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TECHNICAL ANALYSISSpecial Emphasis to Candlestick Chart Formations
Session III
What is Technical Analysis ?..
Technical Analysis is the forecasting of
future financial price movements based on
an examination of past price movements.
Like weather forecasting, technical analysis
does not result in absolute predictions
about the future. Instead, technical analysis
can help investors anticipate what is "likely"
to happen to prices over time. Technical
analysis uses a wide variety of charts that
show price over time.
Technical Analysis Through Chart Analysis
Chart: A price chart is a sequence of prices plotted over a specific time
frame. In statistical terms, charts are referred to as time series plots.
Picking Time Frame: Time frame used for forming a chart depends on the
compression of the data. Intraday, Daily, Weekly, Monthly, quarterly and
Annual data.
Types Of Charts
Candlestick Chart
• Originating in Japan over 300 years
ago, candlestick charts have become
quite popular in recent years. For a
candlestick chart, the open, high, low
and close are all required. A daily
candlestick is based on the open
price, the intraday high and low, and
the close. A weekly candlestick is
based on Monday's open, the weekly
high-low range and Friday's close.
• Candlestick charts are said to have
been developed in the 18th century
by legendary Japanese rice trader
Homma Munehisa.
• The method was picked up by Charles
Dow around 1900 and remains in
common use by today's traders of
financial instruments.
Trend
• One of the most important concepts in technical analysis is that of trend. A trend is
nothing more than the general direction in which a commodity or market is
headed. There are mainly three types of trends are there.
• 1.Up trend
• 2.Down trend
• 3.Horizondal or Range bound
Supports And Resistances
Support and resistance analysis is an important part of trends because it can be used to
make trading decisions and identify when a trend is reversing.
Volume
• Volume is simply the number of shares or contracts that trade over a given period
of time, usually a day. The higher the volume, the more active the security. To
determine the movement of the volume (up or down), chartists look at the volume
bars that can usually be found at the bottom of any chart.
Technical Analysis: Chart Formations
Chart patterns/formations are one of the most important tool for price forecast in technical analysis. These formations may seen in Candlestick chart or Bar chart. Important and most common of them are:
1. Head and Shoulders
2. Cup and Handle
3. Double Top and Bottom
4. Triangles
5. Flag and Pennant
6. Triple Top and Bottom
7. Wedge
8. Rounding bottom
Head And Shoulder:
This is one of the most popular and reliable chart patterns in technical
analysis. Head and Shoulders is a reversal chart pattern that when formed, signals
that the security is likely to move against the previous trend.
Cup and Handle:
A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but
will continue in an upward direction once the pattern is confirmed.
Double Top and Bottoms:
This chart pattern is another well-known patter that signals a trend reversal – it is considered to be
one of the most reliable and is commonly used. These patterns are formed after a sustained trend
and signal to chartists that the trend is above to reverse.
Triangles:
These are some of the most well-known chart patterns used in technical analysis. The three types of
triangles, which vary in construct and implication, are the Symmetrical Triangles and Descending
Triangle.
Flag and Pennant :
These two short term chart patterns are continuation patterns that are formed when there is a sharp
price movement followed by a generally sideways price movement. This is then completed upon
another sharp price movement in the same direction as the move that started the trend. The
patterns are generally thought to last from one to three weeks.
Wedge :
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical
triangle except that the wedge pattern slants in an upward or downward direction, while the
symmetrical triangle generally shows a sideways movement.
Triple Tops and Bottoms :
This is another type of reversal chart pattern but not as prevalent in charts as head and shoulders and
double top and bottoms whereas they act in a similar fashion. These two chart patterns are formed
when the price movement tests a level of support or resistance three times and is unable to break
though, this signals a reversal of the prior trend.
Rounding Bottom:
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern
that signals a shift from a downward trend to an upward trend. This pattern is
traditionally thought to last anywhere from several months to several years.
Candlestick Patterns
Candlestick patterns helps to identify the trend and reversal signals in a chart.
Conclusion
1. Both Fundamental & Technical analysis are complementary
2. In technical analysis, we can’t predict that this thing will
definitely happen.
3. Even if there is a 99% chance of uptrend and 1% chance of
downtrend, that 1 % can also change the trend.