TECHNICAL ANALYSIS PART 1 Copyright © (2011) Dirk Johannes Volschenk All rights reserved By Dirk Volschenk

Technical Analysis What is Technical Analysis? Simply put, Technical analysis is the study of charts, graphs and the stock market's history, in an attempt to determine its future. Technicians say that a market's price reflects all relevant information, so their analysis looks at the history of a security's trading pattern rather than external drivers such as economic, fundamental and news events. Price action also tends to repeat itself because investors collectively tend toward patterned behaviour – hence technicians' focus on identifiable trends and conditions. In essence, Technical analysis determines trends and tries to take advantage of them.

Technical Analysis Market Trends Trend Trading is used to take advantage of trending markets, whether moving up or down in trend. There are 3 types of trends, BULLISH (upward trending) , BEARISH (downwards trending) & CONSOLIDATION Periods(sideways trending). How do we identify trends? BULLISH - Higher Highs & Higher Lows BEARISH - Lower Highs & Lower Lows CONSOLIDATION - Not making any new significant highs or lows & Normally trades inside a band We then use Technical Analysis to time our entry to the markets and set targets.

Technical Analysis Market Trends BULLISH

Technical Analysis Market Trends BEARISH

Technical Analysis Trend Changes Trend Changes occur once a preceding trend stops making Higher Highs & Higher Lows or vice versa. But it is important to wait for Confirmation! Wait untill the new Highs & Lows are finished. Using additional indicators also helps with identifying trend changes.

Technical Analysis Chart Types There are different chart types to use for analysis, with the main 3 being : LINE CHARTS CANDLE CHARTS BAR CHARTS Line charts work on the closing prices of the instrument (Stock, Currency or Index). Candle charts give us a bigger understanding of market moves as they give us more information, namely the open, closing, high and low that the instrument has reached for that time period. It fills the open and closing prices with a body and displays the highs and lows as wicks. Bar charts are drawn with the same information as Candlestick charts but don’t have a body.

Technical Analysis LINE CHARTS Line Charts are formed by connecting the closing price of each period

Technical Analysis CANDLESTICK CHARTS High High Close Open Body Open Wick Low Low Green Candles are Bullish & Red Candles are Bearish

BAR CHARTS High High Open Close Open Close Low Low The Open is always on the Left & the Close always on the Right.

Technical Analysis Trend Lines Trend lines are another very useful tool to help us determine trend changes. Trend lines need to be drawn in the correct way by connecting lows with lows or highs with highs. To identify trend changes with trend lines we would connect the Lows in Bullish Trends & the Highs in Bearish Trends. Once the price breaks through the trend line , we then have a possible trend change, BUT!!!! What do we need to wait for?

Technical Analysis CONFIRMATION!

Technical Analysis Trend Lines We would again use other indications to help us determine if it is a valid trend change. Either a Indicator changing in trend direction as well, or if a support or resistance level has been taken out. The reason for this is that there are often times that the break is false. We try to stay out of the traps that the market sets up for us.

Technical Analysis Trend Lines Fake Break But how would we know?

Support & Resistance Line Technical Analysis Trend Lines 1 Support & Resistance Line 2 3 4

Technical Analysis Support & Resistance Lines The more times a line gets ‘tested’ the more relevance it has. That is why a 4th test break has more significance than a 2nd test break. Support & Resistance lines offer us an invisible ‘level’ to which the price tends to move towards. It thus also helps to determine not only a possible turning point on a chart but also a possible target level.

Technical Analysis 4 3 2 1 Why did the price give a fake Break on the 4th test? And why would I not have climbed into the trade for a Short on the Breakout at 4? 2 1

Technical Analysis Reason 1: It hit a Support/Resistance Line Reason 2: It never broke the Support/Resistance line Or made a new lower low. 4 3 2 1

Technical Analysis 1 2 3 1 2

Technical Analysis Support & Resistance Lines This all works great in hindsight but how do we use it to determine what happens in the future? LESSON 1: There are no guarantees in the markets! All we can do is to find levels and determine what could happen. By having an understanding of what could happen, we can better prepare ourselves for when it does happen. LESSON 2: We always wait for CONFIRMATION. We can only take action upon confirmation.

Technical Analysis TARGET1 TARGET2

Technical Analysis Chart Patterns & Formations Head & Shoulders: Stop X Neckline Entry on breakout X TARGET

Technical Analysis X X

Technical Analysis Double Tops & Bottoms: STOP More or Less Horizontal Support/Resistance Level X Entry on Breakout X TARGET

Technical Analysis X X X X

Technical Analysis STOP Triple Tops & Bottoms: More or Less Horizontal Support/Resistance Level X Entry on Breakout X TARGET

Technical Analysis Rising/Falling Wedges: Rising Wedge Normally BEARISH Falling Wedge Normally BULLISH

Technical Analysis Rising/Falling Wedges: Normally a longer term pattern. Consists of converging support & resistance lines trending in the opposite direction of a rally. In other words, the consolidation period will be a small trending period with either Higher Highs & Higher Lows or vice versa.

Technical Analysis Triangles: Descending Triangle Symmetrical Triangle Resistance LVL Support LVL Ascending Triangle

Technical Analysis Triangles: Generally a shorter term setup. Triangles are usually continuation patterns but can also break out the other way to change the trend. Ascending Triangles are normally BULLISH Descending Triangles are normally BEARISH

Technical Analysis Flags: TARGET X STOP X

Technical Analysis Flags: Normally runs in a rectangle i.e. between Parallel running Support & Resistance lines. Also usually a trend continuation pattern.

Technical Analysis Bringing it all together: Trading is a game of odds. Technical Analysis helps us to put the odds in our favor. We can’t be correct all the time, but we can avoid being wrong most of the time. The Coin Game: Why not play a game where the odds are in your favor? Thank You

Disclaimer: Our Seminars are purely educational in nature, we do not advise or tip and any trades shown in any seminar are for educational illustration purposes only. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. CFDs and Spread Bets are highly leveraged products and carry a high level of risk to your capital. Due to the leverage offered it is possible to you to incur losses in excess of your initial margin. These products are not suitable for all investors so please make sure that you understand the risks involved. Rates of exchange may cause the value of investments to go up or down.

Copyright © (2011) Dirk Johannes Volschenk All rights reserved By Dirk Volschenk