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FINA 408 Tecnical Analysis > Class 3: History and Construction of Charts Trends, Breakouts, Stops > Flashcards

Class 3: History and Construction of Charts Trends, Breakouts, Stops Flashcards

1
Q

What are charts?

A

graphical displays of data

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2
Q

4 types of charts

A

line

bar

candle

point and figure

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3
Q

Data needed to construct most charts

A

Open

high

low

close

volume

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4
Q

why do line charts use losing price?

A

Used to study long term trends.

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5
Q

why use less data on line chart

A

More frequent data leads to detailed, cluttered charts making trend less obvious

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6
Q

which is the economists chart

A

Line Charts

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7
Q

advantage of line charts

A

Easy to construct and maintain

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8
Q

disadvantage of line charts

A

Gives little information

exact time or trend change can be unclear

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9
Q

Bar charts _|¯

A

Displays high, low, closing prices or HLC.

Each interval represented by one bar

Range is difference between high and low.

Left tick=open, right tick= closing price.

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10
Q

which are the best bar charts

A

OHLC

include the open price

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11
Q

advantages of bar chart

A

HLC can give you a better sense of direction.

More versatile, volume usually included below

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12
Q

disadvantage of bar chart

A

Harder to maintain

requires more space if done by hand

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13
Q

real body in candlestick chart

A

the rectangular box formed by open and close price

Real bodies look like candles

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14
Q

shadow in candlestick chart

A

price extremes of the session

look like wicks

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15
Q

White/open real bodies in candlestick chart

A

price advance at close > open price

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16
Q

Black/closed real bodies in candlestick chart

A

price decline at close < open price

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17
Q

advantage of candlestick charts

A

More visual

positive and negative easily seen

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18
Q

disadvantage of candlestick charts

A

Harder to calculate and maintain by hand

patterns must be studied

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19
Q

which chart can be constructed using intraday trading data

A

Point & Figure (P&F) charts

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20
Q

in which chart is volume usually excluded

A

Point & Figure (P&F) charts

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21
Q

Box size meaning in Point & Figure (P&F) charts

what does a smaller box mean

A

dollar amount representing one box

The smaller the box size the more sensitive the chart

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22
Q

Reversal size meaning in Point & Figure (P&F) charts

A

Column of X’s change to O’s or vice versa when the price reverses by this amount ($ amount needed to record X or O)

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23
Q

advantage of Point & Figure (P&F) charts

A

Information is compressed

resistance and support levels are easier to spot.

They are better price targets for buy/sell signals

Good charting method for continuous markets (commodities, currencie, crypto?)

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24
Q

disadvantage of Point & Figure (P&F) charts

A

They do not use time and volume as a consideration.

There are many and unique patterns to P&F charts that must be studied.

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25
Q

Scale – Arithmetic vs. Logarithmic charts

A

Changes charts to include percent changes rather than absolute price changes.

i.e. an increase from $10 to $20, is $10 or 100%, an increase from $100 to $110 is the same $ change but only 10%.

Logarithmic best used for long term charts and for > 20% increases in security values.

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26
Q

A DIRECTIONAL TREND

A

one of rising or falling prices from which a profit can be generated with a trend following method.

Trends tend to continue, rather than reverse

as long as it continues, is how the technician profits (vag reason why)

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27
Q

what do we mean by TRENDS are FRACTAL

A

their behavior is the same regardless of period.

Long term, intermediate and short term minute trends all behave the same.

They are made up the same way. They all break down in the same fashion

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28
Q

what is the larger primary trend made of

A

made up of smaller intermediate corrections, of which are made up of even smaller minor trends

If we dissect these minor trends, we will again find that these same trends are made up of the same trend patterns though at a much smaller degree, such as to the minutes.

This comes back to the fractal nature of trends.

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29
Q

definition of a trending price

A

remain headed in one direction and they tell us that there is an imbalance of demand and supply

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30
Q

what type of trend if we have more aggressive buyers (and sellers)

A

we have an uptrend (downtrend)

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31
Q

TRADING RANGES (or sideways trends) occur when?

A

occur when peaks and troughs appear at roughly similar levels

They can also be called CONSOLIDATIONS or CONGESTION AREAS or RECTANGLE FORMATIONS.

32
Q

when does a resistance level becomes a resistance zone?

A

when more than one resistance level occurs a roughly the same price. The opposite is true for support levels.

33
Q

Ironically when prices reach round numbers, what is the tendency?

A

to buy and sell increases, because people tend to think in terms of round numbers

we should determine entry and exit points based on the technical situation as opposed to these subconsciously important round numbers

34
Q

what is a breakout?

A

If prices break below a support zone or above a resistance zone

35
Q

DONCHIAN RULE (simple, but it works)

A

Buy when the highest high over the past 4 weeks has been broken, and sell when the lowest low over the past four weeks has been broken

Best used with price buy breakouts, sell breakouts

36
Q

How are important reversal points determined?

A

DEMARK METHOD

GANN TWO-DAY SWING METHOD

GANN TWO-DAY SWING METHOD

37
Q

DEMARK METHOD

A

In a low bar, we’d look for 2 bars with higher lows on either side of the on the suspected trough bar

The opposite is true for a resistance point or peak, we’d look for 2 bars with lower highs one either side of the peak.

38
Q

GANN TWO-DAY SWING METHOD

A

To find a support point, or trough, a low bar is identified

Once it is identified, the 2 following trading days are observed. If these 2 days have higher highs than the low bar, then we’d consider the low bar a support point.

The opposite is true for a resistance point or peak. The high bar is followed by 2 successive bars with lower lows.

39
Q

HIGH VOLUME METHOD

A

High volume on the reversal day, indicates that larger than usual activity occurred on that day – ultimately stopping the rally or sell off

This is a strong confirmation signal that previous trend may come to an end

40
Q

problem with a steep angle of a trend

A

the more powerful the trend is, but this is not sustainable and we can expect a reversal in the trend if it gets too overheated

41
Q

when is an uptrend overheated

A

Usually any uptrend steeper than a 45-degree angle

42
Q

Some studies show that trends usually last for which proportion of the time?

A

20% of the time

43
Q

How are up trends spotted?

A

USING A REGRESSION LINE

USING TREND LINES

44
Q

how to use a recession line?

A

We would run a regression to determine the mathematical equation that would minimize the distance between all data points and the theoretical line

–> The line is said to be the BEST FIT to the data

We can also calculate standard deviations around this best fit line that will encompass most of the data

The outliers – the prices outside the standard deviation lines are considered anomalies to the technical analyst and they signify that the regression line may be flattening (the trend may be changing).

Most trendlines in Technical Analysis DO NOT use regression analysis but are drawn simply after 2 or more touch points

45
Q

how to use trend lines

A

the lines are drawn between lows (support
points) when the line is rising (i.e., uptrend) and it is drawn between
tops (resistance points) when the price is declining (downtrend

46
Q

A problem with trend lines

A

that they may not be a straight line

Often prices, especially in a speculative bubble or in a panic, will ACCELERATE upward or downward and run away from a standard, straight trend line. In this case, the trend line must be adjusted continually to account for the price action’s acceleration

47
Q

The opposite of an accelerating trend line

A

DECELERATING trend line

This is called a FAN LINE

Fan lines are regular trend lines that are being broken without any obvious reversal in direction and then being redrawn to account for each new support level.

48
Q

As a a general rule of thumb, after 3 fan lines are drawn, what should we expect?

A

we should expect a reversal in direction

49
Q

Some general rules about trend lines

A
  1. The longer and the more times that the drawn line is touched by prices, the more significant it is when the trend line is finally broken.

2 . The steeper the trend line, the more unsustainable it is, the sooner it will be broken.

50
Q

Retracements

A

Retracements are the corrections to the principal trend

They are counter trend moves (down in an uptrend, and up in a downtrend)

Both up and downtrends usually require only a 33% retracement of a previous trend.

51
Q

opportunity of Retracements in healthy trends

A

can give a second chance to those who missed the earlier stages of the trend - a second chance to buy in an uptrend or a second chance to sell in a downtrend

52
Q

The end of a retracement is usually a

A

The end of a retracement is usually a support/resistance point of the longer trend

53
Q

Usual retracement levels are what? (Dow Theory)

A

33.33%

50%

66.66%

54
Q

Usual retracement levels are what? (FibonacciTheory)

A

38.2%

50%

61.8%

55
Q

PULLBACKS AND THROWBACKS

A

a variation on Retracements, they occur after a breakout in a horizontal support or resistance zone.

56
Q

A THROWBACK

A

a price retracement back to the breakout zone on an upward breakout

57
Q

A PULLBACK

A

a price retracement back to the breakout zone on a downside breakout

58
Q

BREAKOUTS

A

Occurs when price breaks through a prior support or resistance level or zone, or a trend line

Signals a change in supply and demand and that a new trend is beginning.

59
Q

Breakout Confirmation Methods

A

Closing price (Filter)

–> Intraday penetrations likely false
–> 2 days/bars
–> Tradeoff between probability vs. opportunity

Price or percent filters

–> Use of a breakout zone
–> 3% rule

Time since breaking support/resistance

–> 2 days +
–> Premise is that if prices remain outside the breakout zone for a certain time, it must be real.

Volume

–> Usually increasing

Volatility

60
Q

Average True Range (ATR)

A

a moving average of the True Range (difference between each high and low bar over some past period)

a wider filter to account for false breakouts in highly volatile securities

61
Q

True Range is calculated as the greatest of:

A

Difference between current bar high and low

Absolute value of the difference of the prior bar close and current bar high

Absolute value of the difference of the prior bar close and current bar lows.

62
Q

effect of price volatility increase on ATR

A

daily True ranges will expand and ATR will be larger

This means that highly volatile securities will have a wider filter to account for its likelihood of a false breakout because of its higher volatility

63
Q

Pivot Points

A

Used for confirmation with day trading to determine support/ resistance level and as confirmations of breakouts

Using the previous bar, P (pivot point) = (H + L + C) / 3.

To calculate support/resistance bands:
–> R1 = (2 x P) – low previous bar
–> S1 = (2 x P) – high previous bar

The theory behind this technique is that as time passes the effect of past prices diminishes

It’s use is questionable

64
Q

Reward/Risk Ratio

A

Usually breakouts from support or resistance run to the next zone of support or resistance, giving the investor a price objective for the breakout.

From that price objective a return/risk ratio should be calculated.

The return/reward is the difference between the entry and exit. price. The risk is the amount the price must go against the entry price before exited on a stop.

Traditionally the reward/risk ratio should be 3 to 1.

65
Q

The moving average

A

one of the oldest tools used by Technical Analysts

Moving averages are used to smooth erratic data and show trends.

66
Q

Most popular moving averages used by analysts

A

10 – 2 weeks, 20 – 3 weeks

20 – approximately 1 month of business days

50 – 2 months

100, 150

200 – almost one year 250 trading days

67
Q

Length of Moving Averages

A

The longer the SMA, the less influence each data point has on the SMA.

The longer the SMA, the slower it is to change direction but the more reliable it is.

The shorter the SMA, the faster it changes direction, but more frequently it errs.

68
Q

Crossover signals using more than one SMA

A

Shorter SMA to longer SMA – crossover suggests change in trend.

Often late, relative to the reversal point, but more reliable.

Crossover points often turn into support and resistance levels.

Never use in a sideways market

69
Q

Other Types of Moving averages

A

Exponential – other most popular

70
Q

Exponential – other most popular

A

The most recent data has the most effect on the average. Old data is less important.

Determine Weight current = 2/(no days)+1

Determine Weight moving average = (100 - Weight current)

EMA today = (Weight current x today’s data) + (Weight moving average x yesterday’s EMA)

Thus old data becomes diminished over time and more emphasis is placed on current data.

In experiments, difference in results between SMA and EMA are usually small.

71
Q

Envelopes percentage

A

used in trading ranges

Calculated as taking a percentage of a moving average and creates two symmetrical lines.

The percentage is determine by experiment and shouldn’t be too large or small.

Crossing the bands becomes a trigger for buy/sell.

One of biggest problem is that they do not account for the changing volatility of the underlying.

72
Q

Bands

A

Same as envelope except adjusted for volatility (standard deviation)

73
Q

Channel

A

Trading range tipped at an angle such that it trends up/downwards

74
Q

Bollinger Bands

A

Named for John Bollinger, CFA, CMT who developed the bands.

Bands use standard deviation to measure volatility.

+/- 2 standard deviations of a 20 period SMA (simple moving average).

From statistics we know that approximately 95% of all price action should fall within these bands .

75
Q

How to use bands and envelopes

A

Tightening bands represent shrinking volatility, sharp price move expected.

Broadening bands represent increasing volatility and potentially strong trend.

When outer edge of a band is broken, empirical evidence suggests buy the breakout, just like you would do with broken resistance.

MA can become stops, or support resistance.

Calculate %B (bandwidth indicator): difference between high band and low band, which represents increased volatility; breakouts can be confirmed with this, therefore volatility can warn of trend change.

FINA 408 Tecnical Analysis (16 decks)

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