Introduction To Technical Analysis: Course Manual

Introduction to Technical Analysis
Course Manual
Table of Contents
Getting Started Technical Analysis Basics Your Education Plan 5 8 44
2011 TD Ameritrade IP Company, Inc.
Disclaimers
The charts and information provided in this course are for illustrative and educational purposes only and should not be considered an endorsement or recommendation of the strategies discussed. Diversification does not eliminate the risk of experiencing investment losses. Past performance is no guarantee of future results. Technical analysis does not guarantee a profit or prevent losses from occurring. Investools Inc., and TD Ameritrade, Inc. (member FINRA l SIPC l NFA) are separate but affiliated companies that are not responsible for each others services or policies.
Getting Started
Getting Started
Welcome
Welcome to the Introduction to Technical Analysis course. This course is designed to provide a broad overview of some basic elements of technical analysis. In this course, you will learn how price chart analysis can help you determine the trend of a financial security and define congestion levels. You will explore various types of charts and see how buying and selling signals are generated from the charts. After completing this course, we invite you to consider other online courses from TD Ameritrade, as well as the webcasts and workshops available for free to all TD Ameritrade clients. We also offer access to a comprehensive fee-based education offering through our education affiliate, Investools from TD Ameritrade Holding Corp.
Getting Started
Learning Outcomes
Learning outcomes are used to give structure to each lesson and act as a way to measure your progress. After completing the Introduction to Technical Analysis course, you should be able to Identify up, down and sideways market trends Identify different types of price charting Identify support and resistance levels on price charts Determine price targets using support and resistance levels
To complete this lesson successfully, read all material for each lesson, complete all activities and create an education plan.
Technical Analysis Basics
Introduction
In this lesson, you will learn what technical analysis is, how price charts are constructed and how charts can help investors determine the trend, support and resistance of the price using peak and trough analysis. As you progress through this course, you will have the opportunity to practice what youve learned by completing the concept masteries along the way. You will also become more familiar with some of the technical analysis tools available to you. Finally, you will be able to test what youve learned by completing the final course assessment.
Introduction to Technical Analysis

Learning Outcomes
Identify up, down and sideways market trends Identify the different types of price charting Identify support and resistance levels on price charts Determine price targets using support and resistance
Technical Analysis Definition

Technical analysis is an investing discipline that attempts to identify investment opportunities by analyzing the markets physical behavior, including price movements and volume. Technical analysts, or technicians, must ensure that a market has one key characteristic before they attempt to trade in itliquidity. Liquidity reduces slippage. Slippage is when you enter a trade anticipating a certain price but have to settle for a less desirable price due to a lack of buyers or sellers on the other side of the transaction.
Tenets of Technical Analysis

There are three tenets, or principles, of technical analysis. Market Action Discounts Everything: The current price action takes into account all public knowledge about a stock. It is a representation of a stocks past earnings and an expectation of future earnings potential. As new information comes to light through news, it is incorporated into the price almost instantaneously. Technical analysts or technicians believe that if everything that can affect a stocks price is worked into the current price already, it is necessary to study the stocks price action. Prices Move in Trends: The trend is your friend. A trend will stay intact until something acts on a stocks price to cause it to change. Investors are often tempted to fight the trend, but they do so to their detriment. History Tends to Repeat Itself: Technical analysis is a visual representation of market knowledge and belief, which is controlled by human psychology. People respond to changes in market prices the same way today as they did when Charles Dow developed his theory. A study of the past can help you prepare for the future. Still, you must always remember that past performance of a security or strategy is not a guarantee of future results or success.
2011 TD Ameritrade IP Company, Inc. 10
Define the Trend

Defining the trend enables you to follow the prevailing direction of a stocks price movement. Sir Isaac Newtons law of inertia states that an object in motion stays in motion. This principle of inertia can also apply to stock trends. Identifying and trading a particular trend is how many technicians put the probabilities on their side. Remember, it is easier to swim with the current than against it. Trend is determined by analyzing a stocks price on a chart. Stocks are like waves with regular ebbs and flows. A stock can rally higher and then pull back, creating peaks and troughs just like a wave. Stocks also trend by making higher highs and lows, lower highs and lows and equal highs and lows. Therefore, trend has three directions: Up Down Sideways
11
Uptrend
An uptrend is defined as a series of higher peaks and higher troughs on a price chart.
For illustrative purposes only
12
Downtrend
A downtrend is defined as a series of lower peaks and lower troughs on a price chart.
13
Sideways Trend or No Trend

A sideways trend or no trend is defined as a series of relatively similar peaks and troughs.
14
Length of Trends
Trends occur over time cycles or time horizons and each of these periods will have a different effect on the size of price movements. These time horizons are commonly broken down as long, intermediate and short term. It may help to think of trends in terms of an ocean. Longterm trends are analogous to the tide because the tide makes all other waves move higher. A long-term trend that is going up or bullish helps extend rallies and shorten sell-offs. The intermediate-term trend will manifest itself in waves. These waves will ebb and flow over a few months. The height of the peaks and troughs often depend on the tide, just like rallies and sell-offs often depend on the long-term trend. A long-term uptrend will cause higher rallies and smaller sell-offs. Conversely, a long-term downtrend will cause smaller rallies and larger sell-offs.
15
Length of Trends Continued

A rising tide and a crashing wave can send ripples up the beach for an amazing distance, just like long-term and intermediate-term trends can cause day-to-day market moves to be much larger as well. Of course, bearish trends will shorten the length of the ripples. Now that you are familiar with the various trends, lets look at them on a chart.
16
Length of Trends: Long Term and Intermediate Term

Long-term and intermediate-term trends can be seen on five-year charts. In this example the blue line traces the long-term trend and the red and green lines outline the ebbs and flows of the intermediateterm trend. Long-term Trend: A long-term trend is usually nine months or longer. The chart to the right shows five years of history. Longterm trends are sometimes referred to as primary or secular because they are the largest overall focus of most investors.
Vertical axis: Price, Horizontal axis: Years For illustrative purposes only
Intermediate-term Trend: An intermediate-term trend lasts weeks or months, usually three to nine months.
Length of Trends: Intermediate Term and Short Term

Looking at a chart of about a year in length or shorter, you can see intermediate- and short-term trends. In this graph the intermediate-term trend is in blue and short-term trends are traced in green and red. Short-term Trend: A short-term trend is a ripple that lasts from days to weeks but not more than three months. Regardless of the time frame, try to identify long-, intermediate- and shortVertical axis: Price For illustrative purposes only term trends. When riding ripples or waves of a stock, it helps to know if the stocks tide is going in the preferred direction so you can go with the current. This is a main tenet of trading: go with the tide and ride the waves in.
Chart Time Frames

Technicians live by the mantra The trend is your friend. Trading with the trend is expected to increase your likelihood of success because you are swimming with the current. Technicians often diversify their portfolio by allocating assets to different trends in different markets and different sectors or industry groups. No matter what trend you are attempting to trade, you will want to be aware of the direction of other trends because they will influence each other. The longer the trend, the more influence it will usually have. However, changes in the trend will often be spotted in shorter length trends because they may be the start of shortening rallies or sell-offs.
19
Chart Types
Technicians use different chart types. Here are a few that you should become familiar with when doing technical analysis. Bar Chart: A popular chart type is the bar chart. Bar charts are a Western invention and have provided a popular blueprint for investors for more than 100 years. Line Chart: A less-popular chart type for stock analysis is the line chart, but its probably the most widely used when watching the financial news channels. Line charts can offer a clear picture because they remove the noise in the chart. Japanese Candlestick Chart: This is the oldest and most popular chart type for traders because this chart type provides a quick and easy clue to the analyst as to what the current market sentiment is.
20
Chart Types: Bar Chart

The bar chart is a Western method of charting price movement. The long vertical linethe barrepresents each periods trading range, including the days high and low prices. The horizontal line on the left side of the bar represents the days opening price. The horizontal line on the right side of the bar represents the days closing price. In this image, the chart shows colored bars, which indicate days when the stock closed higher than the previous day in black and days when the stock closed lower than the previous day in red.
Vertical axis: Price For illustrative purposes only
21
Chart Types: Line Charts

A line chart does not plot the price movement for a given period; it only plots the closing price for each period. The chart then connects closing prices with a single line hence the name, line chart. At first glance, this chart type seems inferior to the bar chart because it displays less information. However, some technicians like this view because it often shows support and resistance more clearly than a bar chart does because it reduces the clutter.
22
Chart Types: Japanese Candlestick Charts

In 1989 Steven Nison introduced Japanese candlestick charts to the Western trading world. Candlesticks have been used in the Japanese rice markets since the 1700s. They are the primary method of illustrating technical formations throughout this course. Candlesticks are also the first technical analysis method discussed. Like a bar chart, a candlestick chart shows three things: Opening price Trading range Closing price
Next, you will see how these three elements are represented.
Chart Types: Japanese Candlestick Charts

The candlestick chart shows the same opening, high, low and closing prices as the bar chart, but does so by connecting the open and close with a rectangle. The rectangle is called the body. As shown here, the body is white when the closing price is higher than the opening price and black when the closing price is lower than the opening price. The size of the body indicates the strength of buyers and sellers between the open and close: A large white body shows buyers in strong control because the price rose to find enough sellers to meet the demand from buyers. A large black body shows sellers in strong control because the price fell to find enough buyers to meet the supply of shares from sellers. The easy visual contrast between an up and down day as well as the day-to-day relative strength of buyers and sellers has made candlestick charts very popular with investors.
Support and Resistance

Support and resistance are very important technical concepts. Support and resistance levels are price targets that are imposed psychologically by investors. Prices tend to bounce up off support levels because many investors believe the security has a value at these levels and bounce down off resistance levels because many investors believe the security is fully valued at these levels. As with all technical principles, support and Vertical axis: Price For illustrative purposes only resistance levels are not absolute, but using these levels can help increase your probability of a successful trade.
25
Support and Resistance Continued

This example shows that over the years investors purchased the stock when it fell near $40 and sold it when it reached the $54 mark. Some investors have found this stock to be a good buy near the $45$46 level, while others have seen it as a selling opportunity. Its common to see old support act as new resistance. Lets take a closer look at support and resistance by defining each.
26
Support: Definition
Support is an imaginary price level that is difficult for a stock to move below because there are so many investors willing to buy at that level. It may be a horizontal or diagonal price level. Investors create support when the bulls gain enough momentum to overwhelm the bears and stop or reverse downward movement.
27
Support: Definition Continued

In many instances, support levels are self-fulfilling prophecies created by market participants. Analysts examine past support levels and, assuming the psychological and financial conditions that existed in the past still exist, project where future support levels will be. Investors then use these projected levels in their future trading decisions. The more often a stock price bounces off a support level, the stronger the support level becomes. In this example support is highlighted in green. Notice how the stock reached the green level and moved higher or bounced. As the stock returns to support, technicians will look for these bounces as potential buying opportunities. There are two types of support that we will review next: horizontal and diagonal.
28
Horizontal Support
Support relates to a very basic market instinctdont miss a good move. This chart depicts support as a horizontal price level at approximately $67. The stock rose more than 15 percent after forming support at $67. After the stock tested the $67 level, rallied and then came back down to $67, the support level was established. The next bounce off support could have been an entry signal.
29
Diagonal Support
Though support can be identified as a horizontal line, it is also identified as a diagonal line trending with the market. The chart shows that the diagonal support line began to form in August. The price then proceeded to ride its support line higher, bouncing from that line in August and again in September, October and November. Diagonal support can be drawn with two points, but a third low point would confirm the support level.
30
Resistance: Definition
Resistance is the opposite of support. It is an imaginary price level that is difficult for a stock to penetrate on the upside. It may be either a horizontal or diagonal price level. Resistance is created when the bears gain enough momentum to overwhelm the bulls and stop or reverse upward movement.
31
Resistance: Definition Continued

Just like support levels, resistance levels are often self-fulfilling prophecies created by market participants. Analysts examine past resistance levels and, assuming the psychological and financial conditions that existed in the past still exist, project where future resistance levels will be. Investors then use these projected levels in their future trading decisions. The more often a stock price bounces off a resistance level, the stronger the resistance level becomes. In this example resistance is highlighted in red. Notice how the stock reached the red levels and moved lower or bounced. As the stock returns to resistance, technicians will look for these bounces as potential shorting opportunities. There are two types of resistance that we will review next: horizontal and diagonal.
Please note: The risk of loss on a short sale is potentially unlimited since there is no limit to the price increase of a security.
32
Horizontal Resistance
Horizontal resistance represents an area where the supply of shares exceeds the demand for shares. In this example the price rose to approximately $71 and sold off in April and again in June. This caused the stock to decline 14 percent. The inability to break this resistance level can be used as an exit signal for many technicians.
33
Diagonal Resistance
Diagonal resistance occurs after a stock creates two consecutively lower peaks. In this example the lower peaks were made. However, not every peak reached the resistance line; this can be common in bearish moves because stocks have a tendency to drop faster than they rise. Nonetheless, investors could find opportunities to take short positions with each resistance bounce. Notice that the support and resistance levels are parallel to each other in this example. Most investors like to see this because it provides possible entry and exit points. Parallel support and resistance levels form a channel, which is discussed next.
2011 TD Ameritrade IP Company, Inc. Vertical axis: Price For illustrative purposes only
34
Price Channels
A price channel is a price range defined by a strong support level on the bottom of the price and a strong resistance level on the top of the price. Channels are excellent trading tools because they help identify possible entry and exit signals. After defining a channel, you can create long positions on support bounces, then close the long position and reverse with a short position on resistance bounces. The stock pictured to the right channeled for more than six months.
35
Price Channels Continued

The price target for a channeling stock is the opposite channel line. For instance, an investor could theoretically have taken a short position from the resistance bounce in April, and then closed it when support was reached. A long position couldve been created after the support bounce and closed once resistance was reached. Below are two potential benefits of identifying a channel: 1. Defined Movement: Stocks create channels by moving between defined support and resistance levels, which provide fairly welldefined target prices for investors. 2. Trade off the Bounce: Bounces off support and off resistance levels provide potential entry signals for both long and short positions.
36
Breaking Support and Resistance

At this point youve learned how to identify potential buying and selling signals based off support and resistance. However, the breaking of these levels can result in entry and exit signals as well. Investors often struggle with knowing when a stock movement constitutes a confirmed breakout or if it is a false alarm. To help solve this problem, market technicians use the degree of price penetration and a surge in volume as confirmation. Below are a few guidelines to consider for identifying a potential breakout: 3 Percent: Consider the move a breakout if the stock price penetrates the previous level of support or resistance by at least 3 percent. 150 Percent: A breakout is more significant if it occurs on at least 150 percent of average daily volume.
37
Breaking Support and Resistance Continued

Volume is commonly seen on the bottom of a price chart. In this price chart, the volume columns represent one day of trading. For days the stock was up, the volume is black, and for days where the stock was down, the volume is red. In this chart, you see a resistance level at $165 that lasted from June to October. The breakout in mid-October occurred on high volume, with a move in price above the resistance level. This represented a resistance break on increased buying Vertical axis: Price For illustrative purposes only interest. Such a break could be viewed as an instance where resistance has changed to support and the stock is likely to continue rising.
Setting Price Targets

The height between previous levels of support and resistance can be used as a price target. You can measure and average past price moves from support to resistance (or vice versa with bearish stocks) to determine an average expected price move. Suppose you expected this stock to make a bullish bounce. A target can be calculated by averaging past bullish moves from support up to resistance while the stock was uptrending. The Vertical axis: Price average move of the rallies highlighted in green For illustrative purposes only was approximately $4. When the stock forms its next support level, simply add $4 to that price to determine a potential target price. Now lets look at how these price targets work with a bullish and bearish stance.
Setting Price Targets Continued

When a stock breaks out of a channel, an easy way to set price targets for the estimated move that will follow is to compare previous highs and lows. Here is a bullish example of a stock that broke above resistance and hit its price target. The stock formed support at $6.50 and resistance at $7.00, for a 50 difference between levels. After the stock broke out above resistance, it traded up past $7.50 Vertical axis: Price For illustrative purposes only before consolidating. The $7.50 mark could have been used as a bullish price target after buying the stock on a breakout from its previous price channel.
Setting Price Targets Continued

Similarly, a support break can provide a signal for a bearish trade. Look for candlestick formations, degree of penetration and increased volume to confirm the breakout. For the stock shown here, support was established from October to February and again in May near the $27 level. Resistance stretched from December to April near the $31 mark. Therefore, the height of this channel is approximately $4. Once the stock broke support in late May with increasing volume, a price target of $23 (27 4 = 23) could have been set.
41
Review
In this course, you were introduced to the structure and basic charts used in technical analysis. You then learned how peak and trough analysis helps you determine up, down and sideways trends. This same analysis helped you identify support and resistance areas. Finally, you learned how support and resistance can be used by technicians to identify potential price targets. At this point, you should have a basic understanding of technical analysis. Next, you will learn how to increase your knowledge of technical analysis and investing with the various educational offerings available to you.
42
Your Education Plan
Your Education Plan
Creating an Education Plan

Education isnt an event but an ongoing process. Youve learned some basics of technical analysis, but there is so much more to learn in order to apply these instruments to your portfolio. One of the best ways to learn this important knowledge is by determining a process to follow called an education plan. Your education plan outlines which courses will help you pursue your investing goals. Whichever you choose, TD Ameritrade and Investools from TD Ameritrade Holding Corp. offer a wide array of courses, webcasts, live events and education resources to help you pursue your investment goals.
44
Your Education Plan
Elements of an Education Plan

Free Education
As a TD Ameritrade client, there are numerous free courses available to you that are designed to introduce you to a wide array of investing concepts. These courses can help you identify which areas of the financial markets you are most interested in pursuing further. Options: If you are considering options as part of your investment strategy and are looking to learn more before you invest in fee-based education, you may want to consider the Introduction to Options, Buying Calls and Covered Calls courses to learn a little bit more about option fundamentals. Futures: If you would like to explore futures investing, you may want to consider the Introduction to Futures course. Other Resources: Additionally, there are courses on a variety of topics as well as webcasts and workshopsall available to you for free in the TD Ameritrade Education Center.
Options and futures trading are subject to significant risks and not suitable for all investors. Not all account owners will qualify for options and/or futures trading.
45
Your Education Plan
Elements of an Education Plan Continued

Fee-based Education
Investools from TD Ameritrade Holding Corp. offers a wide range of comprehensive feebased educational offerings that can help you continue your education with courses that offer a more robust curriculum and services than courses offered for free. These courses allow you to focus on the investments you are most interested in. In the Resources section of the player, we have a hyperlink to the Investools Web site. Please feel free to visit this site to learn more about the various courses it offers. Or call an Investools Education Counselor at 1.800.393.5123 to create your fee-based education plan today.
46

Introduction To Technical Analysis: Course Manual

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Introduction To Technical Analysis: Course Manual

Hochgeladen von

Copyright:

Verfügbare Formate

Introduction to Technical Analysis

2011 TD Ameritrade IP Company, Inc.

2011 TD Ameritrade IP Company, Inc.

2011 TD Ameritrade IP Company, Inc.

2011 TD Ameritrade IP Company, Inc.

Technical Analysis Basics

Technical Analysis Basics