Technical Analysis Flashcards
Principles, applications, underlying assumptions =
Study of collective market sentiment (buying and selling, where the market equates the two at any one moment).
Price and volume reflect this collective behavior/sentiment. ASSUMPTION: prices reflect both rational and irrational investors - EFFICIENT MARKETS HYPOTHESIS DOES NOT HOLD
Contrasts with fundamental analysis.
Advantages: price and volume are observable, not subject to assumptions and restatements in the way. TA can be applied to assets that do not have cash flows (commodities)
Drawbacks: where price/volume data is poor and does not truly reflect supply and demand (illiquid markets, those where intervention occurs [fx markets], TA is less useful.
Charts =
Line, bar, candlestick, point and figure, volume
Relative strength analysis =
graph shows ratio of an asset’s closing price to a benchmark value (stock index, comparable asset). Increasing trend shows outperformance/positive relative trend, vice versa for decreasing trend.
Trends, trend lines, break—s, — levels, change in polarity =
Uptrend: prices consistently reaching higher highs and retracing to higher lows - demand is increasing relative supply. [opposite for downtrend]
Uptrendline: connects increasing lows
Breakout/down: price crosses the trendline by what the analyst considers a significant amount [breakdown for an uptrend, breakout for downtrend]
Resistance level: selling is expected to emerge that prevents further price increases [opposite for support level] NB tend to appear around psychologically significant prices such as round numbers (100), historic highs/lows.
Change in Polarity: breached resistance levels become support levels
Reversal patterns (Head and Shoulders) =
occurs when a trend approaches a range of prices but fails to continue beyond that range.
HEAD AND SHOULDERS is an example. If prices fall below the neckline after the second shoulder then they ‘should’ continue to fall by the height of the HAS pattern.
Reversal Pattern (double/triple top/bottom) =
similar to HAS, indicating weakening in the buying pressure that drives and up trend.
Price reaches a resistance level.
The size of the pattern can be used to project a price target for the next down trend (same as for HAS)
DOUBLE/TRIPLE BOTTOM IS THE OPPOSITE
Continuation patterns (triangles) =
suggest a pause in the trend. Triangles form from LOWER HIGHS AND HIGHER LOWS over time.
Can be symmetrical, ascending (higher lows and a resistance level) or descending (opposite of asc)
Suggest that buying and selling pressure have become roughly equal TEMPORARILY, but do not imply a change in direction of the trend.
The size of the triangle (the difference between the two trendlines when the pattern forms) can be used to set a price target (assuming that the triangle breaks and the previous trend continues)
Also RECTANGLES.
Price based indicators: moving average lines =
mean of the last n days closing prices. larger n = smoother line.
Moving average lines are often viewed as support or resistance levels.
Can make changes in trend easier to see.
Long term moving averages crossing short term ones: GOLD CROSS, DEAD CROSS - ‘buy’/’sell’ signal.
Shows a change in trend.
Bollinger Bands =
based on the std dev of closing prices over last n periods.
Can be set at, for example, 2 std devs above and below the n-period moving average - GAP WIDENS AS VOL INCREASES ie std dev is increasing.
Prices moving above/below the bollinger bands can be thought of as OVERBOUGHT/SOLD.
Can underly a contrarian trading strategy - sell when the price is at the upper band and vice versa.
Oscillators (x4) =
Values are scaled to oscillate around a value/between two values.
Oscillator charts can also be used to identify convergence or divergence of the oscillator and market prices.
Convergence suggests price trend is likely to continue.
Rate Of Change Osc (ROC)
Relative Strength Index (RSI)
Moving Average Convergence/Divergence (MACD)
Stochastic Oscillator
ROC or momentum oscillator =
100 times the difference between the latest closing price and the closing price n periods earlier.
Will cause oscillation around 0.
Buy on change from -ve to +ve in an uptrend, vice versa for downtrend.
Can use the ratio of the two prices, which results in oscilation around 100.
RSI =
ratio of total price increases to total price decreases over n periods.
Ratio is then scaled to oscillate between 0 and 100.
High values > 70, OVERBOUGHT.
Low values < 30, OVERSOULED.
MACD =
exponentially smoothed moving averages - more recent observations weighted more heavily.
MACD line: differnce between two exponentially smoothed moving averages of the price
SIGNAL line: exponentially smoothed moving average of the MACD line.
Lines oscillate around zero but not bounded.
Same trading signals as line crosses for moving averages (price based indicators)
Stochastic oscillator =
Lows and highs are based on a ‘recent period’ - eg 14 days.
%K - diff between recent price and low, as a percentage of the difference between recent high and low (when recent price is at the high –> 100%)
%D - 3 period average of %K line.
Crossing of lines has same trading signals as MACD.
Non-Price-Based indicators (sentiment) =
Look at investor sentiment and capital flows to gain insight into emerging trends.
Rather than look at price and volume to make judgments about investor sentiment
