TECHNICAL ANALYSIS

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TECHNICAL ANALYSIS

• Applied Portfolio Management
• Ali Nejadmalayeri

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Price Movements

• The Dow Theory
• Major trends like tides in ocean
• Intermediate trends like waves
• Short-run movements like ripples
• Technical indicators
• Volume
• Moving averages
• Relative strength
• Stochastic

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Major Indicators

• Simple Moving Averages (SMA)
• Exponential Moving Average (EMA)
• Relative Strength Index (RSI)
• Moving Average Convergence Divergence (MACD)
• Money Flow Index (MFI)
• Rate-of-Change (ROC )
• Fast and Slow Stochastic (KD)
• Williams R

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Moving Averages Related

• Simple Moving Average (SMA)
• Taking average price over past N period
• Exponential Moving Average (EMA)
• Taking time exponential average. An exponentially
  smoothed moving average (EMA) gives greater
  weight to the more recent data, in an attempt to
  reduce the lag.
• Moving Average Convergence Divergence (MACD)
• An indicator developed by Gerald Appel that is
  calculated by subtracting the 26-period
  exponential moving average of a given security
  from its 12-period exponential moving average.

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Oscillators

• Relative Strength Index (RSI)
• RSI is plotted on a vertical scale from 0 to 100.
  Values above 70 are considered overbought and
  values below 30, oversold.
• Fast and Slow Stochastic (KD)
• The indicator oscillates between 0 and 100, with
  readings below 20 considered oversold and
  readings above 80 considered overbought. A
  14-period Stochastic Oscillator reading of 30
  would indicate that the current price was 30
  above the lowest low of the last 14 days and 70
  below the highest high.
• Money Flow Index (MFI)
• It compares "positive money flow" to "negative
  money flow" to create an indicator that can be
  compared to price in order to identify the
  strength or weakness of a trend. The MFI is
  measured on a 0 to 100 scale and is often
  calculated using a 14 day period.

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Oscillators

• Rate-of-Change (ROC)
• A momentum oscillator that measures the percent
  change in price from one period to the next. The
  plot forms an oscillator that fluctuates above
  and below the zero line as the rate-of-change
  moves from positive to negative.
• Williams R
• Developed by Larry Williams, Williams R is a
  momentum indicator much like the Stochastic
  Oscillator and is especially popular for
  measuring overbought and oversold levels. The
  scale ranges from 0 to -100 with readings from 0
  to -20 considered overbought, and readings from
  -80 to -100 considered oversold. Typically,
  Williams R is calculated using 14 periods and
  can be used on intraday, daily, weekly or monthly
  data.

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Bands

• Bollinger Bands
• An indicator that allows users to compare
  volatility and relative price levels over a
  period of time. It consists of three bands
  designed to encompass the majority of a
  security's price action. Prices will often meet
  resistance at the upper band and support at the
  lower band.
• Parabolic SAR
• An indicator that sets trailing price stops for
  long or short positions. Also referred to as the
  "stop-and-reversal indicator", Parabolic SAR is
  more popular for setting stops than for
  establishing direction or trend. If the trend is
  up, buy when the indicator moves below the price.
  If the trend is down, sell when the indicator
  moves above the price.

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Research on Technical Analysis

• It seems at best, overall its a 50-50 bet!
• There are some indicators that seem to work, such
  as sell-buy signals based on leading indicators
  like RSI.
• For an in-depth econometric analysis of technical
  indicators consult with Foundations of Technical
  Analysis Computational Algorithms, Statistical
  Inference, and Empirical Implementation, with
  Harry Mamaysky and Jiang Wang, Journal of Finance
  55(2000), 1705-1765. abstract download pdf
  (8Mb)

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Put in Use

• Now that it seems we have some idea what
  technicians do, lets make a use of it
• Remember the PFCB chart. Now lets devise a
  strategy bases on what you have seen, so
• BUY?
• or
• SELL?
• Well, now after almost six months its easy to
  see if you were right!

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