TECHNICAL ANALYSIS

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TECHNICAL ANALYSIS

• 26 October 2006
• by
• Chakrit Puechpan

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Introduction

• What is Technical Analysis?
• Philosophy or Rationale
• Market action discounts everything
• Prices move in trends
• History repeats itself
• Technical VS Fundamental Forecasting

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Some Technical words

• Price Patterns
• Patterns that appear on price charts and that
  have predictive value
• Trend
• Refers to the direction of prices
• Overbought
• When prices have risen too far too fast and are
  ripe for a downward correction
• Oversold
• When prices have fallen too far too fast and are
  ripe for an upward correction
• Oscillators
• Indicators that determine when a market is in an
  overbought or oversold condition
• Divergence
• The phenomenon of price and indicators moving in
  opposite directions
• Whipsaw
• To witness sharp trend reversals in prices,
  causing most indicators to generate many false
  signals

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The Bar Chart
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Candlestick Chart
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DOW THEORY

• The market has three trends
• Up trend, Down trend and Sideway
• 2. A trend has 3 parts
• primary, secondary and minor

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Primary Secondary Trend
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Minor Trend
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Classical Chart Analysis

• Support and Resistance
• Trendlines
• Trading Range (Channel)
• Price patterns

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Support and Resistance
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Trendlines

• Draw a trendline through the edges of congestion
  areas
• The most important feature of a trendline is its
  angle
• Trendlines show the action of bulls and bears

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Trendline
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Trendline
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Trendline
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Channel
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Price Patterns

• Five most major reversal patterns
• Head Shoulder
• Triple top and bottom
• Double top and bottom
• Spike top and bottom
• Rounding

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H S
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Rounding
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Double Triple top
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Double Bottom
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Spike top
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Computerized Technical Analysis

• CTA is more objective than classical charting
• Two major Groups of indicators
• Trend-following indicators-Moving average
• Oscillator- Stochastic, Rate of Change
  Momentum,Relative Strength Index (RSI)

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Moving Average

• The MA is a follower not a leader
• Good MA is sensitive enough to generate early
  signal but insensitive enough to avoid noise
• Two popular combination- 5 and 25
• Simple MA P1P2... Pn

N
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Moving Average
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Simulation results (SET)
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Oscillator (OSC)

• The OSC is useful in non-trending market
• Three situation when OSC is most useful
• OSC reaches an extreme reading upper or lower
  end
• A divergence b/w OSC and price
• The crossing of the zero line

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Momentum (Rate of Change)
M Ptod - Ptod-n   ROC Ptod  
Ptod-n
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Stochastic

• A fast line - K
• A slow line - D
• K Ctod - Ln x 100
• Hn Ln
• D 3 day sum of (Ctod Ln) x 100
• 3 day sum of (Hn Ln)
• Ctod todays close
• Ln the lowest point for selected no.of days
• Hn the highest point for selected no.of days
  
• N the no.of days

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Relative Strength Index
RSI 100 - 100 1 RS RS Avg.
of net up closing changes for a selected
day Avg. of net down closing change for the
same period
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MACD
EMA Ptod x K EMAyest x (1-K) Where
K 2 N1 N The no.of days
in the EMA MACD - Moving Average Convergence
Divergence MACD EMA12 EMA26 (Fast
MACD) Signal Line 9 day EMA of Fast MACD
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Momentum
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Stochastic
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Stochastic
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Relative Strength Index (RSI)
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MACD
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MARKET GURUs PRICE PREDICTION
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Bollinger Bands

• Developed By John Bollinger
• BBs are an indicator that allows users to compare
  volatility and price level
• The indicator consists of three bands
• SMA in the middle
• An upper band-SMA2SD.
• An lower band-SMA-2SD.

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Bollinger Bands
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FIBONACCI

• Fibonacci (1170-1240) lived and worked as a
  merchant and mathematician in Pisa, Italy
• Fibonacci summation series 1,1,2,3,5,8,13,21,34,5
  5,..
• The ratio of any number to its next higher number
  approaches 0.618
• The ratios or alternate numbers approach 2.618 or
  its inverse 0.382
• Fibonacci percentage retrenchments or projection
  are 61.8, 38 and 50

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Fibonacci
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Fibonacci Retrenchment
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Fibonacci Projection
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Candlestick

• Candlestick charts are the oldest type of charts
  use for price prediction
• Date back to the 1700s,when they were used for
  predicting rice price
• Sokuta Honma is said to have executed over 100
  consecutive winning trades!!
• Sakatas method is the first verifiable beginning
  of pattern recognition

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Type of Chart

• The signals are created by the change in investor
  sentiment

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Common Candlestick Terminology
White Candlestick
Hammer
Doji Line
Spinning top
Black Candlestick
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HAMMER
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Engulfing
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STAR FORMATION
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Doji Star
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Reversal patterns
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Technical Checklist

• What is the direction of overall market?
• Where are the important support and resistance
  level?
• Are there any major reversal patterns visible?
• Are the oscillators overbought or over sold?
• What about Fibonacci retrenchments or projection?

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