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Technical Analysis
History of Technical Analysis
The principles of technical analysis have derived from hundreds years of financial market data.
Some aspects of technical analysis began to appear in Joseph de la Vega's accounts of the Dutch
markets in the 17th century. n !sia" technical analysis is said to be a method developed by
#omma $unehisa during early 1%th century &hich evolved into the use of candlestick
techni'ues" and is today a technical analysis charting tool. n the 1()*s and 1(+*s ,ichard -.
Schabacker published several books &hich continued the &ork of .harles Do& and -illiam
/eter #amilton in their books Stock Market Theory and Practice and Technical Market
Analysis. n 1(0% ,obert D. 1d&ards and John $agee published Technical Analysis of Stock
Trends &hich is &idely considered to be one of the seminal &orks of the discipline. t is
e2clusively concerned &ith trend analysis and chart patterns and remains in use to the present.
!s is obvious" early technical analysis &as almost e2clusively the analysis of charts" because the
processing po&er of computers &as not available for statistical analysis. .harles Do& reportedly
originated a form of point and figure chart analysis.
Do& Theory is based on the collected &ritings of Do& Jones co3founder and 1ditor .harles
Do&" and inspired the use and development of modern technical analysis at the end of the 1(th
century. 4ther pioneers of analysis techni'ues include ,alph 5elson 1lliott" -illiam Delbert
6ann and ,ichard -yckoff &ho developed their respective techni'ues in the early )*th century.
$ore technical tools and theories have been developed and enhanced in recent decade.
What is technical analysis?
Technical analysis is the name given to forecasting techni'ues that utili7e historical share price
data. Technical analyst believes that price is determined by the demand and supply forces
operating in the market. The forces of supply and demand are reflected in pattern of price and
volume of trading share. The rationale behind technical analysis is that share price repeats itself
historically. ! technical analyst look at the past share price" volume data to see if he can
establish any pattern. #e looks present data to see if any established pattern is applicable.
Technical analyst believes that prices moves in trend or &ave &hich may be up&ard or
do&n&ard. The technician must identify trend. Technical analysis is the study of market action"
primarily through the use of charts. 8ike &eather forecasting" technical analysis does not result in
absolute prediction about the future. nstead" technical analysis can help investors anticipate &hat
is 9likely: to happen to price over time. Technical analysis uses a &ide variety of charts that
sho& price over time.
Logic behind the Technical analysis
Selecting the right stock for investment is most important part for making decision. n stock
market everyday price goes up and do&n. These ups and do&ns come in cyclic &ay. !s an
investor you should kno& &hich time is the best to buy the stock. Technical analysis can give
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you the idea of the future price movement of the stock. ;ased on that analysis you can decide
&hether it is profitable in that stock or not. The past performance of the stock" current price of
the stock" trading volume of the stock are considered in technical analysis. -ith these
information and one the basis of certain principles different types of graphs and charts are
prepared. ;y comparing these graphs of the price movements &ith that of the previous years it is
decided by the analyst ho& the stock &ill perform in future.
Technical Analysis Vs Fundamental Analysis
Technical analysis and fundamental analysis are the t&o main schools of thought in the financial
markets. !s &e've mentioned" technical analysis looks at the price movement of a security and
uses this data to predict its future price movements. <undamental analysis" on the other hand"
looks at economic factors" kno&n as fundamentals. 8et's get into the details of ho& these t&o
approaches differ" the criticisms against technical analysis and ho& technical and fundamental
analysis can be used together to analy7e securities.
Charts Vs Financial Statements
;y looking at the balance sheet" cash flo& statement and income statement" a fundamental
analyst tries to determine a company's value. n financial terms" an analyst attempts to measure a
company's intrinsic value. n this approach" investment decisions are fairly easy to make 3 if the
price of a stock trades belo& its intrinsic value" it's a good investment. !lthough this is an
oversimplification =fundamental analysis goes beyond >ust 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 analy7e 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.
Trading Vs Investing
5ot only is technical analysis more short term in nature than fundamental analysis" but the goals
of a purchase =or sale? of a stock are usually different for each approach. n general" technical
analysis is used for a trade" &hereas fundamental analysis is used to make an investment.
nvestors buy assets they believe can increase in value" &hile traders buy assets they believe they
can sell to somebody else at a greater price. The line bet&een a trade and an investment can be
blurry" but it does characteri7e a difference bet&een the t&o schools.
o! Theory
The theory is called according to the name of Charles H" o! he &as the editor of the Wall
Street journal in @S!. n fact" the theory &as presented in series of editorials in the &all street
>ournal during 1(**31(*).
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!ccording to Do& Theory" the market has three movements and these movements are
simultaneous in nature. These movements are primary movements" secondary reaction and also
minor movements.
The primary movement is a long run process that carries market up or do&n. This is long term
trend in the market. The secondary reaction is a retracements force on primary movement for
short term. This is also called a correction of the market. 8ike &hen the market is moving
up&ard continuously" this up&ard movement &ill be break by do&n&ard movements of short
duration is called secondary reaction. The third movement of the market is the minor
movements &hich is day to day fluctuation of the market changes. These three movements
compared &ith the &aves and the ripples in the ocean.
Figure # $rimary and secondary trend
T%&'S A' T%&' %&V&%SALS
Trend is the direction of share price in the market. -hen the price move up&ard is called uptrend
and &hen the price move do&n&ards is called do&n trend of the market. 4n the other hand there
is another trend is called side&ay trend &hen the price moves in a range side&ay.
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Figure ( u) trend S&*
Figure + do!n trend S&,&'
The changes in direction of trend are referred to as trend reversal. The reversal from a rising
trend to falling trend is marked by the formation of a lo&er top and a lo&er bottom. n The same
&ay of reversal from a falling trend to a rising trend the formation of a higher bottom and higher
top.
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Technical analyst tried to identify the trend reversal earlier so he can make profit in the market.
-hen trend reverse and begins to rise then he recommended buying the share. -hen trend
begins to fall sale the stock" never hold the stock. 6et a&ay from the market.
-ull mar.et or bullish trend
! bull market is an up&ard trend market. The first phase price &ould rise &ith the revival of
confidence in the future of business. So investor buys the share. n the second phase price &ould
rise due to the rising corporate earnings and profit. n third phase price &ould rise due to the
inflation and speculation.
During the bull market line chart &ould e2hibit the formation of three phases. 1ach peak is
higher than the previous phases and there is secondary reaction. !ccording to Do& Theory
higher peak and higher bottom indicate the bull market or bullish trend.
Figure / -ullish trend
-ear mar.et or -earish Trend
;ear market has also three phases. n first phases prices fall due to abandonment of hope.
nvestors sell their share. n the second phase corporate declaration is not good they sho& it
negative earning lo&er profit lo&er dividend. This is also causes further sell pressure in the
market. n the last phase price fall due to force sell or panic selling.
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Figure 0 -earish Trend
The Doe theory laid emphasis on volume. #e found that volume should increase &hen price is
increasing because of bullish market. 4n the other hand &hen price falls volume is also
increasing because of investors are hoping markets &ill be good.
Si1 basic tenets of o! Theory
#" The mar.et has three movements
=1? The Amain movementA" primary movement or ma>or trend may last from less than a year to
several years. t can be bullish or bearish. =)? The Amedium s&ingA" secondary reaction or
intermediate reaction may last from ten days to three months and generally retraces from ++B to
CCB of the primary price change since the previous medium s&ing or start of the main
movement. =+? The Ashort s&ingA or minor movement varies &ith opinion from hours to a month
or more. The three movements may be simultaneous" for instance" a daily minor movement in a
bearish secondary reaction in a bullish primary movement.
(" 2ar.et trends have three )hases
Do& Theory asserts that ma>or market trends are composed of three phasesD an accumulation
phase" a public participation phase" and a distribution phase. The accumulation phase =phase 1? is
a period &hen investors Ain the kno&A are actively buying =selling? stock against the general
opinion of the market. During t phase" the stock price does not change much because these
investors are in the minority demanding =absorbing? stock that the market at large is supplying
=releasing?. 1ventually" the market catches on to these astute investors and a rapid price change
occurs =phase )?. T occurs &hen trend follo&ers and other technically oriented investors
participate. T phase continues until rampant speculation occurs. !t t point" the astute investors
begin to distribute their holdings to the market =phase +?.
+" The stoc. mar.et discounts all ne!s
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Stock prices 'uickly incorporate ne& information as soon as it becomes available. 4nce ne&s is
released" stock prices &ill change to reflect t ne& information. 4n t point" Do& Theory agrees
&ith one of the premises of the efficient market hypothesis.
/" Stoc. mar.et averages must confirm each other
n Do&'s time" the @S &as a gro&ing industrial po&er. The @S had population centers but
factories &ere scattered throughout the country. <actories had to ship their goods to market"
usually by rail. Do&'s first stock averages &ere an inde2 of industrial =manufacturing? companies
and rail companies. To Do&" a bull market in industrials could not occur unless the rail&ay
average rallied as &ell" usually first. !ccording to t logic" if manufacturers' profits are rising" it
follo&s that they are producing more. f they produce more" then they have to ship more goods to
consumers. #ence" if an investor is looking for signs of health in manufacturers" he or she should
look at the performance of the companies that ship the output of them to market" the railroads.
The t&o averages should be moving in the same direction. -hen the performance of the
averages diverges" it is a &arning that change is in the air.
0" Trends are confirmed by volume
Do& believed that volume confirmed price trends. -hen prices move on lo& volume" there
could be many different e2planations &hy. !n overly aggressive seller could be present for
e2ample. ;ut &hen price movements are accompanied by high volume" Do& believed t
represented the AtrueA market vie&. f many participants are active in a particular security" and
the price moves significantly in one direction" Do& maintained that t &as the direction in &hich
the market anticipated continued movement. To him" it &as a signal that a trend is developing.
3" Trends e1ist until definitive signals )rove that they have ended
Do& believed that trends e2isted despite Amarket noiseA. $arkets might temporarily move in the
direction opposite to the trend" but they &ill soon resume the prior move. The trend should be
given the benefit of the doubt during these reversals. Determining &hether a reversal is the start
of a ne& trend or a temporary movement in the current trend is not easy. Do& Theorists often
disagree in t determination. Technical analysis tools attempt to clarify t but they can be
interpreted differently by different investors.
Chart4 ! chart is simply a graphical representation of a series of price over a set time frame.
<or e2ample" a chart sho& a stockEs price movement over a one3year period" &here each point on
the represents the closing price for each day the stock traded.
Line Chart
! style of chart that is created by connecting a series of data points together &ith a line. This is
the most basic type of chart used in finance and it is generally created by connecting a series of
past prices together &ith a line. #ere is an e2ample of S'uare pharma price fluctuation of last
one year.
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-ar chart
5)en6high6lo!6close chart F 4#8. charts" also kno&n as bar charts" plot the span bet&een
the high and lo& prices of a trading period as a vertical line segment at the trading time" and the
open and close prices &ith hori7ontal tick marks on the range line" usually a tick to the left for
the open price and a tick to the right for the closing price.
Figure 6 line chart Square Pharma
Figure 7 Bar Chart DSEX
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Candlestic. Chart .andlestick chart of Japanese origin and similar to 4#8." candlesticks
&iden and fill the interval bet&een the open and close prices to emphasi7e the openGclose
relationship. n the -est" often black or red candle bodies represent a close lo&er than the open"
&hile &hite" green or blue candles represent a close higher than the open price.
Su))ort and %esistance
Support and resistance represent key >unctures &here the forces of supply and demand meet. n
the financial markets" prices are driven by e2cessive supply =do&n? and demand =up?. Supply is
synonymous &ith bearish" bears and selling. Demand is synonymous &ith bullish" bulls and
buying.
What Is Su))ort?
Support is the price level at &hich demand is thought to be strong enough to prevent the price
from declining further. The logic dictates that as the price declines to&ards support and gets
cheaper" buyers become more inclined to buy and sellers become less inclined to sell. ;y the
time the price reaches the support level" it is believed that demand &ill overcome supply and
prevent the price from falling belo& support.
Figure 8 Canle!tic" Chart
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What Is %esistance?
,esistance is the price level at &hich selling is thought to be strong enough to prevent the price
from rising further. The logic dictates that as the price advances to&ards resistance" sellers
become more inclined to sell and buyers become less inclined to buy. ;y the time the price
reaches the resistance level" it is believed that supply &ill overcome demand and prevent the
price from rising above resistance.
Figure 7 Su))ort 8 %esistance -FI'A'C&
Chart $attern
.hartist find out some chart pattern for forecast the movement of the market. There are t&o type
of most chart pattern. <irst is ,eversal /attern and another is continuation pattern.
%eversal $atterns
Share price movements may be uptrend or do&n trend or side&ay trend. The trend reverses the
direction after a period of time. These reverse formation can be identify some chart pattern.
These patterns can changes the direction of trend reversal.
Head and Shoulder Formation
#ead and shoulder pattern is one of the most popular patterns. This pattern comes from the man
head and shoulder. 8eft shoulder is formed &hen price reach the top &ith strong buying impulse.
There is less volume then do&n&ard s&ing. !nother hike of price occurs &ith high volume is
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called head. Then again price is falling &ith less volume and creates left shoulder and hori7ontal
line of >oining t&o shoulders is called neckline.

The head and shoulder formation usually occurs at end of a bull market is indicate of reversal of
the trend. !fter breaking a neck line the price e2pected to fall.
Inverse head and shoulder Formation
nverse head and shoulder is >ust an opposite side. t occurs &hen market is bearish and also it is
a reversal pattern. !nd its breakout &ith large volume indicates upcoming bullish market.
Double top" triple top" double bottom triple bottom are also reversal patterns.
Continuation )atterns
There are some patterns &hich tend to provide a breathing space to the earlier sharp rise or fall
and after the completion of these patterns the price tends to move along the original trend. These
pattern is formed during side&ay movements of share prices is called continuation patterns.

Triangles
This is one of the formations of chartist. Triangles formations occur during the bull or bear
market phases. t is formed &hen t&o or more consecutive descending tops or ascending
bottoms. -hen tops are >oined by a straight line and bottom are also >oin a another straight line.
T&o straight lines are the upper and lo&er trend line respectively.
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Flag and pennants
These are also continuation pattern. They occurs mid3&ay bet&een a sharp price rise or fall. the
breakout from the pattern usually accompanied by increasing volume.
<lag formation is a parallelogram &ith the trend line forming t&o parallel lines. The volume is
e2pected to fall the price but after some time again breakout occur and raise the price.
/ennant formation is a symmetrical triangle. t is formed mid&ay bet&een either a bullish or
bearish trend. The break out from the pattern is marked by increasing volume.
Figure #9 Flags 8 $ennants )attern
&lliot !ave theory
1lliot &ave theory &as formulated by ,alph 1lliot. t &as formulated in 1(+0 by 1lliot after
analy7ing seventy years of stock price movements. #e concluded that the market movements
&as 'uite orderly and follo&ed a pattern of &aves.
$ovements in a particular direction can be five distinct &aves. Three &aves are in direction of
the movements and termed are called as im)ulse !ave" T&o &ave are against the direction is
called corrective !ave or reaction !ave"
The &ave 1 is up&ard and ) correct the &ave 1. Similarly" &ave + and H are up&ard impulse and
&ave + and 0 correct them. !fter complete the &ave H there &ould come correction &hich &ould
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be labeled !;.. ! and ; along the trend but . is against the trend. This !;. correction
follo&ing the fifth &ave &ould correct the entire rise from the start &ave 1 to H.
The &ave theory is not prefect and there is a limitation of practical use. Though The 1lliot &ave
theory is based on the principal that action follo&ed by reaction.
2ar.et indicators
Technical analyst not only focuses on individual stock price but also on the overvie& trend of
market. ndicators they used basically kno&n as market indicators some of them are ;readth of
the market" short selling" odd3lot inde2" mutual fund cash ratio.
-readth of the mar.et
;y comparing the number of share in the market advanced &ith declining during the period. The
trend of the market is ascertained. .omparison of advances and declines is a measurement of
breath of the market price rise or fall.
The breadth of the market is calculated by net different of number of share advances and number
of share declined. 1ach dayEs differences are added to the ne2t dayEs differences to form a
cumulative inde2 as sho&n belo&D
Calculation of -readth

ay Advances eclines aily difference
-readth Cumulative
difference
Sunday )C* )* )0* )0*
$onday 17* %* (* ++*
Tuesday 7* 1%* 311* ))*
-ednesday 1)* 1H* 3+* 1(*
Thursday ))* 1* )1* 0**
The inde2 is plotted as a line graph and compare &ith the market inde2. 5ormally breadth and
market inde2 move in same direction. -hen they diverge" a key signal occurs. n divergences the
breadth line sho&s the true direction of the market. During bull market if the breadth declines to
ne& lo& &hile the market inde2 is makes ne& high a peak suggested follo&ed by a do&n&ard
stock price. ;readth is also signal recovery. This happen in bear market &hen the breadth line
begins to rise as the market inde2 creates ne& lo&.
Short Selling
! speculator often take an advantage of short selling &hich is selling a share that is not o&ned by
the person. This is happened &hen speculator think that market &ill fall in future. The volume of
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short selling is a market indicator. n technical analysis short selling is called short interest. The
e2pectation of short selling speculator may be reaching their position.
$onthly short selling volume is divided by average daily volume to give a ratio that indicate
ho& many days of trading it &ould take to cover up the total short sales. -hen the ratio is less
than 1 it indicated market is overbought. ! decline should be follo&ing sooner or later. ! value
above 1 or 1.H is indicating a market is oversold and likely to turn bullish market shortly.
'ote4 This type of trading system in not allo&ed in ;angladesh .apital $arket.
5dd6lot Inde1 or Trading
The small investor more often than not buys a fe&er than H* or 1** shares of a given stock and
odd lot" and such a buyer and sellers are called odd lotters. $any find reason to &atch the buying
and selling activities of the odd lotters very closely. 4dd lotters try to do right thing most of the
time that is they tend to buy &hen market is fall and buy &hen market is advanced. Technical
analyst fell that the odd lotter is inclined to do the &rong thing at critical turns in the market.
4dd lot inde2 is calculated by odd lot purchase divided by odd lot sales. !n increasing this is
suggested more buying and decreasing is suggested more selling the share. 4dd lotters are
selling the share advanced and buying the share &hen declined. During the advances the odd lot
inde2 is sell proportionately less. The volume of odd lot purchase increases noticeably >ust
before a decline in the market. Similarly" during declines the inde2 is rising >ust before raising
the market" the volume of odd lot sales increasing greatly and inde2 begins to fall.
'ote4 This type of inde2 is not in ;angladesh .apital $arket.
2utual Fund Cash %atio
$utual fund represents one of the most important institutional forces in the capital market.
$utual fund cash as percentage of their net asset on a daily or &eekly or monthly basis has been
a most popular indicator to the technician. $utual funds keep cash to take advantage of
favorable market opportunities and to provide for redemption of their units by holders. 8o& cash
ration like H B &ould indicate a reasonable fully invested position leaving negligible buying
po&er in their hands. 8o& cash ratios are e'uated &ith market highs indicating that the market is
about to decline. !t market bottoms the cash ratio &ould be high. This is indication of potential
purchasing po&er &hich can propel a rise in prices. #igh cash ration signals a rise in price of
shares.
2oving Average
The share price movements are erratic and it isnEt rise and fall in straight lines. Technical analyst
use mathematical tools for smoothen out the apparent erratic movements of share prices and
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highlight the underlying trend. $ost popular moving average is simple moving average =S$!?
and e2ponential moving average =1$!?.
Simple Moving Average
!n average is sum of prices of a share for a specific number of days divided by the total number
of days. -hen it is calculated a series then it is including a ne& price and e2cluding an old price.
Calculating of Five ay Sim)le 2oving Average :S2A ;
days .lose price Total price of H days <ive Day S$!
a b c d
1 ++
) 0*
+ 0)
0 0H
H +% 1(% +(.C
C +C )*1 0*.)
7 +) 1(+ +%.C
% ++ 1%0 +C.%
( +H 170 +0.%
1* +( 17H +H
11 +0 17+ +0.C
1) ++ 170 +0.%
1+ +) 17+ +0.C
10 )% 1CC ++.)
1H )1 10% )(.C
The first
total of
1(% in
column c
is adding
the share
price of
the first
five days
=++I0*I0)I0HI+%?. The second total of )*1 in column c is adding C
th
day price and omit 1
st
day
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price so =1(%I+C3++?. This process is continued. The moving average in column d is obtained by
dividing the total figure in column c by the number of days" namely H days.
Eponential moving average
12ponential moving average =1$!? is calculated by using the follo&ing formula.
1$! J =.urrent /rice3 /revious 1$!?K<actorI /revious 1$!
-here" n J number of days for &hich average is to be calculated.
<actor J )G =5I1?
The calculation is given belo!
Calculating of Five day &2A
Days .losing /rice 1$!
1 ++ ++
) 0* +H.++
+ 0) +7.HC
0 0H 0*.*0
H +% +(.+C
C +C +%.)0
7 +) +C.1C
% ++ +H.11
( +H +H.*7
1* +( +C.+%
Here< Factor =(> :0?#; =9"++
The 1$! of the first day is taken as the closing prices of that day. The second 1$! is
calculating as sho&n
1$!J =.urrent /rice3 /revious 1$!?K<actorI /revious 1$!
J =0*3++?K*.++I++
J+H.++
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The period of the average indicates the type of trend being identified. <or e2ample five or ten
days average &ould indicate short term trend and H* day average &ould indicate mid3 term trend
and also )** day average &ould indicate the long term trend.
The moving average is plotted on the price chart. The curved line >oining these moving averages
represents the trend line. -hen the price of the share intersects and moves above or belo& this
trend line" it may be taken as the first sign of trend reversal.
T&o moving average one is short term and another is long term are used combination. Trend
reversal is indicated by the intersection of the t&o moving average.
Figure ## ,$ &2A
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-asic Indicators
Technical analysis indicators come in t&o basic varietiesD leading and lagging. The indicator
itself is a derivative of share price and volume. This does not change bet&een the t&o categories.
The difference bet&een the t&o =leading and lagging? is ho& the data is used to generate buy and
sell signals. n this session" letEs discuss some concepts first. There are t&o types of indicatorD
leading and lagging.
! leading indicator gives a buy signal before the ne& trend or reversal occurs
! lagging indicator gives a signal after the trend started and basically informs about the
onset of a trend
5scillators> Leading Indicator4 oscillators are mathematical indicators calculated by closing
price data. This is identifying oversold and overbought condition and also the possibility of
trend reversal.
!ate of change indicator "!#$%
t is one of the most po&erful oscillators &hich measure the rate of change of the current price as
compared to the price of certain number of days and &eeks back.
,4.J =.urrent /riceG /rice n period ago? 31
To calculate 7 days of change each days price is divided by the price &hich prevailed 7 days
ago then 1 is subtracted from this price.
ays
Closing
$rice
Closing )rice @ days
ago
$rice
ratio
%5C=%atio6
#
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1 C*
) CH
+ C)
0 C*
H CC
C C%
7 C(
% C+ C* 1.*H *.*H
( C% CH 1.*H *.*H
1* C( C) 1.11 *.11
11 7) C* 1.)* *.)*
1) 7H CC 1.10 *.10
1+ C% C% 1.** *.**
10 CH C( *.(0 3*.*C
1H C* C+ *.(H 3*.*H
1C HH C% *.%1 3*.1(
17 H0 C( *.7% 3*.))
1% H) 7) *.7) 3*.)%
The ,4. values may be positive" negative" or 7ero. -hen ,4. above 7ero line prices is rising is
called overbought. This is the time to sell the stock. 4n the other hand &hen ,4. belo& 7ero
line" price is falling is called oversold. This is the time to buy the stock.
The buying and selling signal indicated by the ,4. should also be confirmed by the price.
2omentum>Lagging Indicators4 lagging indicators is identifying spot a trend. The indicators
that can do so have already been identified as $!.D and moving averages. These indicators
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&ill spot trends once they have established" at the e2penses of delayed entry. The bright side is
that thereEs less chances of being &rong.
!elative Strength inde
The ,S is classified as a momentum oscillator" measuring the velocity and magnitude of
directional price movements. $omentum is the rate of the rise or fall in price.
The ,S is most typically used on a 10 day timeframe" measured on a scale from * to 1**" &ith
high and lo& levels marked at 7* and +*" respectively. Shorter or longer timeframes are used for
alternately shorter or longer outlooks. $ore e2treme high and lo& levelsF%* and )*" or (* and
1*Foccur less fre'uently but indicate stronger momentum.
-here
%SI = #996A#99> :#?%S;B
%S= Average gain )er day> average loss )er day
Calculating #/ days %SI
.hanges over
previous day
.hanges over
previous day
Day .losing price 6ain 8oss
1 1+)
) 10* %
+ 100 0
0 10C )
H 1H* 0
C 1HH H
7 1H+ )
% 1HC +
( 1H% )
1* 1HC )
11 1C* 0
1) 1CC C
1+ 1C% )
10 1C* C
total 0* 1*
#/ ay Average /9>#/= ("C3< #9>#/=9"@#
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%S = ("C3>9"@#= /"9+
%SI= #99 D A#99> :#?/"9+; = C9"#(
This is the ,S for day 1H. n this &ay the ,S values for the subse'uent days can be calculated
by taking the closing price of 10 previous days.
-hen ,S has crossed the +* lines from belo& to above and rising" is a buying opportunity is
indicated. -hen it has crossed the 7* line from belo& and falling is a sell signal.
Moving Average $onvergence and &ivergence "MA$&%
Short and long term e2ponential moving averages constitute a popular combination. The
difference bet&een the Short3term 1$! and the long 3term 1$! represents $!.D.
The $!.D values for different days are derived by deducting the long3term 1$! for each day
from the corresponding short3term 1$! for the day. f the $!.D line cross the 7ero line from
above then the trend can be considered to have turned bearish is time to sell the share. 4n the
other hand" if the $!.D line cross the 7ero line from belo& is bullish trend that indicates to buy
the share.
Calculation
$!.D 8ineD =1)3day 1$! 3 )C3day 1$!?
Signal 8ineD (3day 1$! of $!.D 8ine
$!.D #istogramD $!.D 8ine 3 Signal 8ine
Page 22 of 24
Figure #( - AET5CA 2AC
#ere ,ed line is a signal line and blue line is a $!.D line and difference is histogram.
-ollinger -ands
-ollinger -ands is a technical analysis tools invented by John ;ollinger in the 1(%*s. #aving
evolved from the concept of trading bands" ;ollinger ;ands can be used to measure the highness
or lo&ness of the price relative to previous trades.
;ollinger ;ands consist ofD
Simple moving average =S$!? is in middle.
!n upper band is =S$! plus ) standard deviation?
8o&er band is =S$! minus ) Standard deviation?
Page 23 of 24
Figure #+ -ollinger -and S&*
Some $itfall of Technical Analysis
1. Technical !nalysis is a techni'ue not a science.
). Technical !nalysis indicators are calculating by stock price" volume" trade so itEs biased
on it.
+. Smart technical algorithmic trading soft&are creates technical analysis disadvantages.
0. .hart !nalysis is an art of past e2perience movement of price forecasted not 1**B
accuracy.
H. t cannot calculate risk of the stock or industry.
%andom !al. theory
! change occurs in the stock price because of changing in the economy" industry" or company
earning" profit. nformation about these changes then stock price reacts immediately and stock
moves to ne& level" either up&ard or do&n&ard" depend on the type of information. -hen ne&
information is received price shift rapidly in ne& e'uilibrium is kno&n as fully reflected in the
price of the stock.
The key point in random &alk theory is that the information on changes in the economy"
industry" and company performance is immediately and fully spread so that all investors have
full kno&ledge of information. Therefore the price of stock t&o days ago can in no &ay help in
Page 24 of 24
speculating the price of t&o days later. The price of each day is independent. t may be higher"
lo&er or unchanged from the previous price.
The theory tells us the stock market is so efficient and competitive because there is immediate
price ad>ustment. The theory later comes to kno&n as efficient market hypothesis "EMH%.
-ig Fool Theory
;ig fool theory tell us that the stock price is not determined by its intrinsic value" ! price can be
>ustified by a rational buyer under the belief that another party is &illing to pay you even higher
price. Someone rationally has the e2pectation is that the stock can resell to another people.
n the stock market" the great fool or big fool theory also kno&n as survivor investing is the
belief held by someone &ho makes a 'uestionable investment" &ith the assumption that they &ill
be able to sell it later to Aa greater foolA buying something because you believe that it is the
&orth price" but rather you believe that you &ill be able to sell it to someone else at an even
higher price.
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T%E&>FALS&
2ELTI$L& CH5IC& GE&STI5'S
SH5%T GE&STI5'S
-%5A GE&STI5'S