-day simple movingaverage is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
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9 Technical Analysis
Moving Averages
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10 Technical Analysis
Different Kinds of Moving Averages
Simple Moving Average
Weighted Moving Average
Exponential Moving Average
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11 Technical Analysis
Simple Moving Average
A simple moving average is formed by computing the average (mean) price of a security over a specified
number of periods. While it is possible to create moving averages from the Open, the High, and the Lowdata points, most moving averages are created using the closing price. For example: a 5-day simple movingaverage is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
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12 Technical Analysis
Weighted Moving Average
A weighted moving average is simply a moving average that isweighted so that more recent values are more heavily weighted
than values further in the past.
ne
11 18 25 2
July
9 16 23 30 6
August
13 20 27 3 10 17
September
24 1 8
October
15 2 2 29 5 12
November
19 26 3 10 17
Decemb er
24 31 7
2008
14 21 28 4 11
February
18 25 3 10
March
17 24
13500
14000
14500
15000
15500
16000
16500
17000
17500
18000
18500
19000
19500
20000
20500
21000
21500
* BSE - SENSEX (15,46 7.39, 15,798.42, 15,331.35, 15,760.52, +403.170)
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13 Technical Analysis
Exponential Moving Average
In order to reduce the lag in simple moving averages, techniciansoften use exponential moving averages (also called exponentially
weighted moving averages). EMA's reduce the lag by applying more
weight to recent prices relative to older prices. The weighting applied
to the most recent price depends on the specified period of the
moving average. The shorter the EMA's period, the more weight thatwill be applied to the most recent price.
The formula for an exponentialmovingaverage is:
EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) +EMA(prev)
(2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)
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14 Technical Analysis
Which one is better ?
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15 Technical Analysis
Properties of Good moving Average
Moving averages are portable trendline , So goodmoving average should act as good Support levels.
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16 Technical Analysis
Properties of Good moving Average
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17 Technical Analysis
Properties of Good moving Average
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18 Technical Analysis
Properties of Moving Averages
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19 Technical Analysis
Moving Averages
When two moving averages are used the longer is fortrend identification and the shorter for timing
It is the interplay between the two which gives you the
timing
Classics are 5 and 20 day and 10 and 40 day
On stocks, 7 and 21 work well
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20 Technical Analysis
Right Moving Average Period
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21 Technical Analysis
2 Moving Average Cross over
Market signalBullish When short term moving Average ( i.e 5 Day
) crosses Long term Moving Average (i.e 20 Day )andgoes up . Its a Golden Coress
Bearish When short term moving Average (i.e 5 Day )crosses Long Term Moving Average (i.e 20 Day ) andgoes Down . Its Death Cross
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22 Technical Analysis
2 Moving Average Cross over
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23 Technical Analysis
2 Moving Average Cross over
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24 Technical Analysis
Guppy Moving Averages
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25 Technical Analysis
Benefits and Drawbacks of Moving Averages
Benefits :
As it is a lagging indicator you will always be able to capture the bigmoves when it come along.
It act as a good support and Resistance .
It also shows the underlying Trend
Drawback :
All the lagging indicator gives many whipsaws when it comes to sideways market.
Some time there is significant amount of money is left on the tableas it gives late signals. Although some lag can be removed by usingExponential MA
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26 Technical Analysis
Moving Average Convergence Divergence
IntroductionDeveloped by Gerald Appel, Moving Average Convergence/Divergence (MACD) isone of the simplest and most reliable indicators available. MACD usesmoving averages, which are lagging indicators, to include some trend-followingcharacteristics. These lagging indicators are turned into a momentum oscillatorby subtracting the longer moving average from the shorter moving average.
MACD Formula The most popular formula for the "standard" MACD is the
difference between a security's 26-day and 12-day exponentialmoving averages. Using shorter moving averages will produce aquicker, more responsive indicator, while using longer movingaverages will produce a slower indicator, less prone to whipsaws.
Of the two moving averages that make up MACD, the 12-day EMAis the faster and the 26-day EMA is the slower. Closing prices areused to form the moving averages. Usually, a 9-day EMA of MACDis plotted along side to act as a trigger line. A bullish crossoveroccurs when MACD moves above its 9-day EMA and a bearishcrossover occurs when MACD moves below its 9-day EMA
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27 Technical Analysis
Calculation of MACD
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28 Technical Analysis
MACD Signals
MACD generates bullish or Bearish signals from threemain sources:
Positive divergence
Bullish moving average crossover
Bullish centerline crossover
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29 Technical Analysis
Bullish Divergence
When Prices are falling on remain same but the Indicator
moves up then it is called Bullish Divergence
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30 Technical Analysis
What is Positive Divergence and Negative Divergence
When Prices are going up or remaining same but
Indicator is coming down is called Negative Divergence.
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31 Technical Analysis
MACD Cross Over
Buy : When MACD Crosses above its Average .
Sell : When MACD Crosses below its Average.
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32 Technical Analysis
Centerline Crossover
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33 Technical Analysis
MACD Benefits
One of the primary benefits of MACD is that it incorporates aspects ofboth momentum and trend in one indicator. As a trend-followingindicator, it will not be wrong for very long. The use ofmoving averagesensures that the indicator will eventually follow the movements of theunderlying security.
MACD can be applied to daily, weekly or monthly charts. MACDrepresents the convergence and divergence of two moving averages.The standard setting for MACD is the difference between the 12 and26-period EMA. However, any combination of moving averages can beused. The set of moving averages used in MACD can be tailored foreach individual security. For weekly charts, a faster set of moving
averages may be appropriate. For volatile stocks, slower movingaverages may be needed to help smooth the data. No matter what thecharacteristics of the underlying security, each individual can set MACDto suit his or her own trading style, objectives and risk tolerance.
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34 Technical Analysis
MACD Drwaback
Can Be Applied on Any Time Frame : MACD can be applied to daily, weekly or monthly
charts. MACD represents the convergence and divergence of two moving averages. Thestandard setting for MACD is the difference between the 12 and 26-period EMA. However,any combination of moving averages can be used. The set of moving averages used inMACD can be tailored for each individual security. For weekly charts, a faster set ofmoving averages may be appropriate. For volatile stocks, slower moving averages may beneeded to help smooth the data. No matter what the characteristics of the underlyingsecurity, each individual can set MACD to suit his or her own trading style, objectives and
risk tolerance.
Can not be applied to see historical levels : MACD calculates the absolute differencebetween two moving averages and not the percentage difference. MACD is calculated bysubtracting one moving average from the other. As a security increases in price, thedifference (both positive and negative) between the two moving averages is destined to
grow. This makes its difficult to compare MACD levels over a long period of time,especially for stocks that have grown exponentially.
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35 Technical Analysis
Average Directional Index
Wells Wilder introduced this revolutionary concept in New Concept inTechnical Trading System .
+ DI is greater then DI add that Amount to +DI and Deduct the sameamount from DI ,
If DI is greater than + DI then add to DI and deduct that amount from DI
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36 Technical Analysis
Trading using +DI and DI
Buy : When + DI crosses above DI
Sell : When DI crosses above + DI
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37 Technical Analysis
Is the Market is Trading or Trending ???????????????
Average Directional Index is nothing but the Absolute difference between + DI
and DI .
When ADX is above 25 it is considered to be Trending Market . When it is below25 it is considered Trading . ( Note : Threshold value may vary fromCommodity to Security ) .
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38 Technical Analysis
Trending and Trading Market
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39 Technical Analysis
Average Directional Index (ADX)
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40 Technical Analysis
Benefits and Drawbacks of Lagging Indicators
One of the main benefits of trend-following indicators is the ability to catch amove and remain in a move. Provided the market or security in questiondevelops a sustained move, trend-following indicators can be enormouslyprofitable and easy to use. The longer the trend, the fewer the signals and lesstrading involved.
The benefits of trend-following indicators are lost when a security moves in a
trading range. Another drawback of trend-following indicators is that signals tendto be late. By the time a moving average crossover occurs, a significant portionof the move has already occurred.
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41 Technical Analysis
Leading IndicatorMany leading indicators come in the form of momentum oscillators. Generally
speaking, momentum measures the rate-of-change of a security's price. As the
price of a security rises, price momentum increases. The faster the securityrises (the greater the period-over-period price change), the larger the increase in
momentum. Once this rise begins to slow, momentum will also slow. As a
security begins to trade flat, momentum starts to actually decline from previous
high levels. However, declining momentum in the face of sideways trading is not
always a bearish signal. It simply means that momentum is returning to a more
median level.
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42 Technical Analysis
Leading Indicator
Relative Strenth Index ( RSI )
Stochastic
Rate of Change
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43 Technical Analysis
Relative Strength Index
Developed by J. Welles Wilder and introduced in his 1978 book,
New Concepts in Technical Trading Systems, the RelativeStrength
Index (RSI) is an extremely useful and popular momentum oscillator.
The RSI compares the magnitude of a stock's recent gains to the
magnitude of its recent losses and turns that information into a number
that ranges from 0 to 100. It takes a single parameter, the number of time
periods to use in the calculation. In his book, Wilder recommends using14 periods.
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44 Technical Analysis
Divergence
Bearish Divergence- when prices are making higher highs but the indicatoris making lower highs. Upmove is weakening.
Bullish Divergence- when prices are making lower lows but the indicator ismaking higher lows. Downmove is weakening.
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45 Technical Analysis
RSI Bullish/Bearish Divergence
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46 Technical Analysis
RSI Bearish Divergence
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47 Technical Analysis
RSI Overbought and Oversold
Overbought : RSI when enters 70 level the market is considered to be
overbought .
Oversold : RSI when enters 0 level the market is considered to be oversold
Important point :Only trade when trade when they are exiting Overbought andOversold levels.
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48 Technical Analysis
Properties of RSI
Normal Technical Analysis can aslo be applied to RSI like Trendline,
Fibonacci Retracement or Projection etc.
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49 Technical Analysis
Stochastic
Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is amomentum indicator that shows the location of the current close relative to thehigh/low range over a set number of periods. Closing levels that are consistentlynear the top of the range indicate accumulation (buying pressure) and those nearthe bottom of the range indicate distribution (selling pressure).
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50 Technical Analysis
Stochastic Buying and Selling
17 24 1 8
October
15 22 29 5 12
November
19 26 3 10
December
17 24 31
2008
7 14 21 28 4
February
11 18 25 3 10
March
17 24
10
20
30
40
50
6070
80
90
100
O O
Stochastic Oscillator (39.3942)
4300
4400
4500
4600
4700
4800
4900
5000
5100
5200
5300
5400
5500
5600
5700
5800
5900
6000
6100
6200
6300
6400
O
O
O
P
P
P
- NSE50 - 1 MONTH (4,566.00, 4,759.00, 4,566.00, 4,746.95, +149.650)
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51 Technical Analysis
Stochastic strategy
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52 Technical Analysis
Rate of Change
ROC is a momentum indicator that measures velocity and also leads the price action.
Rate of Change, ROC, can be very useful, because it is a leading indicator (ROC changes directionbefore the underlying price).
Divergences
Divergences can provide warnings or alerts of weaknesses in market trends, but do notrepresent actual buy or sell signals. It is essential to wait for a confirmation from the price
itself that the overall trend has reversed.Zero-line crossings
Although the long-term price trend is still the overriding consideration, a crossing upwardthrough the zero line can confirm a buy signal and a crossing downward through the zero
line, a sell signal.
Trendline Violations
The trendlines on the ROC chart are broken sooner than those on the price chart. Thevalue of the momentum indicators is that it turns sooner than the market itself, making it aleading indicator.
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53 Technical Analysis
Rate of Change ( ROC )
6 3
December
10 17 24 31
2008
7 14 21 28 4
February
11 18 25 3
March
10 17 24 3
-600-550-500-450-400-350-300-250-200
-150-100-50
050
100150200250300350400
O O O
P
Price ROC (-195.600)
1000
1050
1100
1150
1200
1250
1300
1350
1400
14501500
1550
1600
1650
O
OO
P
PP
TATA POWER COMP (1,163.00, 1,188.00, 1,100.50, 1,160.45, -3.10010)
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54 Technical Analysis
Benefits and Drawbacks of Leading Indicators
There are clearly many benefits to using leading indicators. Early
signaling for entry and exit is the main benefit. Leading indicatorsgenerate more signals and allow more opportunities to trade. Earlysignals can also act to forewarn against a potential strength orweakness. Because they generate more signals, leading indicatorsare best used in trading markets. These indicators can be used intrending markets, but usually with the major trend, not against it. In amarket trending up, the best use is to help identify oversold conditionsfor buying opportunities. In a market that is trending down, leadingindicators can help identify overbought situations for sellingopportunities.
With early signals comes the prospect of higher returns and withhigher returns comes the reality of greater risk. More signals and
earlier signals mean that the chances of false signals and whipsawsincrease. False signals will increase the potential for losses.Whipsaws can generate commissions that can eat away profits andtest trading stamina.
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55 Technical Analysis
Bollinger Bands
Introduction
Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatilityand relative price levels over a period time. The indicator consists of three bands designed toencompass the majority of a security's price action.
A simple moving average in the middle
An upper band (SMA plus 2 standard deviations)
A lower band (SMA minus 2 standard deviations)
Standard deviation is a statistical term that provides a good indication of volatility. Using the standard
deviation ensures that the bands will react quickly to price movements and reflect periods of high andlow volatility. Sharp price increases (or decreases), and hence volatility, will lead to a widening of thebands.
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Formula
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57 Technical Analysis
Signaling System
Buy : After Prolonged Selling the Candel gives closing outside the band and next candel isinside band than amove above highes high is Buying signal .
Sell : After Prolonged Buying spree candelstick move above BB and Next Daxt Day candelcomes in BB then A move below Lowest Low of Candel is your Short Signal.
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58 Technical Analysis
Bollinger Bands
Sideways consolidation Breakouts.
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59 Technical Analysis
Bollinger Band Breakout
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60 Technical Analysis
Band Envelop and Bollinger Bands
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61 Technical Analysis
Conclusion
To identify periods of high and low volatility
To identify periods when prices are at extreme,and possibly unsustainable, levels.
As stated above, securities can fluctuatebetween periods of high volatility and low
volatility. Being able to identify a period of lowvolatility can serve as an alert to monitor theprice action of a security. Other aspects oftechnical analysis, such as momentum, movingaverages and retracements, can then beemployed to help determine the direction of thepotential breakout
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62 Technical Analysis
GAPS
Gaps are nothing but the vacuum left by the Prices.
Upside Gap : when Todays low is higher than previous Days High .
Down Side Gap : When Todays High is Lower than Previous Days
Low .
Mi d th G
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63 Technical Analysis
Mind the Gap
Common gap occur in low volume caused by lack of
interest. (sometimes filled but be careful)
Breakaway gap occur in heavy volume when trendlinesbreak or patterns complete. (often filled)
Runaway gap occur in moderate volume during a trend.(generally filled and will provide support on reversal)
Exhaustion gap occurs in heavy volume near the end ofa market move. (pretty much always filled)
Mi d th G
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64 Technical Analysis
Mind the Gap
NAS NAS/NMS COMPSITE, Last Trade [Hi/Lo/Cl Bar] Daily16Nov00 - 08Feb01
P
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21Nov00 28Nov 05Dec 12Dec 19Dec 26Dec 02Jan 09Jan 16Jan 23Jan 30Jan 06Feb
Pr
USD
2300
2400
2500
2600
2700
2800
2900
3000
3100
NAS NAS/NMS COMPSITE , Last Trade, Hi/Lo/Cl Bar
19Jan01 2841.25 2752.06 2770.38
.BSESN, Last Trade [O/H/L/C Bar] Daily FREEZE11Feb05 - 30Jun05
Pr
INR.BSESN , Last Trade, O/H/L/C Bar
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66 Technical Analysis11Feb05 18Feb 25Feb 04Mar 11Mar 18Mar 25Mar 01Apr 08Apr 15Apr 22Apr 29Apr 06May 13May 20May 27May 03Jun 10Jun 17Jun 24Jun
INR
6150
6200
6250
6300
6350
6400
6450
6500
6550
6600
6650
6700
6750
6800
6850
6900
01Jun05 6729.39 6763.28 6721.22 6745.83
G
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Gaps
M M t
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Money Management
The most Important part of your Trading Career.
Two Types of Money Management Systems Martingle System
Anti Martingle System
Martingale System
Anti Martingale System
TABLE OF TRADES
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TABLE OF TRADES
20201000
17189(1)1
14168(2)2
11147(3)3
8126(4)4
5105(5)5
284(6)6
(1)63(7)7
(4)42(8)8
(7)21(9)9
(10)00(10)10
Total Inflow/
Outflow
Amt of
WinningTrades
No of Winning
Trades
Amt of Lossing
Trades
No of Lossing
Trades
M ti l S t
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Martingale System
You make a bet and if you lose you double your bet. If you lose again
you double your bet. You keep doing this until you win and then go back
to your original bet.
You bet Rs 5 and you lose.
Your next bet is Rs. 10. If you lose:
Your next bet is Rs 20. If you lose:
Your next bet is Rs 40. If you lose:
Your next bet is Rs 80. If you lose:
Your next bet is Rs 160. If you lose:
If you win you will get back 320 so net inflow is your original Rs 5
Is it a Good bet.
A ti M ti l S t
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71 Technical Analysis
Anti Martinalge System
Anti Martingale System tells to Invest double in a winningstreak and either slow down or remain constant on your
bets during the losing periods.
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72 Technical Analysis
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