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TECHNICAL ANALYSIS

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STOCK
BANGLADESH
LIMITED

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3rd Edition

Handbook for Basic Technical Analysis


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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.

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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 aboveaverage 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.

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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.

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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 ................................................................................................................................... 2
Goal ........................................................................................................................................ 2
Chapter 1 .................................................................................................................................. 15
Capital Market ......................................................................................................................... 16
Supply & Demand.................................................................................................................... 16

Market Analysis ....................................................................................................................... 17


Three Types of Market Analysis.......................................................................................... 17

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Random Walk Theory .............................................................................................................. 18


Efficient Market Hypothesis .................................................................................................... 18
Fundamental Analysis .............................................................................................................. 19
Technical Analysis ................................................................................................................... 20

The Market Discounts Everything ....................................................................................... 20


Price Moves in Trends ......................................................................................................... 20

History Tends To Repeat Itself ............................................................................................ 20


Criticism of Technical Analysis........................................................................................... 21
Dow Theory ............................................................................................................................. 22

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The Basic Principles of Dow Theory ................................................................................... 24


Dow Theory Criticism ......................................................................................................... 26

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Chapter 2 .................................................................................................................................. 28
History and Construction of Charts ......................................................................................... 29
Benefits of Using Chart ........................................................................................................... 29

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History of Charting .................................................................................................................. 30


Type of Charts.......................................................................................................................... 31
Early Charts ......................................................................................................................... 31
Line Charts ........................................................................................................................... 31
Bar Charts ............................................................................................................................ 32
Candlestick Charts ............................................................................................................... 33
Point & Figure Chart............................................................................................................ 34
Equivolume Chart ................................................................................................................ 35
Support and Resistance ............................................................................................................ 36
Identification and Psychology behind Support and Resistance ........................................... 37
Support & Resistance Zone ................................................................................................. 38
Support Become Resistance or Vice Versa ......................................................................... 39

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Trend Line ................................................................................................................................ 40


Drawing Trend Line ............................................................................................................. 43
Tentative Versus the Valid Trend line ................................................................................. 43
How to use the Trend Line................................................................................................... 44
How to Determine the Significance of a Trend Line ........................................................... 46
How Trend Lines Reverse Roles ......................................................................................... 46
Measuring and Implication of Trend Line ........................................................................... 48
Accelerating Trend Lines ..................................................................................................... 49
Channel .................................................................................................................................... 51
Liner Regression Channel .................................................................................................... 52

Candlesticks ............................................................................................................................. 53

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A Potted history ................................................................................................................... 53


Construction of Candlestick Charts ..................................................................................... 54
Candlesticks vs. Traditional Bar Charts............................................................................... 54
The Anatomy of the Candles ............................................................................................... 56

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


Candlestick Patterns ................................................................................................................. 58
Bullish Pattern ...................................................................................................................... 59

Bullish Candlesticks............................................................................................................. 59
Bearish Candlestick ............................................................................................................. 63

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Reversal Candlestick ............................................................................................................ 68


Neutral Candlestick .............................................................................................................. 72

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Heikin Ashi Candlesticks ..................................................................................................... 76


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

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Interpretation .................................................................................................................... 78
Doji and Spinning Tops ....................................................................................................... 79

Chapter 3 .................................................................................................................................. 81
Introduction to Chart Pattern: .................................................................................................. 82
Chart Pattern ............................................................................................................................ 82
Common Pattern Characteristics.......................................................................................... 82
Types of Pattern ................................................................................................................... 82
Preliminary Points Common to All Reversal Patterns ......................................................... 83
Reversal Pattern ....................................................................................................................... 83
The Head and Shoulders Reversal Pattern ........................................................................... 83
The inverse Head and Shoulders.......................................................................................... 86
Double Top .......................................................................................................................... 87

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Double Bottom ..................................................................................................................... 88


Triple Bottom ....................................................................................................................... 89
Triple Top ............................................................................................................................ 91
Rounding Top ...................................................................................................................... 92
Rounding Bottom ................................................................................................................. 93
Continuation Patterns ............................................................................................................... 94
Triangles .............................................................................................................................. 94
Symmetrical Triangle........................................................................................................... 95
Ascending Triangle .............................................................................................................. 96
Descending Triangles........................................................................................................... 97

Wedge and Climax ............................................................................................................... 98

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Flag and Pennant ................................................................................................................ 100


Rectangle............................................................................................................................ 103
Diamond Pattern ................................................................................................................ 103
Measure Move ................................................................................................................... 104

Gaps ....................................................................................................................................... 105


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

Exhaustion Gaps ................................................................................................................ 107


Elliot Wave Theory ................................................................................................................ 108

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Impulse Waves ................................................................................................................... 109


Impulse ............................................................................................................................... 110

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Truncation .......................................................................................................................... 111


Corrective Waves ............................................................................................................... 112
Zigzags ............................................................................................................................... 112

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Flats .................................................................................................................................... 113


Triangles ............................................................................................................................ 114

The Fibonacci sequence ......................................................................................................... 115


The Golden Ratio ............................................................................................................... 115
Fibonacci Retracement....................................................................................................... 116
Fibonacci Retracement in Uptrend .................................................................................... 116
Fibonacci Retracement in Downtrend ............................................................................... 117
Fibonacci Fan ..................................................................................................................... 118
Fibonacci Arcs ................................................................................................................... 119
Chapter 4 ................................................................................................................................ 121
Indicators and Oscillators ...................................................................................................... 122
Lagging Indicators ............................................................................................................. 122

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Leading Indicator ............................................................................................................... 122


Moving Averages ............................................................................................................... 123
Types of Moving Averages ................................................................................................ 124
Simple Moving Average (SMA) .................................................................................... 124
Weighted Moving Average (WMA) .............................................................................. 125
Exponential Moving Average (EMA) ........................................................................... 126
Differences between SMA, EMA and WMA .................................................................... 127
Interpreting Moving Averages ........................................................................................... 128
Determining Trend Direction ............................................................................................. 128
Determining Trend Reversals ............................................................................................ 129

Determining Support and Resistance ................................................................................. 130

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Moving Average Convergence Divergence (MACD) ....................................................... 131


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

MACD Histogram.......................................................................................................... 134


Average Directional Index (ADX)..................................................................................... 135
Interpreting Average Directional Index (ADX) ............................................................. 138

DI or DMI Crossover ..................................................................................................... 138


Peak of The Trend .......................................................................................................... 139

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Minor Crossover ............................................................................................................ 139


ADX Line....................................................................................................................... 140

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Determining Trend Direction and Strength ................................................................... 141


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

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Principles of Volume ......................................................................................................... 143


Money Flow Index ............................................................................................................. 150
Introduction .................................................................................................................... 150
Calculation ..................................................................................................................... 150

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


Calculation ..................................................................................................................... 153
Accumulation Distribution Line ........................................................................................ 156
Calculation ..................................................................................................................... 156

Chapter 5 ................................................................................................................................ 159


Volatility Indicators ............................................................................................................... 160
Bollinger Bands ................................................................................................................. 160
Calculation ..................................................................................................................... 160

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Signal: W-Bottoms......................................................................................................... 161


Signal: M-Tops .............................................................................................................. 162
Bollinger Bounce ........................................................................................................... 162
Bollinger Squeeze .......................................................................................................... 163
Percentage Bands or Envelopes ......................................................................................... 164
Calculation ..................................................................................................................... 164
Trend Identification ....................................................................................................... 165
Average True Range (ATR)............................................................................................... 166
True Range ..................................................................................................................... 166
Calculation ..................................................................................................................... 167

Absolute ATR ................................................................................................................ 168

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


Calculation ..................................................................................................................... 169
Momentum Indicators ............................................................................................................ 170
Relative Strength Index (RSI)............................................................................................ 170

Calculation ..................................................................................................................... 171


Interpreting RSI ............................................................................................................. 172
Stochastics.......................................................................................................................... 173

Calculation ..................................................................................................................... 173


StochRSI ............................................................................................................................ 175

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Calculation ..................................................................................................................... 175


Overbought/Oversold ..................................................................................................... 176

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Calculation ..................................................................................................................... 176


Overbought and Oversold Crossovers ........................................................................... 176
Centerline Crossovers .................................................................................................... 177

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Positive and Negative Divergences ............................................................................... 177


Strong Trend .................................................................................................................. 177

Commodity Channel Index (CCI)...................................................................................... 177


Calculation ..................................................................................................................... 178
Emerging New Trend ..................................................................................................... 178
Overbought/Oversold ..................................................................................................... 179
Rate of Change (ROC) ....................................................................................................... 180
Overbought/Oversold Situation ..................................................................................... 180
William %R ....................................................................................................................... 182
Calculation ..................................................................................................................... 182
Overbought Oversold ..................................................................................................... 183
Ultimate Oscillator ............................................................................................................. 184

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Calculation ..................................................................................................................... 184


Composite indicators ............................................................................................................. 186
Guppy Multiple Moving Averages .................................................................................... 186
Interpretation .................................................................................................................. 187
Trend Direction .............................................................................................................. 187
Trend Reversal ............................................................................................................... 188
Trend Strength ............................................................................................................... 189
........................................................................................................................................ 190
Pullbacks ........................................................................................................................ 190
Breakouts ....................................................................................................................... 190

Tactics ............................................................................................................................ 191

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Rules .............................................................................................................................. 192


Advantages ..................................................................................................................... 192
Disadvantages ................................................................................................................ 192
Ichimoku Chart .................................................................................................................. 193

Interpretation .................................................................................................................. 194


Trend direction ............................................................................................................... 194
Trend Reversal ............................................................................................................... 195

Trend Strength ............................................................................................................... 195


Pullbacks ........................................................................................................................ 196

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Breakout ......................................................................................................................... 197


Divergence Study ................................................................................................................... 198

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1. Regular Divergence ....................................................................................................... 199


2. Hidden Divergence ........................................................................................................ 201
3. Exaggerated Divergence ................................................................................................ 203

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Divergence Trading Strategy ................................................................................................. 205


Indicators Used .................................................................................................................. 205
Entry ................................................................................................................................... 205
Exit ..................................................................................................................................... 205
Stop Loss............................................................................................................................ 205

Chapter 6 ................................................................................................................................ 206


Behavioral Finance ................................................................................................................ 207
Common Mental Mistakes ..................................................................................................... 207
Overconfidence ...................................................................................................................... 208
Examples of Overconfidence ............................................................................................. 208
Anchoring .............................................................................................................................. 209
Examples of Anchoring ..................................................................................................... 209

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Metal Accounting................................................................................................................... 209


Examples of Mental Accounting ....................................................................................... 210
Confirmation .......................................................................................................................... 210
Examples of Confirmation ................................................................................................. 210
Hindsight Bias ........................................................................................................................ 211
Examples of Hindsight Bias............................................................................................... 211
Herd Behavior ........................................................................................................................ 211
Examples of Hard Behavior ............................................................................................... 211
Applying Behavioral Finance ................................................................................................ 211
Classification of Capital Market Participants ........................................................................ 212

Institutional Investors......................................................................................................... 212

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Speculators ......................................................................................................................... 212


Retail Investors .................................................................................................................. 213
Long Term Investors .......................................................................................................... 213
Short Term Traders ............................................................................................................ 213

High Frequency Traders .................................................................................................... 213


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

Examples of Bangladesh Capital Market Bubbles............................................................. 214


Investors Psychological Behavior ........................................................................................ 216

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Chapter 7 ................................................................................................................................ 219


Technical Analysis Platform .................................................................................................. 220

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How to Install Amibroker ...................................................................................................... 220


Chapter 8 ................................................................................................................................ 242
Trading Strategy..................................................................................................................... 243

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Instrument Selection .............................................................................................................. 243


Market Timing ....................................................................................................................... 243
Money Management .............................................................................................................. 244
Position Sizing ....................................................................................................................... 244
Stop Loss................................................................................................................................ 244
Exit Strategy........................................................................................................................... 245
Fixed Stop .......................................................................................................................... 245
Trailing Stop Loss .............................................................................................................. 245
Indicator Based Stop/Dynamic Stop .................................................................................. 245
Trading Psychology ............................................................................................................... 245
Knowing Yourself.................................................................................................................. 246
There is no Holy Grail ........................................................................................................ 246

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Independent Thinking ............................................................................................................ 246


Patience is a Profitable Virtue................................................................................................ 247
Sticking With the Plan ........................................................................................................... 247
Psychological Problems in Trading ....................................................................................... 247
Fear .................................................................................................................................... 247
Greed .................................................................................................................................. 248
Pride ................................................................................................................................... 248
Overcoming Psychological Problems in Trading .................................................................. 248
Complete Trading Strategies.................................................................................................. 251
Trading the W Patterns ...................................................................................................... 251

Entry Conditions ............................................................................................................ 255

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Stop Loss........................................................................................................................ 256


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

Stop Loss........................................................................................................................ 257


Reference ............................................................................................................................... 259

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Appendix ................................................................................................................................ 260

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Table of Figure

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Figure 1.1: Supply & Demand ................................................................................................. 17


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

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Figure 2.45: Reversal Candlestick | Long Legged Doji | FUWANGCER............................... 69


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

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Figure 3.39: Fibonacci Retracement Example | DSEGEN .................................................... 117


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

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Figure 5.10: ATR | NTC ........................................................................................................ 168


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

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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

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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

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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

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

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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

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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.

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

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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.

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Figure 2.36: Bullish Candlestick | Bullish Engulfing | EASTLAND

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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

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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

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

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patterns properly

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particular stock or market very easily

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

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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.

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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

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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.

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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.

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Fibonacci Retracement: it
works as a support or
resistance level and shows
the possible retracement
level of price.

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.

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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.

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Fibonacci Retracement in Uptrend

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Figure 3.38: Fibonacci in Uptrend | DSEGEN

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Chapter 4

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

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Learning Objectives

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

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picking and dumping points

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

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different angles and views. Combination of indicators can detect exact reaction points
of the market. Individual range bound indicators and free indicators generate trading

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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)

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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
MACD is a very popular
your computer screen although three lines are actually
and widely used indicator
used in its calculation. The faster line (called the
which can detect both
MACD line) is the difference between two
trend and momentum.
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.

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Chapter 5

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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)

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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

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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

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Figure 6.1: Dhaka Stock Exchange 1987 Bubble

Figure 6.2: Dhaka Stock Exchange 1996 Bubble

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Chapter 7

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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

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Data updating is completed.


Using Amibroker

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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).

Let's now take a look at


the user interface:

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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

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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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Figure 8.7: Trading Strategy | Pullbacks | 1st Pullback after MA Crossover |


DHAKABANK

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Figure 8.8: Trading Strategy | Pullbacks | Pullback after Breakout DHAKABANK

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