technical analysis - basic level research & development department, mex. all rights reserved

Technical Analysis- Basic Level

RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Disclaimer

This presentation is being provided solely for informational purposes. Mercantile Exchange Nepal Limited does not warrant the accuracy or completeness of any information provided in this presentation and such information is provided without any correctness or condition of any kind. Neither Mercantile Exchange Nepal Limited nor any other person associated with the creation of this presentation or its contents shall be liable or responsible to any person for any harm, loss or damage that may arise in connection with the use of this presentation, including without limitation, any indirect, third party, or consequential damages.


Flow of Presentation

• What is Technical Analysis?• Basis of Technical Charts• Chart Analysis• Support & Resistance Levels• Leading Vs Lagging Indicators• Strengths of Technical Analysis• Weaknesses of Technical Analysis


What is Technical Analysis?

• Forecasting of future financial price movements based on past price movements

• Weather Forecasting-does not result in absolute predictions about the future

• Helps investors anticipate what is “likely” to happen to prices over time

• Uses a wide variety of charts


Basis of Technical Analysis

• Charles Dow propagated the Dow Theory• Laid the foundation for modern technical

analysis• Pieced together from the writings of

Charles Dow over several years



• Price Discounts Everything Price reflects all information Represents the fair valueReflects the sum knowledge of all

participants, including traders, investors, etc.

Utilizes the price to interpret the nature of the market



• Price Movements are not Totally Random

Prices trend but sometimes prices do not trend too

Possible to identify a trend, invest or trade

Possible to identify both short and long-trends



• What is more important than why Fundamentalists are concerned with why

the price is what it is Technicians are concerned with What is the current price What is the history of the price

movements?


Chart Analysis

• Supports technical analysis• Prices Open-Price at which the market opens at High-Highest Price attained Low- Lowest Price reached Close-Price at which the market closes at


Chart Analysis

Line Chart-Uses only the Closing Prices


Chart Analysis

Bar Chart - Open, High, Low and Closing Prices


Chart Analysis

Japanese Candlesticks


Support & Resistance• Represents key levels where demand and

supply meet• Prices are driven by excessive demand

and supply• Demand is synonymous with bulls &

buying• Supply is synonymous with bears &

selling• If the levels are broken, the relationship

between demand and supply has changed


Support & ResistanceSupport• Price level at which demand is

strong enough to prevent it from declining further

• Normally lies below the current price

• As price declines towards support, buyers become more inclined to buy and sellers become less inclined to sell

• When price reaches support level, demand will overcome supply, preventing prices from further decline RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Support & Resistance

Resistance• Price level at which selling is strong

enough to prevent the prices from rising further

• Normally lies above the current price

• As price rises towards resistance, sellers become more inclined to sell and buyers become less inclined to buy

• When price reaches resistance level, supply will overcome demand , preventing prices from further rise RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Support & Resistance


Leading Indicators

• Leading indicators are designed to lead price movements

• Represent a form of price momentum over a fixed look-back period

• Some of the more popular leading indicators include Relative Strength Index (RSI)


Leading Indicators

• Momentum Oscillators Momentum measures the rate-of-change

of a security's price As the price of a security rises, price

momentum increases Once this rise begins to slow, momentum

will also slow As a security begins to trade flat,

momentum starts to actually decline from previous high levels


Leading Indicators

• Benefits of Leading Indicators Early signaling for entry and exit is the

main benefit Leading indicators generate more signals

and allow more opportunities to trade Leading indicators are best used in

trending markets


Leading Indicators

• Drawbacks of Leading IndicatorsWith early signals comes the prospect of

higher returns and with higher returns comes the reality of greater risk

More signals and earlier signals mean that the chances of false signals and whipsaws increase


Lagging Indicators

• Follow the price action and are commonly referred to as trend-following indicators

• Trend-following indicators work best when markets or securities develop strong trends

• These indicators are not effective in trading or sideways markets

• Some popular trend-following indicators include moving averages (exponential, simple) and MACD.


Lagging Indicators

• Benefits of Lagging Indicators Ability to catch a move and remain in a

move Indicators can be enormously profitable

and easy to use


Lagging Indicators

• Drawbacks of Lagging Indicators Lost when a security moves in a trending

range Signals tend to be late


Strengths of Technical Analysis

• Focus on Price Sense to focus on price movements Price movements usually precede

fundamental developments Technicians are automatically focusing

on the future



• Supply, Demand and Price Action Use the OHLC when analyzing the price

actions OHLC reflects forces of demand and

supply Higher prices reflect increased demand

and lower prices reflect increased supply



• Support/Resistance Identify support and resistance levels Prices move within a confined range for

an extended period which means supply and demand are deadlocked

If prices moves out of the range, it means either supply or demand has changed



• Pictorial Price History Reactions prior to and after important

events. Past and present volatility. Historical volume or trading levels.



• Assist with Entry Point Help with timing a proper entry Fundamental analysis decides what to

buy and technical decides when to buy


Weaknesses of Technical Analysis

• Analyst Bias Subjective and personal biases can be

reflected Important to be aware of such biases If the analyst is a perpetual bull, then a

bullish bias will overshadow the analysis If the analyst is a disgruntled eternal bear,

then the analysis will probably have a bearish tilt



• Open to Interpretation Different technicians will paint different

scenarios or patterns Both will come up with logical support to

support their notion Technical analysis is more like an art than

a science



• Always Another Level Always another important level close at

hand Accused of sitting on the fence and failing

to spot the developing trend



• Trader’s Remorse Not all technical signals and patterns

work Each Asset class will have its own

idiosyncrasies


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technical analysis - basic level research & development department, mex. all rights reserved

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