Project On Technical Analysis

TECHNICAL ANALYSIS TY.
BFM
Introduction
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.
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.
TECHNICAL ANALYSIS TY.BFM
Technical Analysis - The Concept
OUT
OF THE MANY HUMAN ACTIVITIES THAT ARE STUDIES SO FAR BY MAN, PROBABLY THE MOST COMPLEX
ACTIVITY, WHICH HAS BEEN OBSERVED BY MANY KINDS OF PEOPLE AND FROM MANY ANGLES, IS THE ANALYSIS OF SECURITIES.
AND THIS IS SO MAINLY BECAUSE THE REWARDS THAT THE STOCK MARKET OFFERS IS UNLIMITED AND
AT THE SAME TIME THE PENALTIES CAN ALSO BE DISASTROUS.
Analysis of stocks on a real time basis can best be done by Technical Analysis. What I mean by real time basis is the time when the prices are being set, stocks are being bought and sold, decisions are being taken and the prices are on the move.
So what actually is Technical Analysis?

TECHNICAL ANALYSIS
IS THE SCIENCE OF RECORDING, USUALLY IN GRAPHICAL FORM, THE ACTUAL HISTORY OF
TRADING (PRICE CHANGES, VOLUME OF TRANSACTIONS, ETC.) IN A CERTAIN STOCK OR IN THEN DEDUCTING FROM THAT PICTURED HISTORY THE PROBABLE FUTURE TREND.
THE
AVERAGES AND REFERS
TECHNICAL ANALYSIS
TO THE STUDY OF THE ACTION OF THE MARKET ITSELF AS OPPOSED TO THE STUDY OF THE GOODS IN WHICH THE MARKET DEALS.
THE BASIC OBJECTIVE OF TECHNICAL ANALYSIS IS TO IDENTIFY THE TREND OF THE MARKET
UNDER STUDY AND BENEFIT FROM BEING WITH THE TREND OF THE MARKET.
Technical Analysis is based on the following three premises:
History repeats itself It means that certain price formations like triangles; channels, etc. reoccur throughout time and can be used to foresee the extent of an ensuing price move. THE MARKET PRICE IS AN OUTCOME OF DEMAND AND SUPPLY No market is efficient and that all market prices are influenced by the level of demand and supply in that market. The price of a security depends on the expectations of the buyer and the seller. If the investor expects the price to rise, he will buy the security and if he expects it to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans are neither easily quantifiable nor predictable. This fact alone will keep any mechanical trading system from working consistently. Security prices are determined by
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accounts, analysts and researchers, along with a motley crew of eccentrics, mystics and human players, and a multitude of just ordinary hopeful citizens. This breadth of market expectations guarantees an element of unpredictability and excitement. The market action discounts everything This premise argues that any available information (public as well as inside information) is reflected in the current price. So instead of analyzing the economic environment (i.e. monetary and fiscal policy, balance sheet, etc.) a technical analyst bases his or her research exclusively on historical price data. One obvious advantage of this procedure is that the rather decisive psychological rational of the investor is taken into account and included indirectly into the research which is handled mostly through mathematical or geometrical methods. It is crucial to keep in mind that Technical Analysis is not an exact science. Rather, Technical Analysis rather deals with probability distributions and as such leaves room for unexpected counter-productive outcomes. This means that a strict and rigorous discipline is a must in the practical use of Technical Analysis, which should actually be true for any other approach as well!

"The market action discounts everything". This statement is a valuable summarization of the philosophical aspects concerning technical analysis described in the introduction above. Unless the full significance of this premise is fully understood and accepted, nothing else that follows will make much sense.
Fundamental Vs. Technical Analysis
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities. The Differences Charts vs. Financial Statements At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements) for the purposes of this tutorial, this simple tenet holds true. Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.Time Horizon Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in
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the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. (For more insight, read Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?) Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.
ELEMENTS OF TECHNICAL ANALYSIS

Technical Analysis is based almost entirely on the analysis of price and volume. All the elements listed below are available on a daily basis in any leading business newspaper. The formation and relevance of a securitys price and volume is explained below: Price As defined earlier, price in terms of Technical Analysis is an interaction of demand and supply. The price of a security depends on the expectations of the buyer and the seller. If the investor expects the price to rise, he will buy the security and if he expects it to fall, he will sell it. OPENING PRICE This is the price of the first trade for the period (e.g. The first trade of the day). When analyzing daily data, the Open is especially important, as it is the consensus price after all interested parties were able to sleep on it. HIGH This is the highest price that the security traded during the period. It is the point at which there were more buyers (i.e. There are always sellers willing to sell at higher prices, but the high price represents the highest price that buyers are willing to pay). LOW

This is the lowest price that the security traded during the period. It is the point at which there are more buyers than sellers (i.e. There are always buyers willing to buy at lower prices, but the low represents the lowest price sellers were willing to accept).
CLOSE This is the last price that the security traded during the period. Due to its availability, the close is the most often used price for analysis. The relationship between the first price (open) and the last price (close) is considered significant by most technicians. This relationship is emphasized in candlestick charts.
VOLUME This is the number of shares that were traded during the period. The relationship between the price and volume is very important. The behavior of volume in some cases confirms the accuracy of predictions made. Time Both, price and volume are relative to the time frame taken. Thus, the time frame becomes one more component of Technical analysis. After all, trading in the stock market based on how well you time your transactions. Demand and supply are never constant in the stock market and thus, a highly priced stock today may not be so high some other day. Whether you are an investor, or a speculator, relative worth of time comes into play. Since, time assumes so much importance in Technical Analysis, charts are required to give us a pictorial presentation of the time frame and price movement.
CHARTS - A CHARMING TOOL

What are charts? A PRICE CHART IS A SEQUENCE OF PRICES PLOTTED OVER A SPECIFIC TIMEFRAME. IN STATISTICAL TERMS, CHARTS
ARE REFERRED TO AS TIME SERIES PLOTS.
A CHART IS THE TECHNICAL ANALYSTS PRIMARY TOOL.
WHY CHARTS? As you can see, there is no magic in the charts itself. It is simply a pictorial record of the trading history of the stock or stocks in which we may be interested. However, charts give a pictorial view of the price movement and it becomes easy to identify the trend of the price. In this case, literally, a picture speaks a thousand words. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between.
WHAT ARE THE TYPES OF CHARTS?

The following are the most frequently used charts: Line chart: The line chart is one of the simplest charts. It is formed by plotting one price point, usually the close, of a security over a period of time. Connecting the dots, or price points, over a period of time, creates the line. Some investors and traders consider the closing level to be more important than the open, high or low. By paying attention to only the close, intraday swings can be ignored. Line charts are also used when open, high and low data points are not available. Sometimes only closing data are available for certain indices, thinly traded stocks and intraday prices.
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Candlestick Chart: Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For a candlestick chart, the open, high, low and close are all required. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Monday's open, the weekly high-low range and Friday's close.
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Open Close High Low Open Close High Low
Many traders and investors believe that candlestick charts are easy to read, especially the relationship between the open and the close. Black (solid) candlesticks form when the close is higher than the open and white (clear) candlesticks form when the close is lower than the open. The white and black portion formed from the open and close is called the body (white body or black body). The lines above and below are called shadows and represent the high and low.
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Point & Figure Chart: All the charting methods shown above plot one data point for each period of time. No matter how much price movement, each day or week represented is one point, bar or candlestick along the time scale. Even if the price is unchanged from day to day or week to week, a dot, bar or candlestick is plotted to mark the price action. Contrary to this methodology, Point & Figure Charts are based solely on price movement and do not take time into consideration. There is an x-axis but it does not extend evenly across the chart.
The beauty of Point & Figure Charts is their simplicity. Little or no price movement is deemed irrelevant and therefore not duplicated on the chart. Only price movements that exceed specified levels are recorded. This focus on price movement makes it easier to identify support and resistance levels, bullish breakouts and bearish breakdowns.
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A comparative Analysis!
Using candlesticks, 200 data points can take up a lot of room and look cluttered. Line charts show less clutter, but do not offer as much detail (no high-low range). The individual bars that make up the bar chart are relatively skinny, which allows users the ability to fit more bars before the chart gets cluttered. If you are not interested in the opening price, bar charts are an ideal method for analyzing the close relative to the high and low. In addition, bar charts that include the open will tend to get cluttered quicker. If you are interested in the opening price, candlestick charts probably offer a better alternative. Conclusion It is not the charts but the interpretation of the charts that is important. Chart analysis in neither easy nor foolproof. Yet it is not at all uncommon for some casual investor who has no idea whatever of market techniques to pick up a chart by chance and see in it something which he has not hitherto expected something perhaps which saves him from making an unfavorable commitment. The keys to successful chart analysis are dedication, focus and consistency. DEDICATION:
LEARN THE BASICS OF CHART ANALYSIS, APPLY YOUR KNOWLEDGE ON A REGULAR BASIS AND CONTINUE YOUR DEVELOPMENT.
FOCUS: LIMIT THE NUMBER OF CHARTS, INDICATORS AND METHODS YOU USE. LEARN HOW TO USE THESE
AND LEARN HOW TO USE THEM WELL.
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The Trendy Trendlines

WHAT IS A TREND? The trend is a basic direction of the market price movement. Careful analysis of the trend can help you earn a lot or can help you minimize your losses. WHAT ARE THE TYPES OF TRENDS? The trend can be up, down or sideways. A trend is said to be up if it is making continuous higher tops and higher bottoms. Similarly a trend can be said to be down if there is a series of lower tops and lower bottoms. A flat or a sideways trend is a situation where prices move in a range in horizontal direction for a long period of time. Thus graphically also a trend can be shown as an up trend, a downtrend or a flat or a sideways trend. TREND DURATION IS ALSO MADE UP OF THREE TIME PERIODS - MAJOR, INTERMEDIATE AND MINOR. THE MAJOR
TREND WILL HAVE DURATION OF SIX TO EIGHT MONTHS OR LONGER AND IS BEST ILLUSTRATED BY WEEKLY AND MONTHLY BAR CHARTS.
WITHIN THE MAJOR TREND SIGNIFICANT CORRECTIONS OR REVERSALS OF TREND WILL BE THE INTERMEDIATE TREND LASTS FROM THREE WEEKS TO THREE MONTHS, AND THE MINOR TREND IS ANYTHING LESS, FROM TWO TO THREE WEEKS IN DURATION.
PRESENT; THESE WOULD BE INTERMEDIATE AND MINOR TRENDS WITHIN THE MAJOR TREND.
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What is a trend line? TECHNICAL ANALYSIS IS BUILT ON THE ASSUMPTION THAT PRICES TREND. A TRENDLINE IS A STRAIGHT LINE THAT
CONNECTS TWO OR MORE PRICE POINTS AND THEN EXTENDS INTO THE FUTURE TO ACT AS A LINE OF SUPPORT OR RESISTANCE.
TRENDLINES
ARE AN IMPORTANT TOOL IN TECHNICAL ANALYSIS FOR BOTH TREND IDENTIFICATION
AND CONFIRMATION.
Up Trendline An Up Trendline has a positive slope and is formed by connecting two of more low points. The second low must be higher than the first for the line to have a positive slope. Up trend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. A rising price combined with increasing demand is very bullish and shows a strong determination on the part of the buyers. As long as prices remain above the trendline, the uptrend is considered solid and intact. A break below the up trendline indicates that net-demand has weakened and a change in trend could be imminent.
Down Trendline A Down Trendline has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Down trend lines act as resistance and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish and shows the strong resolve of the sellers. As long as prices remain below the down trendline, the downtrend is considered solid and intact. A break above the down trendline indicates that netsupply is decreasing and a change of trend could be imminent.
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TECHNICAL ANALYSIS TY.BFM Importance of a Trend Line
TREND LINE IS SAID TO BE MORE SIGNIFICANT IF THE NUMBER OF TIMES THE PRICES SUCCESSFULLY TOUCHES
THE TRENDS LINE AND REVERSES, I.E. DIRECTION IN WHICH IT IS MOVING.
EACH
TIME THE PRICES MOVE BACK TO THE TREND LINE AND RENEW THE
An important point to understand is the length of time prices have persisted in the direction of the trend or decline as the case maybe without penetrating the trendline. The longer the period the prices have persisted in one direction of the trend advance or decline stronger is the trend. The angle of the trend line i.e. the steepness of the trend line is important. Wore steeper the angle of the trend line, greater are the chances of the trend line being broken, i.e. Very steep trendline can easily be broken by some sideways consolidation moves. Trendlines that are less steep are not subject to many short-term price movements that are often inconsistent with the current trend.
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Penetration
Once a trend-line has been established, a change in the direction of the trend is signaled by prices breaking through the trend line.
THE THUMB RULE IS THAT IF THE CLOSING PRICE FOR THE DAY IS 3% LOWER THAN THE TREND LINE IN CASE
OF AN UPTREND OR HIGHER IN CASE OF A DOWNTREND THAN THE PENETRATION IS CONSIDERED VALID. MAY NOT BE NECESSARY FOR THE UNUSUAL.
IT
3%
PENETRATION TO OCCUR IN ONE DAY THOUGH IT MAY NOT BE
THE
OTHER METHOD IS THAT IF THE PRICES CLOSE ABOVE OR BELOW THE TREND LINE IN CASE OF A
DOWNTREND OR AN UPTREND RESPECTIVELY, FOR TWO OR MORE DAYS, IT IS CONSIDERED AS A VALID PENETRATION AND THE PRICES ARE MORE LIKELY TO CONTINUE THEIR REVERSAL.
THE IMPORTANCE OF PENETRATION IS MORE VALID IF IT IS ACCOMPANIED BY VOLUME ESPECIALLY WHEN THE
DOWNTREND IS BROKEN. PENETRATION.
HOWEVER
IT IS NOT ESSENTIAL FOR VOLUME TO INCREASE FOR A VALID
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Conclusion
Trend lines can offer great insight, but if not used properly can also result in false signals. Other items such as horizontal support and resistance levels or peak and trough analysis should be employed to validate trendline breaks. While trend lines have become a very popular aspect of technical analysis, they are merely one tool for establishing, analyzing and confirming the trend. Trend lines should not be the final arbiter, but serve as a warning that a change in trend may be imminent. By using trendline breaks for warnings, investors and traders can pay closer attention to other confirming signals for a potential change in trend.
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Support & Resistance Of Trendlines

SUPPORT
TRENDS.
AND RESISTANCE ARE TOOLS USED BY TECHNICIANS TO HELP THEM IDENTIFY AND FOLLOW PRICE
HORIZONTAL LINES
ARE DRAWN ON THE BAR CHART TO INDICATE AREAS OF SUPPORT AND RESISTANCE.
THE TROUGHS OR REACTION LOWS ON A PRICE CHART ARE IDENTIFIED AS SUPPORT. SUPPORT IS AN AREA ON THE
CHART WHERE BUYING PRESSURE OVERTAKES SELLING PRESSURE AND THE MARKET REACTS HIGHER. SUPPORT IS IDENTIFIED BY A PREVIOUS REACTION LOW OR TROUGH ON THE BAR CHART.
USUALLY A
RESISTANCE IS AN AREA
ON THE CHART WHERE SELLING PRESSURE OVERTAKES BUYING PRESSURE AND THE MARKET REACTS LOWER. RESISTANCE LEVEL IS IDENTIFIED BY A PREVIOUS PRICE HIGH OR PEAK ON THE BAR CHART.
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THE CONCEPTS OF SUPPORT AND RESISTANCE ARE CRITICALLY IMPORTANT TOOLS USED BY TECHNICIANS TO HELP
THEM
IDENTIFY AND FOLLOW TRENDS. RESISTANCE AND PRICE TRENDS.
LINES ARE DRAWN ON THE CHART TO INDICATE AREAS OF PRICE SUPPORT, PRICE IN
AN UPTREND, THE RESISTANCE LEVELS REPRESENT PAUSES IN THE UPTREND,
WHICH SERVE TO TEMPORARILY HALT THE PRICE ADVANCE. IN LIKE MANNER, IN A DOWNTREND, SUPPORT LEVELS WILL TEMPORARILY HALT A PRICE DECLINE.
TREND
LINES ARE DRAWN ABOVE OR BELOW THE MARKET ACTION
DEPENDING UPON THE DIRECTION OF THE MOVE.
DURING AN UPTREND A LINE WOULD BE DRAWN FROM THE FIRST
SIGNIFICANT LOW TO THE NEXT, EXTENDING ACROSS THE PAGE FROM LEFT TO RIGHT. IF THE UPTREND IS VALID YOU WILL FIND THE PRICE WILL MOVE TO, OR CLOSE TO, THE UPTREND LINE ON CORRECTIONS AND THEN MOVE HIGHER.
EACH
TIME A TREND LINE IS TESTED AND HOLDS, THE MORE SIGNIFICANT IT BECOMES.
EACH
TIME A
PREVIOUS SUPPORT OR RESISTANCE LEVEL IS BEING TESTED THE PREVAILING TREND OF THE MARKET IS CRITICALLY ANALYZED BY THE TECHNICIAN.
FAILURE
TO EXCEED A PREVIOUS RESISTANCE PEAK IN AN UPTREND, OR TO
BREAK A PREVIOUS SUPPORT LOW IN A DOWNTREND, PROVIDES A WARNING THAT THE EXISTING TREND MAY BE CHANGING.
THE
TESTING OF THESE SUPPORT AND RESISTANCE LEVELS FORM PICTURES ON THE CHARTS THAT
SUGGEST EITHER A TREND REVERSAL OR SIMPLY A PAUSE IN THE PREVAILING TREND. BLOCKS ON WHICH PRICE PATTERNS ARE BASED HOWEVER, ARE SUPPORT AND RESISTANCE.
THE
BASIC BUILDING
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Support
RESISTANCE
Support and resistance levels reverse roles once they are decisively broken. In other words if the price penetrates a resistance level, then it will generally move upward to the next resistance level, such that the previous resistance level will now become an area of support. The longer the period of time that prices trade in a support or resistance area, the more significant that area becomes. For example, if prices trade sideways for three weeks in a support area before moving higher, that support area would be more significant than if only three days of trading had occurred. The reason for this is that there are now more participants in the market with a vested interest in that support area which will hold prices up.
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Averages: For The Above Average Investor

Moving averages are one of the most popular and easy to use tools available to the technical analyst. By using an average of prices, moving averages smooth a data series and make it easier to spot trends. This can be especially helpful in volatile markets. Moving average is a Trend-Following Indicator Moving averages smooth out a data series and make it easier to identify the direction of the trend. Because past price data is used to form moving averages, they are considered lagging, or trend following, indicators. Moving averages will not predict a change in trend, but rather follow behind the current trend. Therefore, they are best suited for trend identification and trend following purposes, not for prediction.
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When do we use moving averages? Because moving averages follow the trend, they work best when a security is trending and are ineffective when a security moves in a trading range. With this in mind, investors and traders should first identify securities that display some trending characteristics before attempting to analyze with moving averages. This process does not have to be a scientific examination. Usually, a simple visual assessment of the price chart can determine if a security exhibits characteristics of trend. In its simplest form, a security's price can be doing only one of three things: trending up, trending down or trading in a range. An uptrend is established when a security forms a series of higher highs and higher lows. A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established if a security cannot establish an uptrend or downtrend. If a security is in a trading range, an uptrend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.
Moving Average Settings Once a security has been deemed to have enough characteristics of trend, the next task will be to select the number of moving average periods and type of moving average. The number of periods used in a moving average will vary according to the security's volatility, trendiness and personal preferences. The more volatility there is, the more smoothing that will be required and hence the longer the moving average. Stocks that do not exhibit strong characteristics of trend may also require longer moving averages. There is no one set length, but some of the more popular lengths include 21, 50, 89, 150 and 200 days as well as 10, 30 and 40 weeks. Short-term traders may look for evidence of 2-3 week trends with a 21-day moving average, while longerterm investors may look for evidence of 3-4 month trends with a 40-week moving average.
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Trial and error is usually the best means for finding the best length. Examine how the moving average fits with the price data. If there are too many breaks, lengthen the moving average to decrease its sensitivity. If the moving average is slow to react, shorten the moving average to increase its sensitivity. HOW TO USE AVERAGES FOR TRADING? The simple rule of using averages is that when the price cuts the average line from the bottom, a buy signal is generated and when the price cuts the average line from the top, a sell signal is generated. There is however, one shortcoming while following averages for the trading or investment decisions. When the market is choppy or moving in a close range then there will be frequent crossovers and one may not be in a position to take a decision. Hence, to overcome this situation, it is advisable to use two different types of moving averages. One will be of a short-term moving average and the other will be a long term moving average. As the shorter term moving average is of a short-term duration, it will react faster to the changes in price trends than the longer term moving average. The long term moving average will be slow and late to react to any price fluctuation than the shorter term moving average. Thus, when there is an intersection of the two averages, the buy and the sell signals are generated.
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WHEN THE SHORTER-TERM AVERAGE IS CUTTING THE LONGER-TERM AVERAGE FROM THE BOTTOM A BUY
SIGNAL IS GENERATED AND IF THE SHORT-TERM AVERAGE CUTS THE LONGER TERN AVERAGE FROM THE TOP A SELL SIGNAL IS GENERATED.
Types of moving averages

Simple Moving Average A simple moving average is formed by finding the average price of a security over a set number of periods. Most often, the closing price is used to compute the moving average. For example: a 5-day moving average would be calculated by adding the closing prices for the last 5 days and dividing the total by 5. 10 + 11 + 12 + 13 + 14 = 60 60 / 5 = 12 A moving average moves because as the newest period is added, the oldest period is dropped. If the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day moving average would be calculated as follows: 11 + 12 + 13 + 14 + 15 = 65 65 / 5 = 13 Over the last 2 days, the moving average moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time. Exponential moving average In order to reduce the lag in simple moving averages, technicians sometimes use exponential moving averages, or exponentially weighted moving averages. Exponential moving averages reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the length of the moving average. The shorter the
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exponential moving average is, the more weight that will be applied to the most recent price. For example: a 10-period exponential moving average weighs the most recent price 18.18% and a 20-period exponential moving average weighs the most recent price 9.52%. The method for calculating the exponential moving average is fairly complicated. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average. Exponential Moving Average Calculation The formula for an exponential moving average is: X = (K x (C - P)) + P Where: X = Current EMA C = Current Price P = Previous period's EMA* K = Smoothing constant (*A SMA is used for first period's calculation) The smoothing constant applies the appropriate weighting to the most recent price relative to the previous exponential moving average. The formula for the smoothing constant is: K = 2/(1+N) N = Number of periods for EMA For a 10-period EMA, the smoothing constant would be .1818.
The EMA formula works by weighting the difference between the current period's price and the previous period's EMA and adding the result to the previous period's EMA. There are two possible outcomes: the weighted difference is either positive or negative.
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IF THE CURRENT PRICE C IS HIGHER THAN THE PREVIOUS PERIOD'S EMA (P), THE DIFFERENCE WILL BE
POSITIVE
(C-P). THE POSITIVE DIFFERENCE IS WEIGHTED BY MULTIPLYING IT BY THE CONSTANT ((C-P) EMA,
RESULTING IN A NEW
XK) AND THE ANSWER IS ADDED TO THE PREVIOUS PERIOD'S IS HIGHER,
EMA
THAT
((C-P) X K) + P. IF
THE CURRENT PRICE IS LOWER THAN THE PREVIOUS PERIOD'S
EMA,
THE DIFFERENCE WILL BE
NEGATIVE
(C - P). THE NEGATIVE DIFFERENCE IS WEIGHTED BY MULTIPLYING IT BY THE CONSTANT ((C

AND THE FINAL RESULT IS ADDED TO THE PREVIOUS PERIOD'S
- P)
K)
EMA,
RESULTING IN A NEW
EMA THAT IS LOWER ((C - P) X K) + P.
Uses of moving averages:

There are many uses for moving averages, but two basic uses stand out: 1.Trend Identification/Confirmation
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There are three ways to identify the direction of the trend with moving averages: direction, location and crossovers. The first trend identification technique uses the direction of the moving average to determine the trend. If the moving average is rising, the trend is considered up. If the moving average is declining, the trend is considered down. The direction of a moving average can be determined simply by looking at a plot of the moving average or by applying an indicator to the moving average. In either case, we would not want to act on every subtle change, but rather look at general directional movement and changes. 2.Support and Resistance Levels Another use of moving averages is to identify support and resistance levels. This is usually accomplished with one moving average and is based on historical precedent. As with trend identification, support and resistance level identification through moving averages works best in trending markets.
Gaps - Grasp the Opportunity
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A
GAP IN THE LANGUAGE OF THE CHART TECHNICIAN REPRESENTS A PRICE RANGE AT WHICH
(AT
THE TIME IT
OCCURRED) NO SHARES CHANGED HANDS.
Gaps in daily harts are produced when the lowest price at which a certain stock is traded on any one day is higher than the highest price at which is was traded on the preceding day. When the ranges of any two such days are plotted, they will not overlap or touch the same horizontal level on the chart. There will be a price gap between them. For a gap to develop on a weekly chart, it is necessary that the lowest price recorded at any time in one week be higher than the highest recorded during any day of the preceding week. This can happen, of course, and doe, but for obvious reasons not as often a daily charts. Monthly chart gaps are rare in actively traded issues. Their occurrence is confined almost entirely to those few instances where a panic decline commences just before the end of the month and continues through the first part of the succeeding month.
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Superstitions about gaps The most common superstition is that a gap must be closed. Sometimes it is stated more cautiously in such words as if a gap isnt closed in three days than it will be closed in three weeks and if it is not closed in three weeks than it will be closed in three months, etc. There are various variations but they all add up to the belief that a gap must be closed, and that the trend is not to be trusted until the gap has been covered. It is the latter inference that leads to error.
What exactly is closing the gap? Suppose that a gap is created in the stock price of xyz limited at the price of Rs. 56-57. If a subsequent price trend comes back and retraces the range of the gap, it is aid that the gap is closed. MUST A GAP BE CLOSED BEFORE PRICES MOVE VERY FAR AWAY FROM IT? NOT NECESSARILY. WILL IT BE
CLOSED EVENTUALLY?
PROBABLY YES. IF IT NOT CLOSED IN THE NEXT MINOR REACTION, THERE IS A CHANCE IT BUT THAT MAY BE YEARS LATER - HARDLY A MATTER OF INTEREST
WILL BE COVERED BY THE NEXT INTERMEDIATE RETRACEMENT, AND IF NOT THEN, PRETTY SURELY BY THE NEXT GREAT MAJOR SWING IN THE OPPOSITE TREND. TO THE ORDINARY TRADER.
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TYPES OF GAPS
COMMON
ZONE. GAP: WHEN PRICES MOVE IN A NARROW RANGE, THE PRICES ARE SAID TO BE IN CONGESTION
THESE
PATTERNS COULD BE IN VARIOUS SHAPES I.E.
TRIANGLE, A WEDGE ETC. IF THE GAP FALLS RESULT OF A COMMON GAP IS NOT VERY
WITHIN THE PATTERN IT IS CALLED A COMMON GAP. SIGNIFICANT.
THE
AFTER THE FORMATION OF A COMMON GAP THE PRICES USUALLY TEND TO FILL THE GAP WITHIN THEY
DO NOT HAVE ANY MAJOR SIGNIFICANCE IN TERMS OF
THE NEXT FEW SESSIONS OF THE MARKET. PREDICTIVE VALUE OF THE MARKET.
BREAKAWAY
FORMED.
GAP: WHEN A GAP OCCURS AWAY FROM A CONGESTION PATTERN A BREAKAWAY GAP IS
THIS GAP IS OF MAJOR SIGNIFICANCE WHEN A HIGH VOLUME ACCOMPANIES IT. THE PRICES TEND TO THESE
GAPS TEND TO BE
GAP AWAY FROM THE PATTERN AND A SIGNIFICANT MOVE FOLLOWS THEREAFTER. FILLED IN AFTER A LONG TIME.
RUN-AWAY GAP:
OF THE RISE OR FALL.
WHEN GAPS OCCUR FOLLOWING AFTER THE BREAKAWAY GAPS.
THEY WILL NORMALLY THESE
BE FOUND IN THE MIDDLE OF BIG RISE OR FALL IN THE MARKET.
THEY NORMALLY ACCELERATE THE PROCESS

GAPS SHOULD
SOMETIMES
MORE THAN ONE GAP DEVELOPS DURING THE RISE.
BE TREATED WITH CARE AND CAUTION, AS THEY MAY BE SIGNS OF EXHAUSTION OF A RALLY.
EXHAUSTION
GAP: THESE GAPS WILL GENERALLY OCCUR AT THE END OF THE RALLY.
THEY
GENERALLY
OCCUR AFTER A RUNAWAY GAP.
THEY ARE GENERALLY WIDER THAN THE BREAKAWAY GAPS. THIS GAP DOES
NOT ALWAYS SIGNAL THE REVERSAL OF A TREND, BUT MAY BE A CALL FOR A TEMPORARY HALT IN A RALLY AS THE PRICES HAVE MOVED TOO FAST IN A VERY SHORT PERIOD OF TIME AND TRADERS HAVE DECIDED TO BOOK PROFITS.
Patterns
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WHAT ARE YOUR CHARTS TRYING TO TELL YOU? Hidden inside every chart is a story. A story about where the price has been and where it might go in the future. Some stories are obvious. Others are a little more difficult to figure out. These stories are told with patterns. Chart patterns are simply defined as pictures or formations made by the price movements of the stocks or commodities you're examining. Numerous studies have repeatedly shown that these patterns have excellent predictive value. In fact, technical analysts who effectively identify this classic, tried-and-true chart patterns are among the most successful traders in the world.
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Types of
When analyzing chart generally that Most would categorize trend patterns that predict predict
Patterns
patterns, them in technical two analysts (1) groups:
trend reversal and (2) patterns continuation. analysts consider the process within the charts an art, and venture down the road of quantifying how to identify
technical hesitate to
of identifying patterns mathematically specific patterns. Reversal patterns Reversal patterns can be classified as: Head and Shoulder Double top & Double Bottom Rounding bottom Triple top & Triple Bottom
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There are a few common points about market reversals that we should be familiar with: 1. A
PREREQUISITE FOR ANY REVERSAL PATTERN IS THE EXISTENCE OF A PRIOR TREND.
MARKET MUST
HAVE SOMETHING TO REVERSE.
2. BREAKING
AN IMPORTANT TREND LINE SIGNALS THE POSSIBILITY OF A TREND REVERSAL BUT DOES NOT
GUARANTEE IT.
3. THE LONGER THE CURRENT TREND, THE GREATER THE POTENTIAL FOR A MARKET REVERSAL. 4. REACHING
A MARKET TOP USUALLY OCCURS MUCH QUICKER AND WITH MORE VOLATILITY THAN
REACHING A MARKET BOTTOM.
5. TRADING VOLUME IS USUALLY MORE IMPORTANT ON THE UPSIDE REVERSAL. ONCE A BEAR MARKET GETS
UNDER WAY, PRICES HAVE A TENDENCY TO DROP BUT FOR A BULL MARKET TO BEGIN, IT USUALLY REQUIRES SIGNIFICANT BUYING ACTIVITY TO START A BULL TREND.
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Head and Shoulders

This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can see in Figure 1, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.
Figure 1: Head and shoulders top is shown on the left. Head and shoulders bottom, or inverse head and shoulders, is on the right. Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in Figure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successivemovements of the highs and lows.
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Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals
Figure 2: A double top pattern is shown on the left, while a double bottom pattern is shown on the right. In the case of the double top pattern in Figure 2, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward.
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Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years.
FIGURE3 A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, makes it a difficult pattern to trade.
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Triple Tops and Bottoms

Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.
FIGURE4
Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom,
39

which could lead a chartist to enter a reversal position too soon.
Continuation Patterns
Continuation refers to the resumption of a trend after a consolidating or pattern of indecision. When looking at the various patterns and formations that can occur on price graphs, patterns are often unreliable as to whether the pattern will ultimately point to a continuation of the trend or a reversal. Continuation patterns can be: 1. 2. Triangles Symmetrical triangle Ascending triangle Descending triangle
3. Wedges 4. Flags & Pennants 5. Rectangle
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Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.
Figure 5 The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trendline is flat and the upper trendline is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.
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Wedge
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months.
Figure 6
The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In Figure 6, we have a falling wedge in which two trendlines are converging in a downward direction. If the price was to rise above the upper trendline, it would form a continuation pattern, while a move below the lower trendline would signal a reversal pattern.
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Flag and Pennant

These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.
Figure 7
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As you can see in Figure 7, there is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trendlines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trendlines. In both cases, the trend is expected to continue when the price moves above the upper trendline
The Rectangle Pattern
Rectangles should generally be traded as continuation patterns. They are indecision areas that are usually resolved in the direction of the trend. Research has shown that this is true far more often than not. Of course, the trend lines run parallel in a rectangle. Supply and demand seems evenly balanced at the moment. Buyers and sellers also seem equally matched. The same 'highs' are constantly tested, as are the same 'lows'. The market vacillates between two clearly set parameters. (While volume doesn't seem to suffer like it does in other patterns, there usually is a lessening of activity within the pattern. But like the others, volume should noticeably increase on the breakout.)
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Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance, bears take over and force the price lower. Nimble traders sometimes play these bounces by buying near support and selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emerge when there is a breakout. Again, it is important to remember that rectangles have a neutral bias. Even though clues can sometimes be gleaned from volume patterns, the actual price action depicts a market in conflict. Only until the price breaks above resistance or below support will it be clear which group has won the battle.
Indicators For Success

WHAT IS AN INDICATOR? An indicator is a series of data points that are derived by applying a formula to the price data of a security. Price data includes any combination of the open, high, low or close over a period of time. Some indicators may use only the closing prices, while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced.
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For example, the average of 3 closing prices is one data point ((41+43+43)/3=42.33). However, one data point does not offer much information and does not an indicator make. A series of data points over a period of time is required to create valid reference points to enable analysis. By creating a time series of data points, a comparison can be made between present and past levels. For analysis purposes, indicators are usually shown in a graphical form above or below a securitys price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison. WHAT DOES AN INDICATOR OFFER? An indicator offers a different perspective from which to analyze the price action. Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand. Others, such as Stochastics, have complex formulas and require more study to fully understand and appreciate. Regardless of the complexity of the formula, indicators can provide unique perspective on the strength and direction of the underlying price action. A simple moving average is an indicator that calculates the average price of a security over a specified number of periods. If a security is exceptionally volatile, then a moving average will help to smooth the data. A moving average filters out random noise and offers a smoother perspective of the price action.
WHY USE INDICATORS?

Indicators serve three broad functions: to alert, to confirm and to predict.
AN INDICATOR CAN ACT AS AN ALERT TO STUDY PRICE ACTION A LITTLE MORE CLOSELY. IF MOMENTUM
IS WANING, IT MAY BE A SIGNAL TO WATCH FOR A BREAK OF SUPPORT.
OR,
IF THERE IS A LARGE
POSITIVE DIVERGENCE BUILDING, IT MAY SERVE AS AN ALERT TO WATCH FOR A RESISTANCE BREAKOUT.
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INDICATORS CAN BE USED TO CONFIRM OTHER TECHNICAL ANALYSIS TOOLS. IF THERE IS A BREAKOUT ON
THE PRICE CHART, A CORRESPONDING MOVING AVERAGE CROSSOVER COULD SERVE TO CONFIRM THE BREAKOUT.
OR,
IF A STOCK BREAKS SUPPORT, A CORRESPONDING LOW IN THE
ON-BALANCE-VOLUME
(OBV) COULD SERVE TO CONFIRM THE WEAKNESS.
SOME INVESTORS AND TRADERS USE INDICATORS TO PREDICT THE DIRECTION OF FUTURE PRICES.
LEADING INDICATORS
As their name implies, leading indicators are designed to lead price movements. Most represent a form of price momentum over a fixed look-back period, which is the number of periods used to calculate the indicator. For example, a 20-day Stochastic Oscillator would use the past 20 days of price action (about a month) in its calculation. All prior price action would be ignored. Some of the more popular leading indicators include momentum, RELATIVE Strength Index (RSI), Stochastic Oscillator and Williamss %R.
William's % R This oscillator, a version of the Stochastics oscillator, was developed by Larry Williams. Williamss %R has proven very useful for anticipating market reversals. Overview WILLIAMS %R IS A MOMENTUM INDICATOR IDENTIFIES OVERBOUGHT OR OVERSOLD MARKETS. IT IS PLOTTED ON AN INVERTED 0 TO 100 SCALE.
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Interpretation Mr. Williams indicates that the essence of his trading system is based on interpreting readings of %R. He states that, "Generally speaking, readings below 95% give a buy indication - during bull markets. A reading above 10% gives a sell signal during bear markets." He goes on to say "the %R index will not work if you insist on acting on the buy signals during a bear market." He emphasizes strongly the need to isolate the dominant trend - whether it is a bull or bear trend. Then he tracks price movements with %R and waits for the signals. To determine the long-term trend for commodity or futures markets, Mr. Williams advocates the use of a 10-week moving average. The indicator is now popular in most markets and has proven itself useful with stocks. Like other momentum indicators, Williamss %R is not very useful in a sideways market, or trading range. The market needs to be trending up or down for the signals to be reliable. Signals Mr. Williams bases his system largely on the use of the following two signals (once again notice that the signal is reliant on the direction of the underlying long-term trend):

BUY WHEN %R HITS 90% TO 100% AND THE TREND IS UP. SELL WHEN %R HITS 10% TO 0% AND THE TREND IS DOWN.
Some traders use readings below 80% to indicate oversold markets and readings above 20% to indicate overbought markets. These levels can also be used as early warning signals. In a blow-off market, where prices have undergone a very steep rise, Mr. Williams suggests waiting before responding to %R. For example, he suggests acting on buy signals (assuming the long term trend is up) only after: 1. %R has hit 100%, 2. Five trading days have passed since the 100% reading was hit, and 3. %R again falls below 95%. Mr. Williams assures us that not all signals will be correct; there are no perfect indices. "Yet," he continues, "%R remains the best timing tool I have ever used for determining overbought and oversold markets."
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Williamss %R has proven very useful in anticipating market reversals. The indicator almost always forms a peak and turns down a few days before the price peaks and turns down. And vice versa for bottoming markets. Momentum Oscillators Many leading indicators come in the form of momentum oscillators. Generally speaking, momentum measures the rate-of-change of a security's price. As the price of a security rises, price momentum increases. The faster the security rises (the greater the period-over-period price change), the larger the increase in momentum. Once this rise begins to slow, momentum will also slow. As a security begins to trade flat, momentum starts to actually decline from previous high levels. However, declining momentum in the face of sideways trading is not always a bearish signal. It simply means that momentum is returning to a more median level.
Momentum indicators employ various formulas to measure price changes. Some momentum indicators are: ROC RSI
Lagging indicators
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As their name implies, lagging indicators follow the price action and are commonly referred to as trend-following indicators. Rarely, if ever, will these indicators lead the price of a security. Trend-following indicators work best when markets or securities develop strong trends. They are designed to get traders in and keep them in as long as the trend is intact. As such, these indicators are not effective in trading or sideways markets. If used in trading markets, trendfollowing indicators will likely lead to many false signals and whipsaws. Some popular trendfollowing indicators include moving averages (exponential, simple, weighted, variable) and MACD.
Oscillator types
An oscillator is an indicator that fluctuates above and below a centerline or between set levels as its value changes over time. Oscillators can remain at extreme levels (overbought or oversold) for extended periods, but they cannot trend for a sustained period There are many different types of oscillators and some belong to more than one category. The breakdown of oscillator types begins with two types: centered oscillators, which fluctuate above and below a center point or line, and banded oscillators that fluctuate between overbought and oversold extremes. Generally, centered oscillators are best suited for analyzing the direction of price momentum, while banded oscillators are best suited for identifying overbought and oversold levels. Centered Oscillators Centered oscillators fluctuate above and below a central point or line. These oscillators are good for identifying the strength or weakness, or direction, of momentum behind a security's move. . In its purest form, momentum is positive (bullish) when a centered oscillator is trading above its centerline and negative (bearish) when the oscillator is trading below its centerline. MACD is an example of a centered oscillator that fluctuates above and below zero. Rate-of-change (ROC) is a centered oscillator that also fluctuates above and below zero.
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MOVING AVERAGE CONVERGENCE/DIVERGENCE (MACD) The Moving Average Convergence/Divergence (MACD) indicator is calculated by subtracting the 12-period exponential moving average of a given security from its 26-period exponential moving average. A 9-period exponential moving average of the MACD itself is usually plotted over this line as a signal or trigger line. By using moving averages, MACD has trend following characteristics. In addition, by plotting the difference of the moving averages as an oscillator, MACD also has momentum characteristics.
ROC As with MACD, ROC is not bound by upper or lower limits. This is typical of most centered oscillators and can make it difficult to spot overbought and oversold conditions. The ROC chart indicates that readings above +20% and below -20% represent extremes and are unlikely to last for an extended period of time. However, the only way to gauge that +20% and -20% are extreme readings is from past observations. Also, +20% and -20% represent extremes for this particular security and may not be the same for other securities. Banded oscillators offer a better alternative to gauge extreme price levels. Banded Oscillators Banded oscillators fluctuate above and below two bands that signify extreme price levels. The lower band represents oversold readings and the upper band represents overbought readings. These set bands are based on the oscillator and change little from security to security; allowing the users to easily identify overbought and oversold conditions. The Relative Strength Index (RSI) and the Stochastic Oscillator are two examples of banded oscillators.
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TECHNICAL ANALYSIS TY.BFM Use

THE RSI HAS THE FOLLOWING USES:
Overbought/Oversold Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points. Divergences Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. For example, consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say, 55. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.
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Conclusions
Banded oscillators are best used to identify overbought and oversold conditions. However, overbought is not meant to act a sell signal and oversold is not meant to act as a buy signal. Overbought and oversold situations serve as an alert that conditions are reaching extreme levels and close attention should be paid to the price action and other indicators. To improve the robustness of oscillator signals, traders can look for multiple signals. The criteria for a buy or sell signal could depend on three separate yet confirming signals. A buy signal might be generated with an oversold reading, positive divergence and bullish moving average crossover. Conversely, a sell signal might be generated from a negative divergence, bearish moving average crossover and bearish centerline crossover. Traditional chart pattern analysis can also be applied to oscillators. This is a bit trickier, but can help to identify the strength behind an oscillator's move. Looking for higher highs or lower lows can help confirm previous analysis. A trendline breakout can signal that a change in the direction of the momentum is imminent.
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It is dangerous to trade an oscillator signal against the major trend of the market. In bull moves, it is best to look for buying opportunities through oversold signals, positive divergences, bullish moving average crossovers and bullish centerline crossovers. In bear moves, it is best to look for selling opportunities through overbought signals, negative divergences, bearish moving average crossovers and bearish centerline crossovers. And finally, oscillators are most effective when used in conjunction with pattern analysis, support/resistance identification, trend identification and other technical analysis tools. By being aware of the broader picture, oscillator signals can be put into context. It is important to identify the current trend or even to ascertain if the security is trending at all. Oscillator readings and signals can have different meaning in differing circumstances. By using other analysis techniques in conjunction with oscillator reading, the chances of success can be greatly enhanced.
STOCHASTICS
OVERVIEW Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure). Formula
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A 14-day %K (14-period Stochastic Oscillator) would use the most recent close, the highest high over the last 14 days and the lowest low over the last 14 days. The number of periods will vary according to the sensitivity and the type of signals desired. As with RSI, 14 is a popular number of periods for calculation. %K tells us that the close (115.38) was in the 57th percentile of the high/low range, or just above the mid-point. Because %K is a percentage or ratio, it will fluctuate between 0 and 100. A 3-day simple moving average of %K is usually plotted alongside to act as a signal or trigger line, called %D USE: Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A security can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of
56

the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20. Buy and sell signals can also be given when %K crosses above or below %D. However, crossover signals are quite frequent and can result in a lot of whipsaws. One of the most reliable signals is to wait for a divergence to develop from overbought or oversold levels. Once the oscillator reaches overbought levels, wait for a negative divergence to develop and then a cross below 80. This usually requires a double dip below 80 and the second dip results in the sell signal. For a buy signal, wait for a positive divergence to develop after the indicator moves below 20. This will usually require a trader to disregard the first break above 20. After the positive divergence forms, the second break above 20 confirms the divergence and a buy signal is given. The Stochastic Oscillator is another oscillator with a set range and is bound by 100 and 0 as well.
CONCLUSION CENTERED OSCILLATORS ARE BEST USED TO IDENTIFY THE UNDERLYING STRENGTH OR DIRECTION OF MOMENTUM
BEHIND A MOVE.
BROADLY SPEAKING, READINGS ABOVE THE CENTER POINT INDICATE BULLISH MOMENTUM AND THE BIGGEST DIFFERENCE BETWEEN
READINGS BELOW THE CENTER POINT INDICATE BEARISH MOMENTUM.
CENTERED OSCILLATORS AND BANDED OSCILLATORS IS THE LATTER'S ABILITY TO IDENTIFY EXTREME READINGS.
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WHILE IT IS POSSIBLE TO IDENTIFY EXTREME READINGS WITH CENTERED OSCILLATORS, THEY ARE NOT IDEAL FOR
THIS PURPOSE.
BANDED OSCILLATORS ARE BEST SUITED TO IDENTIFY OVERBOUGHT AND OVERSOLD CONDITIONS.
BOLLINGER BANDS
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Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a security's price action. A SIMPLE MOVING AVERAGE IN THE MIDDLE AN UPPER BAND (SMA PLUS N STANDARD DEVIATIONS) A LOWER BAND (SMA MINUS N STANDARD DEVIATIONS) STANDARD DEVIATION IS A STATISTICAL TERM THAT PROVIDES A GOOD INDICATION OF VOLATILITY. USING THE
STANDARD DEVIATION ENSURES THAT THE BANDS WILL REACT QUICKLY TO PRICE MOVEMENTS AND REFLECT PERIODS OF HIGH AND LOW VOLATILITY. LEAD TO A WIDENING OF THE BANDS.
SHARP PRICE INCREASES (OR DECREASES), AND HENCE VOLATILITY, WILL
BASIC RULES 1. ONE OF THE GREAT JOYS OF HAVING INVENTED AN ANALYTICAL TECHNIQUE SUCH AS BOLLINGER BANDS
IS SEEING WHAT OTHER PEOPLE DO WITH IT.
WHILE THERE ARE MANY WAYS TO USE BOLLINGER BANDS, THAT
FOLLOWING ARE A FEW RULES THAT SERVE AS A GOOD BEGINNING POINT.
2. BOLLINGER BANDS
SELL DECISIONS.
PROVIDE A RELATIVE DEFINITION OF HIGH AND LOW.
RELATIVE DEFINITION
CAN BE USED TO COMPARE PRICE ACTION AND INDICATOR ACTION TO ARRIVE AT RIGOROUS BUY AND
3. APPROPRIATE
INDICATORS CAN BE DERIVED FROM MOMENTUM, VOLUME, SENTIMENT, OPEN INTEREST,
INTER-MARKET DATA, ETC.
4. VOLATILITY AND TREND HAVE ALREADY BEEN DEPLOYED IN THE CONSTRUCTION OF BOLLINGER BANDS,
SO THEIR USE FOR CONFIRMATION OF PRICE ACTION IS NOT RECOMMENDED.
5. THE INDICATORS USED SHOULD NOT BE DIRECTLY RELATED TO ONE ANOTHER. FOR E.G., YOU MIGHT USE
ONE MOMENTUM INDICATOR AND ONE VOLUME INDICATOR SUCCESSFULLY, BUT TWO MOMENTUM INDICATORS AREN'T BETTER THAN ONE.
6. BOLLINGER BANDS CAN ALSO BE USED TO CLARIFY PURE PRICE PATTERNS SUCH AS "M" TOPS AND "W"
BOTTOMS, MOMENTUM SHIFTS, ETC.
7. PRICE BAND.
CAN, AND DOES, WALK UP THE UPPER
BOLLINGER BAND
AND DOWN THE LOWER
BOLLINGER
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8. CLOSES 9. THE
OUTSIDE THE
BOLLINGER BANDS 20
ARE CONTINUATION SIGNALS, NOT REVERSAL SIGNALS.
(THIS
HAS BEEN THE BASIS FOR MANY SUCCESSFUL VOLATILITY BREAKOUT SYSTEMS.) DEFAULT PARAMETERS OF PERIODS FOR THE MOVING AVERAGE AND STANDARD DEVIATION
CALCULATIONS, AND TWO STANDARD DEVIATIONS FOR THE BANDWIDTH ARE JUST THAT, DEFAULTS. ACTUAL PARAMETERS NEEDED FOR ANY GIVEN MARKET/TASK MAY BE DIFFERENT.
THE
10. THE 11. IF
AVERAGE DEPLOYED SHOULD NOT BE THE BEST ONE FOR CROSSOVERS.
RATHER,
IT SHOULD BE
DESCRIPTIVE OF THE INTERMEDIATE-TERM TREND. THE AVERAGE IS LENGTHENED THE NUMBER OF STANDARD DEVIATIONS NEEDS TO BE INCREASED
SIMULTANEOUSLY
FROM
AT
20
PERIODS, TO
2.5
AT
50
PERIODS.
LIKEWISE,
IF THE AVERAGE IS
SHORTENED THE NUMBER OF STANDARD DEVIATIONS SHOULD BE REDUCED
- FROM 2 AT 20 PERIODS, TO
1.5 AT 10 PERIODS. 12. BOLLINGER BANDS

CONSISTENT. ARE BASED UPON A SIMPLE MOVING AVERAGE.
THIS
IS BECAUSE A SIMPLE MOVING
AVERAGE IS USED IN THE STANDARD DEVIATION CALCULATION AND WE WISH TO BE LOGICALLY
13. MAKE NO STATISTICAL ASSUMPTIONS BASED ON THE USE OF THE STANDARD DEVIATION CALCULATION IN
THE CONSTRUCTION OF THE BANDS.
THE SAMPLE SIZE
IN MOST DEPLOYMENTS OF
BOLLINGER BANDS IS BOLLINGER

IS
SIMPLY TOO SMALL FOR STATISTICAL SIGNIFICANCE.
14. FINALLY, BAND

IS
TAGS OF THE BANDS ARE JUST THAT, TAGS NOT SIGNALS.
TAG OF THE UPPER
NOT
IN-AND-OF-ITSELF A SELL SIGNAL.
TAG OF THE LOWER
BOLLINGER BAND
NOT
IN-AND-OF-ITSELF A BUY SIGNAL.
CONCLUSION
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Even though Bollinger Bands can help generate buy and sell signals, they are not designed to determine the future direction of a security. The bands were designed to augment other analysis techniques and indicators. By themselves, Bollinger Bands serve two primary functions: 1. TO IDENTIFY PERIODS OF HIGH AND LOW VOLATILITY 2. TO IDENTIFY PERIODS WHEN PRICES ARE AT EXTREME, AND POSSIBLY UNSUSTAINABLE, LEVELS. AS
STATED ABOVE, SECURITIES CAN FLUCTUATE BETWEEN PERIODS OF HIGH VOLATILITY AND LOW VOLATILITY.
BEING ABLE TO IDENTIFY A PERIOD OF LOW VOLATILITY CAN SERVE AS AN ALERT TO MONITOR
THE PRICE ACTION OF A SECURITY.
OTHER
ASPECTS OF TECHNICAL ANALYSIS, SUCH AS MOMENTUM, MOVING
AVERAGES AND RETRACEMENTS, CAN THEN BE EMPLOYED TO HELP DETERMINE THE DIRECTION OF THE POTENTIAL BREAKOUT.
REMEMBER SUCH
THAT BUY AND SELL SIGNALS ARE NOT GIVEN WHEN PRICES REACH THE UPPER OR LEVELS MERELY INDICATE THAT PRICES ARE HIGH OR LOW ON A RELATIVE BASIS.
LOWER BANDS.
SECURITY CAN BECOME OVERBOUGHT OR OVERSOLD FOR AN EXTENDED PERIOD OF TIME.
KNOWING
WHETHER OR NOT PRICES ARE HIGH OR LOW ON A RELATIVE BASIS CAN ENHANCE OUR INTERPRETATION OF OTHER INDICATORS AND ASSIST WITH TIMING ISSUES IN TRADING.
TRADING BANDS ANSWER THE QUESTION WHETHER PRICES ARE HIGH OR LOW ON A RELATIVE BASIS. THE MATTER
ACTUALLY CENTERS ON THE PHRASE
"A
RELATIVE BASIS."
TRADING
BANDS DO NOT GIVE ABSOLUTE BUY AND
SELL SIGNALS SIMPLY BY HAVING BEEN TOUCHED; RATHER, THEY PROVIDE A FRAMEWORK WITHIN WHICH PRICE MAY BE RELATED TO INDICATORS.
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SOME
OLDER WORK STATED THAT DEVIATION FROM A TREND AS MEASURED BY STANDARD DEVIATION FROM A
MOVING AVERAGE WAS USED TO DETERMINE EXTREME OVERBOUGHT AND OVERSOLD STATES.
BUT
THE USE OF
TRADING BANDS AS THE GENERATION OF BUY, A SELL AND CONTINUATION SIGNAL THROUGH THE COMPARISON OF AN ADDITIONAL INDICATOR TO THE ACTION OF PRICE WITHIN THE BANDS IS RECOMMENDED.
If price tags the upper band and indicator action confirms it, no sell signal is generated. On the other hand, if price tags the upper band and indicator action does not confirm (that is, it diverges). We have a sell signal. The first situation is not a sell signal; instead, it is a continuation signal if a buy signal was in effect. It is also possible to generate signals from price action within the bands alone. A top (chart formation) formed outside the bands followed by a second top inside the bands constitutes a sell signal. There is no requirement for the second top's position relative to the first top, only relative to the bands. This often helps in spotting tops where the second push goes to a nominal new high. Of course, the converse is true for lows.
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Joint Application
"Markets turn on a dime. Most traders cannot. Therein lies your profit."
A cardinal rule for the successful use of technical analysis requires avoiding multi co linearity amid indicators. Multicolinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example. So one indicator derived from closing prices, another from volume and the last from price range would provide a useful group of indicators. But combining RSI, moving average convergence/divergence (MACD) and rate of change (assuming all were derived from closing prices and used similar time spans) would not. Here are, however, three indicators to use with bands to generate buys and sells without running into problems. Amid indicators derived from price alone, RSI is a good choice. Closing prices and volume combine to produce on-balance volume, another good choice. Finally, price range and volume combine to produce money flow, again a good choice. None is too highly collinear and thus together combine for a good grouping of technical tools. Many others could have been chosen as well: MACD could be substituted for RSI, for example.
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Conclusion
It is not only plausible that markets are efficient, but participants can also profit from efficient markets. However, it is a fact that even though it is possible to outperform the markets, it requires ongoing research, continuous improvement and constant innovation. Beating the market does not come easy, nor is it something that is easy to maintain. I would compare the pursuit of above-average returns to that of a company trying to maintain its competitive advantage. After introducing a hot new product, a company cannot just sit back and wait for the money to roll in. In order to remain above the competition, management must be flexible and look for ways to continuously improve and innovate. Otherwise the competition will overtake them. Money managers, traders and investors who find ways to outperform the market must also remain flexible and innovative. Just because a method works today, does not mean it will work tomorrow. To sum it up, "the more creativity you bring to the investment process, the more rewarding it will be. The only way to maintain ongoing success, however, is to constantly innovate. That's much the same in all endeavors. The only way to continue making money, to continue growing and keeping your profit margins healthy, is to constantly come up with new ideas."
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Most important of all, however, is the fact that investing is fun. It's fun to pit your intellect against that of the vast investment community and to find yourself rewarded with an increase in assets. It's exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary. And it's also stimulating to learn about new ideas for products and services, and innovations in the forms of financial investments. A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work to earn more money.
Even though there are some universal principles and rules that can be applied, it must be remembered that technical analysis is more an art form than a science. As an art form, it is subject to interpretation. However, it is also flexible in its approach and each investor should use only that which suits his or her style.
Developing a style takes time, effort and dedication, but the rewards can significant.
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TECHNICAL ANALYSIS TY.

TECHNICAL ANALYSIS TY.BFM

Technical Analysis - The Concept

AT THE SAME TIME THE PENALTIES CAN ALSO BE DISASTROUS.

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So what actually is Technical Analysis?

AVERAGES AND REFERS

Technical Analysis is based on the following three premises:

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Fundamental Vs. Technical Analysis

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ELEMENTS OF TECHNICAL ANALYSIS

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CHARTS - A CHARMING TOOL

A CHART IS THE TECHNICAL ANALYSTS PRIMARY TOOL.

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WHAT ARE THE TYPES OF CHARTS?

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The Trendy Trendlines

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ARE AN IMPORTANT TOOL IN TECHNICAL ANALYSIS FOR BOTH TREND IDENTIFICATION

TECHNICAL ANALYSIS TY.BFM Importance of a Trend Line

THE TRENDS LINE AND REVERSES, I.E. DIRECTION IN WHICH IT IS MOVING.

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PENETRATION TO OCCUR IN ONE DAY THOUGH IT MAY NOT BE

IT IS NOT ESSENTIAL FOR VOLUME TO INCREASE FOR A VALID

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Support & Resistance Of Trendlines

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IDENTIFY AND FOLLOW TRENDS. RESISTANCE AND PRICE TRENDS.

LINES ARE DRAWN ABOVE OR BELOW THE MARKET ACTION

DEPENDING UPON THE DIRECTION OF THE MOVE.

DURING AN UPTREND A LINE WOULD BE DRAWN FROM THE FIRST

TO EXCEED A PREVIOUS RESISTANCE PEAK IN AN UPTREND, OR TO

TECHNICAL ANALYSIS TY.BFM

TECHNICAL ANALYSIS TY.BFM

Averages: For The Above Average Investor

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Types of moving averages

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XK) AND THE ANSWER IS ADDED TO THE PREVIOUS PERIOD'S IS HIGHER,

THE DIFFERENCE WILL BE

(C - P). THE NEGATIVE DIFFERENCE IS WEIGHTED BY MULTIPLYING IT BY THE CONSTANT ((C

EMA THAT IS LOWER ((C - P) X K) + P.

Uses of moving averages:

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Gaps - Grasp the Opportunity

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OCCURRED) NO SHARES CHANGED HANDS.

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