Technical Analysis Flashcards
(29 cards)
What is the difference between Fundamental Analysis and Technical Analysis
Fundamental analysis considers the value of the company. This ultimately depends on the value of its assets and the profits it can generate. Fundamental analysts are concerned with the difference between a stock’s value, and the price at which it is trading.
Technical analysis is concerned with price action, which gives clues as to the stock’s supply and demand dynamics – which is what ultimately determines the stock price. Patterns often repeat themselves because investors often behave in the same way in the same situation. Technical analysis is concerned with price and volume data alone.
What are the most useful types of charts?
In Trading, there is too much information. You wanna cut off the useless information and focus on the useful.
Two types of charts that we wanna use are:
1) Line charts - A chart that connects every price point throughout time with a line.
2) Candlesticks Charts -
What is a candlestick?
Candlestick is something that we draw for each timespan (day/hour). It will show, what’s the opening and close price of a stock, together with high and low.
| (High) 13 \_\_\_ (Close) 12 | | | | |\_\_ | (Open) 10 | | (Low) 9
With candlestick, we have much more access to important information about what happened (i.e. during a day)
Candle is a graphical representation of supply and demand throughout its lifespan.
What are the different types of Candlesticks?
- Big Candles
- Dojis
- Gravestone
- Dragonfly
- Shooting Star
- Hammer
- Morning Doji Star / Evening Doji Star
- Bearish Harami / Bullish Harami
- Engulfing Bullish / Engulfing Bearish
What does Big Candle tell us about supply and demand?
Big Green Candle Has an unusually long white body with a wide range between high and low of the day. Prices open near the low and close near the high. Considered a bullish pattern.
Big Red Candles are considered a bearish pattern
What do dojis tell us about supply and demand
Dojis are one of the most useful candlesticks to use.
Doji is candle that opens at a certain price, goes up, goes down and closes at the same price that it opened at. Dojis form when the opening and closing prices are virtually equal.
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That tells us that there is very big indecision. Alone, dojis are neutral patterns. When used together with other candlesticks, they might tell us more.
What does Gravestone tell us about supply and demand
Gravestone: The long upper shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
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What Does Dragonfly tell us about supply and demand
Dragonfly: The long lower shadow suggests that the direction of the trend may be nearing a major turning point. It is formed when the opening and closing price of the underlying asset are equal and occur at the high of the day.
The most consistent pattern
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What does shooting star tell us about supply and demand
Shooting Star A black or a white candlestick that has a small body, a long upper shadow and a little or no lower tail. Considered a bearish pattern in an uptrend.
A Shooting star - Gravestone
What does hammer tell us about supply and demand
Hammer A black or a white candlestick that consists of a small body near the high with a little or no upper shadow and a long lower tail. Considered a bullish pattern during a downtrend.
A Hammer, is very similar to Dragonfly
What does Bearish/bullish Harami tell us about supply and demand
Bearish Harami Consists of an unusually large green body followed by a small red body (contained within large green body). It is considered as a bearish pattern when preceded by an uptrend.
“The strength of the buyers is not there anymore, the next day they open it lower”, It means the movement is exausted.
Bullish Harami Consists of an unusually large red body followed by a small green body (contained within large red body). It is considered as a bullish pattern when preceded by a downtrend.
What does Engulfing bullish/bearish tell us about supply and demand
Engulfing Bullish Consists of a small red body that is contained within the followed large green candlestick. When it appears at bottom it is interpreted as a major reversal signal.
Engulfing Bearish Consists of a small green body that is contained within the followed large red candlestick. When it appears at top it is considered as a major reversal signal.
What does morning/evening doji star tell us about supply and demand
Morning Doji Star Consists of a large red body candlestick followed by a Doji that occurred below the preceding candlestick. On the following day, a third green body candlestick is formed that closed well into the red body candlestick which appeared before the Doji. It is considered as a major reversal signal.
Evening Doji Star is exact opposite.
What are trends?
Trends are something that is at the core of technical analysis. The principal is that
- prices move in trends
- history tends to repeat itself
Trend is just a direction.
Higher highs, higher lows - Uptrend
Lower Highs, lower lows - Downtrend
With the lows, we can draw a trend line. Whenever, the chart breaks, that line, it means that the trend is over.
The basic tenet of TA says, that if support line is broken, then it becomes the resistance and vice versa
What are channels?
Usually, when a stock is moving, either upward, downward or to the side, there is a trend that’s located on the lows and there is one on the highs.
Then a trend might form a channel. It is unlikely, that a stock will break the channel. Most likely, it will fluctuate within a channel.
What are support and resistance lines?
Something that supports price, doesnt let fall below it.
Resistance is something that the price can’t go through.
Support and resistance is consistent because of people buying/selling on the trend lines. We can consider it as a self-fulfilling prophecy - If everyone believes that the support line is gonna hold, then they buy at the support line, thus providing a surge in demand, which in turn increases the price.
If support line is broken, then it becomes the resistance and vice versa
When it comes to intraday trading support and resistance tend to be much stronger
What are the types of chart patterns?
Chart patterns give us indication of either continuation or reversal. Some patterns which historically caused some type of movement, with heighest probability will behave the same way.
- Head and Shoulders (like a self-fulfilling prophecy, can find something on finviz)
- Double Top
- Double Bottom
- Triangles / Wedges (work the same)
- Cup and Handle and Rounding Bottom (much more rare)
What does Double Top pattern mean?
Double Top is a chart that topped at two different locations. It comes to some high, and is not able to break it, then came back down ->
What that tells us: This price level is a resistance for this stock, this stock cannot break it.
It is much more likely, that the prices will go down, instead of breaking that level.
If the price reaches that resistance multiple times, it may usually mean, that there is a big seller at this price.
On top of that everybody knows it and its a self fulfilling prophecy, it has other fundamentals. Also, when we look on an intraday chart, double top has much more meaning.
What is Double Bottom patten?
Double Bottom chart bottoms a stock at two different locations. There are many buyers, that think, that it is a reasonable price and do not let fall below it.
It usually means, that the price will bounce back top.
How does Ascending Triangle work?
Ascending triangle has a resistance line that is horizontal, and support line that is going up. The price is being wedged inside the triangle
It means, that buyers are being more aggressive, and are willing to buy at a higher price (earlier).
Usually, the side that is more aggressive, will win and break the triangle (in ascending triangles case - the buyers) - so, most often the price will grow.
However, we as traders, do not guess in which direction it’s gonna break, we either short or long depending where it breaks. Following a basic tenet of technical analysis - broken support turns into resistance and vice versa.
How does Descending Triangle work?
Descending Triangle is the opposite of Ascending Triangle.
In this case, the sellers are being more and more aggressive
Similarly, when the break happens, we want to go in that direction, if it happens bottom, we short
What is a wedge?
Wedge is another type of triangle. It can be either ascending, or descending (upward, downward wedge)
Buyers and Sellers are being more impatient - buyers are buying at higher prices and sellers are selling at lower prices.
The price is being wedged. Similarly, to other triangles - when a side wins, then its gonna break and the old resistance will become support or vice versa
(Sometimes, the new resistance will get tested and will fail, however we as traders, do not need to be correct all the time, but most of the time)
What is Cup and Handle pattern?
Is another proven and consistent pattern.
You have price that’s dropping, then it drops slower, eventually it grows and grows fast. Then after it does that, it reconciliates. Then we expect it to go up as much as the height of the cup.
What is Volume?
When speaking about TA, we say, that it’s studying price movement and volume.
Volume is basically the quantity of shares that were traded. Volume (quantity) actually confirms price - if there is a price movement, but there is no volume to support it, it’s not as meaningful.
Volume precedes price - when something happens and the stock is gonna move, you’re gonna see a lot of volume coming in, before the price actually moves.
