TECHNICAL ANALYSIS

©2015 BSE Institute Limited

What is Technical Analysis
• Technical analysis is all about identifying
trends and riding them

• For Buyer: one should buy any stock when the

bottom is confirmed by the chart pattern and
continue till the top is not confirmed.

• For Seller: One should sell when the top is

confirmed as per the chart pattern and cover their
short position only after the bottom is confirmed.
Myths about Technical Analysis
 Technical analysis is not a tool to predict the
tops and bottoms of the market but in fact a
method of identifying market trends and
maximizing profits by riding these trends.
Difference between technical and
fundamental analysis
• Fundamental analysis a method of tracking the
performance of a company by studying its
balance sheet

• Technical analysis is method of identifying

future price movements with the help of past
price pattern
Difference between technical and
fundamental analysis
• Fundamental analysts use tools such as EPS,
PE, Book value, Order book etc to predict the
future price of stocks

• Technical analysts use tools such as moving

average, trend line, oscillators etc to predict
the future price of stocks
Importance of Stop loss
 Ideally a stop loss is a point above or below
which the technical analyst’s view about the
trend itself changes.

 If one does not follow the stop loss strictly then

the losses could be unlimited

 Trailing stop loss, Time stop loss, Money stop

loss
Trading Rules
• Strictly trade in the direction of the main trend

• Follow the stop loss religiously

• Do not be selective in case of technical calls

(the patient has a full choice of selecting a
doctor, not the medicine)

• Use signals from the technical indicators in the

direction of the main trade
Crowd Psychology
• Listen to your heart and do the opposite

• "The best time to buy is when blood is running

in the streets."
Trend
The general direction in which a stock or index is
moving.

Mean reversion
The tendency of a market variable ( such as an
interest rate ) to revert back to some
Long-run average level.

Outperformance
To surpass in excellence of performance
Volatility
The volatility of a stock, σ is a measure of
our uncertainty about the return provided by
The Stock.
Define as the standard deviation of the return
provided by the stock in one year when the
Return is expressed using continuous
compounding
Support and resistance.
• Support.
• Resistance.
Break out.
• Close filter.(not intraday)
• Point or percent filter.
• Time
• Volume
• Volatility (ATR)
False alarm .
• Whipsaw.
• Bull trap.
• Bear trap.
Theories of Technical analysis
• Dow Theory

• Candlestick Technique

• Time Cycle

• Elliot Wave Theory

Theories of Technical analysis
• Dow Theory ( Hypothesis )
1 Primary trend cannot be manipulated.
2 The averages discount everything.
( Everything get quickly discounted in the
market)
3 The theory is not infallible.
( It is not a tool to beat the market , but a way to
understand it better.)
Types of charts.
1 Closing price chart ( line chart )
2 Bar chart
3 Japanese candlestick chart.
SCALING
1 Arithmetic scale. ( 10,20,30,40 )
2 Semi- log or percentage scale. ( 10,20,40,80 )

EX RIGHT ( XR), EX- BONUS ( XB ), SHARE SPLIT( SS)

Bar charts ( Bar reversals )
Upward bar reversal ( Bullish)
Simple- Lower low ,High higher than previous day’s high,
Close higher than previous day’s close
Perfect- Lower low ,High higher than previous day’s high ,
Close higher than previous day’s close and high

Downward bar reversal ( Bearish )

Simple- Higher high, Close lower than previous day’s close
Perfect- Higher high, Close lower than previous day’s close
and low.
Candlestick
• The Body, The Shadows
• Long days, Short days
• Marubozu ( White, black, Opening, Closing)
• Spinning tops
• Doji ( Long legged, gravestone, dragonfly )
• Long legged
• Gravestone(Bullish/Bearish –change in trend)
• Dragonfly (Bullish/Bearish –change in trend)
• Stars ( Small body gaps above or below the previous day’s
long body)
Candlestick ( Reversal patterns)
• Hammer ( Bullish)& Hanging man (Bearish)
• Inverted Hammer ( Bullish) & Shooting star (Bearish)
• Engulfing (Bullish & Bearish , Small body & long body)
• Harami
• Piercing line (Bullish)
• Dark cloud cover ( Bearish)
• Meeting lines ( opposite colour candlesticks- same close)
• Belt Hold ( Opening marubozu )
• Kicking ( White & Black marubozu with gap )
• Matching low
Candlestick (Continuation patterns)
• Upside Tasuki gap & downside Tasuki gap
• Upside gap three methods & downside gap three methods
• Side-by-side white lines
• Rising three methods & falling three methods
• Mat hold
• Separating lines
• Three-line strike
• On neck line
• In neck line
• Thrusting line
Averages
• 1 Simple moving averages (SMA)
• 2 Exponential moving averages (EMA)
• = ( Current close – previous EMA ) * Factor + previous
exponential averages
• Factor = 2/ ( n + 1) ( n = number of days )
• 3 Weighted moving averages (WMA)
• Day Close Weight Weighted close 3 dwa
• 1 250 1 250
• 2 260 2 520
• 3 270 3 810 263.33
Gap
• 1 Common gap
• 2 Breakaway gap
• 3 Run- away gap
• 4 Exhaustion gap.
Trend
• As per Dow theory
• There are three types of trends that are in
operation .
• Primary trend – 1 year to many years.
• Intermediate trend – 3 weeks to 3 months.
• Short-term trend – 2-3 days to 2-3 weeks.
Trend lines
• 1 Rising trend line
• 2 Falling trend line
• 3 flat trend line

• Validity of trend line penetration

• 3%
• Time – 2 days in a row.
Curved Trend lines
• Buying climax (Parabolic blow off)
• Selling climax.
• Draw with French curve.
Speed resistance lines (Speed lines)
• Trend lines based on 1/3 & 2/3 retracements.
• 1/3,2/3 or 1/3,1/2,2/3
Fibonacci number series
• 1,2,3,5,8,13,21,34,55,89,144,233,377,610,987
• Any Fibonacci number is addition of the previous two.
• Fibonacci ratio – The ratio between Fibonacci numbers are
called Fibonacci ratio.
(0.146,0.236,0.382,0.618,1.618,2.618,4.236,6.856)
• 1/1.618=0.618 0.618x0.618=0.382
• 1.618x1.618=2.618 2.618x1.618=4.236
• 1-0.618=0.382 1.618/0.618=2.618
• 0.618/1.618=0.382 0.382x0.382=0.146
Fibonacci Fans

Fibonacci retracements (23.6,38.2,50,61.8,76.4)

Fibonacci Retracements

Fibonacci retracements (23.6,38.2,50,61.8,76.4)

Price Projections

Fibonacci price projections (1.618,2.618,4.236)

Golden ratio (1.6180339887…)
a+b a 1+ √ 5
----- = ---- = phi ( Ф or φ ) = ------------ = 1.6180339887
a b 2
Iteration Result ratio
Add the two numbers 25+250 275 1.1
add the result to the highest previous 250 +275 525 1.9
add the result to the highest previous 275 +525 800 1.52
add the result to the highest previous 525+800 1325 1.65
add the result to the highest previous 800+1325 2125 1.60
add the result to the highest previous 1325 + 2125 3450 1.62
add the result to the highest previous 2124 + 3450 5575 1.615
add the result to the highest previous 3450 + 5575 9025 1.618
(Take any two whole numbers. add two numbers together, calculate the ratio for sum
total and second number, repeat the process)
Gann fan lines (W.D. GANN)

• 1X8, 1X4, 1X3, 1X2, 1X1, 2X1, 3X1, 4X1, 8X1

82.87,75.96,71.56,63.43,45,26.26,18.26,14.03,7.12
Channels
• Return or channel line – Line parallel to the
trend line.
• Join 0-2 line and parallel line passing 1.
• Join 2-4 line and parallel line passing 3.
• Join 5-a line and parallel line passing b.
• (1-2-3-4-5 and a,b,c )
Andrew pitchfork

• Three points, Median line, Center point

• Upper trigger line ,lower trigger line
Volume
• Volume leads price
• Bearish volume configuration
( rallies on a trend of lower volume)
• Selling climax -( price fall at accelerating pace along
with expanding volume )
• Parabolic blow off –( price & volume expand
exponential then fall equally sharp )
• Churning –( higher volume near top )
• Accumulation – ( higher volume near bottom )
Volume Oscillators

• Rate of change of volume (10 d volume ROC )

• Volume Oscillator ( volume in momentum
format)

• The Demand Index ( volume leads price )

(It combines price & volume into one indicator)

• Chaikin Money Flow ( rising prices should be

accompanied by expanding volume )
Volume Oscillators
• The Arms index ( TRIN or MKDS )
(advances/declines)/( advancing vol/declining vol)
• On –balance volume
( The line is started with an arbitrary number,
volume for the day added when price rises &
subtracted when it falls)
• Equivolume ( Candlestick volume )
( Bars are plotted in different width as per volume,
higher the volume wider the bar )
Breadth
• Advance/Decline line
• Breadth Oscillators
• The Mcclellan Oscillator
(The difference between a 19 days & 39 days
EMA of advancing minus declining shares.)
• The Mcclellan summation index
( Derivation of Mcclellan Oscillator)
It is calculated as a cumulative total of the daily
reading of the oscillator itself.
Breadth
• High-low figures
(The number of shares making new highs or
lows over a 52 week period )
• Diffusion Indicators
( Example – Percentage of the stocks comprising
Index that are above their 50 days SMA)
Bollinger bands
• Variance =

• μ (the Greek letter "mu") is the mean, xi =They are the individual x values

• standard deviations = square root of Variance

•
• Upper Bollinger band= mean + 2 *s,
• Middle Bollinger band= mean
• Lower Bollinger band= mean - 2 *s
• %b= last - Lower band / Upper band - Lower band
• Band width = Upper band - Lower band / Middle band
• The Squeeze
• Head fake ( trap )
Reversal patterns
• 1 Head & shoulders ( Inverted )
• 2 Double top / bottom
• 3 Triple top / bottom
• 4 Rounding top / bottom
• 5 V – shaped or spike
Continuation patterns

• Triangles
(Symmetrical, Ascending, Descending, Expanding)
• Pennants
• Flag
• Rectangle
• Wedges ( Rising – bearish, falling – bullish )
Oscillators Rate of change ( ROC)

• Rate of change compares today’s price with

the price ( x ) days age.
• 10 days ROC is calculated by comparing the
price today with the price of 10 days ago.
• First method .
• Today price = 12 ,x days before = 10
• 12/10*100 = 120 %
• Second method
• Today price = 12 ,x days before = 10
• 12/10*100 -100 = 20 %
Rate of change ( ROC)
• Overbought and oversold
• Divergences
• Positive divergences - Oversold
• Negative divergences – Overbought
• Moving average with ROC
Rate of change ( ROC)
Relative strength index ( RSI)
• RSI = 100 - ( 100 )
1+RS
• RS = Average gain per day
• Average loss per days
• For calculation of 9 days RSI
• Gain= 65 ,loss = 35
• Average gain = 65/9 = 7.2 , Average loss = 35/9 = 3.9
• RS = 7.2/3.9 = 1.85
• RSI = 100 - ( 100/ 1+ RS ) = 100 – ( 100 /1+1.85 )
• RSI = 64.91
Relative strength index ( RSI)
• Overbought and oversold
• Divergences
• Positive divergences - Oversold
• Negative divergences – Overbought
• Moving average with RSI
Relative strength index ( RSI)
Moving average convergence and
divergence ( MACD)
• Measures the convergence and divergence
between two exponential moving averages
• Moving average with MACD ( 9 DEMA )
Moving average convergence and
divergence ( MACD)
Stochastics
• Two lines % K ( Fast) & % D ( Slow )
• % K = 100 { ( C – L5 ) / ( H5 – L5 ) }
• C = Close, L5 = 5 days low, H5 = 5 days high
• % D = 100 * ( H3 / L3 )
• H3 = 3 days sum of ( C – L5 )
• L3 = 3 days sum of ( H5 – L5 )
Stochastics
True Range, DI,ADX & ADXR
• Directional Movement
• Directional movement is positive (plus) when the current high minus the prior high is
greater than the prior low minus the current low. This so-called Plus Directional
Movement (+DM) then equals the current high minus the prior high, provided it is
positive. A negative value would simply be entered as zero.
• Directional movement is negative (minus) when the prior low minus the current low is
greater than the current high minus the prior high. This so-called Minus Directional
Movement (-DM) equals the prior low minus the current low, provided it is positive. A
negative value would simply be entered as zero.
• Outside day-
• All inside days will have zero directional movement.
True Range, DI,ADX & ADXR
• True Range in price is the greatest of the following
The distance between today’s high and today’s low
The distance between yesterday’s close and today’s high
The distance between yesterday’s close and today’s low
The Directional indicator(DI) is calculated by dividing the directional movement by
the true range – The formula for one day is
DI 1= (+DM1/TR1) AND – DI1= (-DM1/TR1)
TR1 reflects the true range for today and the DM1 the directional movement for day
one.
Wilder recommended 14 days since that represents 28 days lunar cycle.
+DI14=(+DM14/TR14) AND –DI14=( -DM14/TR14)
Here the DM14 is the sum total of 14 days of directional movement and TR14 the
sum total of 14 days of true range
True Range, DI,ADX & ADXR
The actual formulas are given below
+DM14(Today)= Previous +DM14-((Previous+DM14)/14)+DM14
-DM14(Today)= Previous -DM14-((Previous-DM14)/14)+ -DM14
These two formulas are each divide by the TR14 and multiply the results buy 100 to
get the plus and minus directional indicators.
The indicator called the directional movement index (DX)that measures the difference
between the two DI’s . The DX is calculated by dividing the difference between
+DI14 and –DI14 by the sum of the +DI14 and the –DI14

Take a14 days average of DX .This average is known as the

average directional movement index (ADX)
Average Directional Movement Index rating (ADXR)
ADXR= ( ADXR today + ADX 14 days ago)/2
True Range, DI,ADX & ADXR
Money Flow Index( MFI)
Gene Quong & Avrum Soudack

• Oscillator – 0 to 100 , Volume – weighted RSI , 14Days

• Typical Price = (H+L+C) / 3
• Money flow = Typical Price * Volume
• Positive Money flow = Total of all days , where the typical price is higher than the previous days
typical price.
• Negative Money flow = Total of all days , where the typical price is lower than the previous days
typical price.
• If Typical Price unchanged then that day is discarded

• Money Ratio = Positive Money flow / Negative Money flow

MFI = 100 - ( _____100_____ )

1+ MONEY RATIO

Positive Money flow

OR MFI = 100 * ---------------------------------------------------------
• Positive Money flow + Negative Money flow
Accumulation/Distribution Line
Accumulation/Distribution Index (Marc Chaikin )

• Close Location Value ( CLV) Range - +1 to -1

(CLOSE – LOW) – ( HIGH – CLOSE)

• CLV= ------------------------------------------
HIGH - LOW

• Accdist = Accdist Prev + Volume * CLV

• Starting point for the accdist total i. e the Zero point is arbitrary ,
only shape of the indicator is used.
Chaikin Oscillator (Marc Chaikin 1970)
• Accumulation / Distribution(AD)

( C- L ) – ( H-C)
AD = cum ---------------------- * V
( H-C)

• AD = Accumulation / Distribution cumulative total running line

• CUM = Calculate a cumulative total running line

• Chaikin Oscillator - This oscillator measured as differences between 3

Days EMA of the AD to the 10 Days EMA of the AD
Chaikin Money Flow ( CMI) Marc Chaikin

20-21 days
• Close Location Value ( CLV)
( Close 1- Low 1 ) – ( High1-Close1)
CLV = ------------------------------------------------
( High 1 –low1)

t CLV t * Volume t

CMF = ∑ t =20 ------------------------------------------------

t

∑ t =20 (Vol t)

• Chaikin Money Flow ( CMI) - This Indicator oscillates above & below
the zero line which indicates a bullish & bearish Trend.
Chaikin Volatility
Marc Chaikin
10 days
• H-L Average = EMA of ( High – Low)

(H-L Average ) – (H-L Average n period ago)

Chaikin Volatility = ------------------------------------------------------ * 100
(H-L Average n period ago)
Trading frame work

• Market dynamics ( Index. Sector, Stock)

• Selection of scripts ( Volume, Impact cost )
• Beta ( Stock , Portfolio )
• Cost of equity
• Portfolio constructions
• Money management (Position Sizing.)
Elliot wave

• Degree

• Sub-Minuette
• Minuette
• Minute
• Minor
• Intermediate
• Primary
• Cycle
• Super Cycle
• Grand Super Cycle
Elliot wave

• Impulse ( 1,2,3,4,5 )OR Corrective ( A,B,C )

• 3 cannot be the shortest of 1,3,5
• 4 cannot overlap 1 ( except terminal impulse )
• No part of 1 or 3 should break 0-2 line
• No part of 3 or 5 should break 2-4 line ( except terminal impulse )
• Only one of 1,3,5 can extend
• Extended wave is at least 1.618 times of next longest
• Two non- extended tend towards equality
• 5 failure possible ( * when 3 extended)
• 2-4 line should be cut in lesser period than 5 wave for completion
of impulse.
 Contact
. Gurudatta G. Dhanokar
9324809630
guru_21@rediffmail.com
Thank You
.