DCX on B-School

Technical Analysis 101 : Session 1 Josheph Adhikari Dipendra Banskota DCX On B-School

Time Frames Auctions Chart Types Trends Trading Ranges Support and Resistance Technical Analysis Basics

A method of evaluating securities Does not measure a security’s intrinsic value Uses price charts and other tools to identify patterns Technical Analysis

1.The market discounts everything Basic Assumptions

1.The market discounts everything 2.Price moves in trends Basic Assumptions

1.The market discounts everything 2.Price moves in trends 3.History tends to repeat itself Basic Assumptions

Markets have three trends Trends have three phases The markets discount all news Market averages must confirm each other Trends are confirmed by volume Trends exist until proven otherwise Dow Theory Principals

Commodity Futures Fixed Income Foreign Exchange Equities and Indices Technical Analysis and the Markets

Fundamental Analysis: Based on the study of economic factors Fundamental vs Technical Analysis Supply demand relationships Government economic reports Geo-political factors Acts of nature Corporate balance sheets, cash flow statements, and income statements

Fundamental Analysis: Based on the study of economic factors Fundamental vs Technical Analysis Technical Analysis: Study of price action through charts and price history

The Study of Supply and Demand Fundamental Analysis Price SupplyDemand

Futures markets and other derivative markets were created as risk management tools Futures Markets

Futures markets are an anticipatory market Futures Markets

Types of charts Bar charts Candlestick charts Line charts

Bar Charts Vertical line representing the high and low of the sessions Horizontal line on the left of vertical is the opening Horizontal line on the right of the vertical is the close. Timeframe can be anything from 1 minute to annual, including intraday, daily, weekly, monthly, quarterly, semiannual, and annual.

Candlestick Charts The candlestick chart like the bar chart includes the high, low, open and close. The Japanese put great interest in the opening and the closing. The candlestick charts have a colored body which represents the open and close. In DCX the body of the candlestick is colored green if the close is higher than the open (trades up). The body of the candlestick is colored red if the open is higher than the close (trades down) The shadow or the black vertical line represents and trading activity which is higher than the open or close which is higher or any trading activity which is lower than the open or close which ever is lower.

Timeframes The timeframe used for forming a chart depends on the compression of the data:The timeframe used for forming a chart depends on the compression of the data: –Intraday, daily, weekly, monthly, quarterly or annual data. –The less compressed the data is, the more detail is displayed. –Different time horizons represent different trend lengths. Many traders look at multiple timeframes. Many traders look at multiple timeframes. –Traders trend to look at three time frames: trend, trade and trade entry. i.e. monthly (trend), weekly (trade), and daily (entry). –Short term traders may look at weekly, daily, and intraday timeframes.

Line Charts Line charts simply connect the close of each bar, ignoring any intra bar activity. Many market participants believe the close is the single most important price.

Support and Resistance Levels Support levels are price levels where buying has entered the market prior or is expected to enter the market currently. Resistance levels are price levels where selling has entered the market prior or is expected to enter the market currently. Support and resistance levels are identified by horizontal line from recent highs and lows or trendlines which connect highs and lows. Buy support when penetrated becomes resistance. Sell resistance when penetrated becomes support.

Support and Resistance 2 All our markets are auction markets Auction markets move higher to find sellers. Auction markets move lower to find buyers

Support and Resistance 3 Trendlines Up trendline is a straight line drawn upward connecting successive swing or reaction lows. Down trendline is a straight line drawn downward connecting successive swing or reaction highs. Two points are needed to draw a trendline and a third point is necessary to confirm the validity of a trendline. The longer a support or resistance hold the stronger, more important the level. Volume is a sign of the strength of the support or resistance levels.

Retracements Another indication of the strength of a trend is retracements from highs and lows. Markets do not trade in one direction, they take breathers and retrace. Dow retracement levels are 33%; 50%; 66% Fibonacci retracement levels are 38.2%;50%;61.8% Strong trends retrace % Weak trends retrace %

98% of all trading is now done electronically across all asset classes, creating a resurgence and growth of technical analysis Electronic Trading

Charting Mechanical Trend-following Range Automated executed, black box Artificial intelligence Neural network Technical Systems

Series 102 Trend Analysis DCX ON B-School

Trend Analysis One of the most important concepts in technical analysis is that of trend. Trend is Your Friend

Trend  In a general sense, the trend is simply the direction of the market, which way it’s moving.  It is direction of those peaks and troughs that constitutes market trend.  The fact of the market is that markets actually move in three directions –up, down, and sideways.  There are three decisions confronting the trader- whether to buy a market, sell a market, or don nothing (stand aside).

Trend Classifications  Major trend : Long term trend, Dow theory, for example, classifies the major trend as being in effect for long than a year.  Intermediate trend or secondary trend as three weeks to as many months.  Near term trend is usually defined as anything less than two or three weeks.

Rising Support and Resistance levels in Uptrend

Support and Resistance in a Downtrend

RULE OF THUMB Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders.

Tops and Buttons

Double Top

Double Bottom

Head and Shoulders

Technical Indicators Relative Strength Index (RSI) Rate of Change(ROC) Stochastic MACD Bollinger Band Average Directional Index Regression Moving Average Commodity Channel Index Oscillator Stochastic

Dipendra Banskota Joseph Adhikari DCX On B-School