TECHNICA

L
ANALYSIS
Learning Outlines

Introduction to Technical
Analysis

Basic Principles of Technical

Analysis

Technical
Indicators
Introduction to
Technical
Analysis
TECHNICAL ANALYSIS
A trading discipline employed to
evaluate investments a n d identify
trading opportunities in price trends
a n d patterns seen on charts.

It is a w ay of studying a n d analyzing
markets a n d providing insights to
inform trading decisions.
PURPOSE OF TECHNICAL
ANALYSIS
Identify trends and trend reversals.

Spot potential entry and exit points.

Manage risk and optimize trading

decisions.
HISTORY

(1) Early Use in Japan: 17th Century

During this Japan' econom

time,
flourished, with ric s serving y as an
important item e trade. Traders and
merchants
in sought efficient methods
for analyzing and forecasting price
swings in the rice market.
HISTORY

(1) Early Use in Japan: 17th Century

The creation of candlestick charts was

a significant advance during this period.
This breakthrough is frequently
attributed to Munehisa Homma, a
Japanese rice trader from Sakata who is
regarded as one of the earliest
practitioners of technical analysis.
HISTORY

(1) Early Use in Japan: 17th Century

The debut of candlestick charts in

Ja pa n signaled an early realization
of the importance of visually
representing price data. This concept
would later expand and become a
fundamental feature of modern
technical analysis approaches
employed in financial markets around
the world.
HISTORY

(2) Dow Theory: 19th Century

The Dow Theory is a core principle

of modern technical analysis that
was developed by Charles H. Dow, co-
founder of Dow Jones & Company
and widely regarded as the father
of technical analysis, and his
business partner Edward Jones.
Key Principles of Dow Theory:

The Market Discounts Everything: The theory suggests that all

information, whether public or private, is already reflected in the
stock prices.

There Are Three Phases of Market Trends: Dow identified primary trends
as being divided into three phases - the accumulation phase, the
public participation phase (or the main trend), and the distribution
phase.
Key Principles of Dow Theory:

Price Movements Have Trends: The Dow Theory asserts that markets
move in trends - either upward (bull markets), downward
(bear markets), or sideways (range-bound markets).

Indexes Must Confirm Each Other: Dow emphasized that for a trend to
be considered valid, it must be confirmed by both the Dow
Jones Industrial Average (DJIA) and the Dow Jones Transportation
Average (DJTA).
HISTORY
(3) Technological Advancements:
mid-20th Century

Evolved with the advent of computers,

allowing for advanced charting
and analysis tools.
Transitioning from manual charting
and calculations to
computerized analysis significantly
enhanced the speed and
accuracy of market analysis.
Key Technological Milestones:

Computerized Charting: The ability to create, modify, and analyze

charts became much more efficient with computer software.

Technical Indicators: Automation allowed for the calculation and

interpretation of various technical indicators in real time.

Algorithmic Trading: Computers enabled the development and

implementation of algorithmic trading strategies based on
technical analysis.
Basic Principles of
Technical Analysis
PRICE
CHARTS
A sequence of prices plotted over
a specific timeframe. In
statistical terms, charts are
referred to as time series plots.

It displays the price of a

particular market over a period of
time
MOST C O M M O N TYPES OF PRICE
CHARTS

LINE BAR
CHAR CHAR
T T

CANDLESTI
CK
CHART
Line Chart
A fundamental technical analysis visualization tool that provides
a simplified portrayal of a security's price movement over
time. It combines closing prices with a continuous line to
provide a clear and simple assessment of the total trend.

Each data point on the chart corresponds to the security's

closing price at a certain time, and the connecting line makes
identifying general trends simple.

Line charts are especially beneficial for providing a rapid

and straightforward assessment of a security's
performance over extended time periods.
Bar Chart
A more detailed representation of price fluctuations, with the
trading time divided into open, high, low, and closing prices.

Each vertical bar represents a specific time interval, such as a

day or an hour. The top of the bar represents the highest price
achieved over that period, while the bottom represents the
lowest. The opening and closing prices are represented as short
horizontal lines on the left and right sides of the bar, respectively,
and color coding is frequently used to indicate whether the
closing price is higher or lower than the opening price

Bar charts are useful for monitoring price ranges and volatility
and spotting market patterns.
Candlestick Chart
It depicts price fluctuations in a visually rich and
meaningful manner, integrating information such as the open,
high, low, and close prices for a specified period.

Each candlestick on the chart is made up of a body,

which represents the opening and closing prices, and wicks or
shadows, which reflect the highest and lowest prices attained.

Frequently color-coded to distinguish between bullish and

bearish movements, with white or green indicating upward trends
and black or red indicating downward trends.
TIMEFRAM
ES
Short-Term
Timeframe:
Characteristics: Short-term timeframes typically range from
minutes to a few days.

Usage: Traders focusing on short-term timeframes, often referred to

as day traders or intraday traders, aim to capitalize on small price
fluctuations within a single trading session. Technical indicators and
chart patterns on short-term charts help identify quick entry and
exit points.
M e d i u m - Term
Timeframe:
Characteristics: Medium-term timeframes range from a few
days to several weeks.

Usage: Swing traders and position traders often utilize medium-

term timeframes. These traders aim to capture trends that unfold
over a period of days to weeks. Technical analysis on medium-
term charts helps identify broader trends and potential turning
points.
Long-Term
Timeframe:
Characteristics: Long-term timeframes span from several
weeks to years.

Usage: Investors and long-term traders often focus on these

timeframes. Long-term charts help identify major trends, providing
a big-picture view of a security's historical price movements.
Fundamental analysis is often combined with long-term
technical analysis for comprehensive investment decisions.
Support a n d
Resistance
Support and resistance
are
fundamental in
ideas analysis, technical as
serving
foundations for
comprehending critical
price
movements and making
sound trading decisions.
Technical
Indicators
A. Moving Averages
(1) Simple Moving Average ( S M A )

A foundational indicator is calculated by summing

up the closing prices of a security over a specific
period (designated as 'n') and then dividing this
sum by the number of periods ('n'). The result is an
average that provides a smoothed representation
of the security's price movements over time,
effectively reducing noise and highlighting the
overall trend.
(2) Exponential Moving Average
(EMA)
An advanced version of the SMA. What sets it apart
is its responsiveness to recent price changes. Unlike
the SMA, which assigns equal weight to all data
points, the EMA gives more significant weight to
recent data, making it more adaptable to
current market conditions.
DAYS STOCK PRICE
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B. Relative Strength Index (RSI)
(1) Interpretation of Overbought a n d Oversold
Conditions

Signals:
It is a momentum indicator that monitors price
movement speed and change. The RSI scale runs
from 0 to 100. Historically, an RSI reading above 70
suggests that an investment may be overbought,
implying a possible market reversal or correction. An
RSI below 30 indicates that a security is oversold,
indicating a potential upward bounce or reversal. Traders
utilize these overbought and oversold states to
It is a momentum oscillator used in technical analysis to measure the
speed and change of price movements of a security.

Average Gain: The average of all gains over a

specified period (typically 14 days).
Average Loss: The average of all losses over
the same period.

Interpretation:
a. Overbought: An RSI above 70 suggests that the security might be
overbought or overvalued, indicating a potential pullback or reversal.
b. Oversold: An RSI below 30 suggests that the security might be oversold or
undervalued, indicating a potential buying opportunity12.

Usage: Traders use RSI to identify potential buy and sell signals, confirm
trends, and spot potential reversals.
END OF PRESENTATION