Basic Technical Analysis

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What is Technical Analysis?
Technical analysis is a method of evaluating securities that
involves a statistical analysis of market activity, such as
price and volume.

The use charts and other tools to identify patterns that can
be used as a basis for investment decisions.
Technical Analysis
There are many different forms of
technical analysis: Some rely on chart
patterns, others use technical
indicators and oscillators, and most use
a combination of techniques.
Indicators
Technical Indicators are the often
squiggly lines found above, below and
on-top-of the price information on a t
echnical chart. Indicators that
use the same scale as prices are
typically plotted on top of the price
bars and are therefore referred to as “
Overlays”.
Oscillators
An oscillator is a technical analysis tool that is banded between two extreme values and built with
the results from a trend indicator for discovering short-term overbought or oversold conditions.
As the value of the oscillator approaches the upper extreme value, the asset is deemed to be over
bought, and as it approaches the lower extreme, it is deemed to be oversold.

One common Oscillators is RSI (Relative Stock Index)

Relative Strength Index (RSI) -Shows how strongly a stock is moving in its current direction
Technical Overlays
Bollinger Bands
A chart overlay that shows the upper and lower limits of 'normal' price movements based on the
Standard Deviation of prices

Chandelier Exit
An indicator that can be used to set trailing stop-losses for both long and short position

Kaufman's Adaptive Moving Average (KAMA)

A unique moving average that accounts for volatility and automatically adjusts to price behavior.

MACD (Moving Average Convergence/Divergence Oscillator)

A momentum oscillator based on the difference between two EMAs
Three Assumptions

Technical analysis is based on three assumptions:

The market discounts everything.
Price moves in trends.
History tends to repeat itself.
The Market Discounts Everything
This theorem is similar to the strong and semi-strong forms of market
efficiency.

Technical analysts believe that the current price fully reflects all information.

All information is already reflected in the price, it represents the fair value, and
should form the basis for analysis
Price moves in trends.

Most technicians agree that prices trend. However, most technicians also
acknowledge that there are periods when prices do not trend.

If prices were always random, it would be extremely difficult to make money

using technical analysis
Chart Analysis
Overall Trend: The first
step is to identify the
overall trend. This can be
accomplished with trend
lines, moving averages or
peak/trough analysis.
RSI (Relative Strength Index)

The relative strength index (RSI) is a momentum indicator developed by noted technical
analyst Welles Wilder, that compares the magnitude of recent gains
and losses over a specified time period to measure speed and change of price movement
s of a security. It is primarily used to attempt to identify
overbought or oversold conditions in the trading of an asset.

- A relative strength index is a momentum oscillator that measures the speed and
change of price movements.
- RSI oscillates between 0 to 100. Traditionally, the stock is considered overbought when
above 70 and oversold when below 30.
- Overbought (overvalued) = SELL
- Oversold (undervalued) = BUY
Overbought Indicators
When an oscillator reaches its upper bound, it is generally interpreted as a
sign that the price of the asset is becoming overvalued and may experience
a pullback.
 BB (Bollinger Bands)
• Bollinger Bands was developed by John Bollinger.
• These are volatility bands placed above and below a
moving average.
• Volatility is based on the standard deviation, which changes as volatility
increases and decreases. The bands automatically widen when volatility
increases and narrow when volatility decreases.
• Bands show volatility which gives opportunities for short term gains.
• Price almost touching the bottom band may indicate oversold status.
•
MACD Moving Average Convergence/Divergence
Developed by Gerald Appel in the late seventies

The MACD turns two trend-following indicators, moving averages, into a

momentum oscillator by subtracting the longer moving average from the
shorter moving average.

Prices are trending above the signal line showing an upward momentum. This
may indicate a bullish market being favorable for investors.