Introduction to Technical Analysis
Open Interest/ Volume Timeframes Monthly, weekly, daily Support/ Resistances Indicators RSI, MACD, Moving Average, Fibonacci Classical Reversal Patterns Continuation Patterns Triangles Trading Divergences
Technical Analysis Philosophy
Technical Analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. John J. Murphy
3 premises on which Technical Analysis is based on: 1. Market action discounts everything. (Insiders trading/ pricing of news events) 2. Price moves in trends. 3. History repeats itself. (Humans always repeat the same mistakes.)
Fundamentalist
Using weather data, production, exports and ending stock numbers to predict supply demand and hence price action. Concerned with reasons for price movements.
Technicalist
Using past price actions, chart patterns and indicators to forecast future prices. Is not concerned with reasons for price to rise or fall.
Open Interest / Volume
Open interest = the total number of derivative contracts such as futures and options that have not been closed out/ net off. Volume = done/matched trades for the day How Open Interest & Volume works
Date 1-Jan 2-Jan 3-Jan 4-Jan Net positions A +1 -1 -5 -1 -4 B -1 C +5 D -5 +1 +5 +5 E O.I 1 6 5 5 5 Volume 1 5 1 5
**Open interest is cumulative but volume is not. Rising open interest in uptrend bullish. (New money is flowing into the market) Falling open interest in uptrend bearish. (Short covering. Uptrend losing momentum)
Weekly MDEX KPOc3
Price peaks usually correspond to volume peaks.
Steady Uptrend Price going up
Rising O.I
Falling O.I
Rising Volume Flat Volume
Candlesticks, BarCharts & Timeframe
CandleStick Representation BarChart Representation
open
close
close
open
Timeframe 1 Weekly Bar = 5 Daily Bars 1 Monthly Bar = 4 Weekly Bars 1 Quarterly Bar = 3 Monthly Candles
Daily MDEX KPOc3
Small noisy fluctuations amid visible trends. Smaller range. Entry of trades & execution
Weekly MDEX KPOc3
Less noisy compared to daily charts. Larger trading range. Short term trend
Monthly MDEX KPOc3
Trend is apparent. Less noise compared to daily and weekly charts. Largest Range.
Supports & Resistances
Supports and Resistances can be slanted or horizontal, formed by connecting at least 2 points. Strength of the support/resistance depends on the number of points it touches and the presence of gaps. Supports can become resistances and vice versa and they usually are very important levels. Daily GBPUSD
Weekly MDEX KPOc3 Supports & Resistances
Support/ Resistance with gap are very strong.
Horizontal support turned resistance
Gap
Trendline support
Gap
Horizontal Resistance turned support.
Daily AUDUSD
FX pairs are usually highly trending especially AUDUSD which is a carry trade currency. AUDUSD rises slowly and falls quickly. More favorable to go short than long.
2 points to draw, 3rd point to validate.
Steep trendlines (> 45 degrees) are usually not sustainable.
Weekly USDJPY 1989 - 2009
Resistance trendline touching 5 points. Very strong resistance line.
Major downtrend resistance
2 points required to draw support False breakout
Breakout
Moving Averages Lagging Indicator
Curving Trendline Identify the start of a trend & tracks the progress of a trend. Lagging indicator Reacts but not anticipate Simple Moving Average (SMA) Average of the previous N periods closing price. Exponential Moving Average (EMA) Aka Weighted moving averages. EMA reduces the lag by applying more weight to recent prices relative to older prices. Uses of Moving Averages Combination of 50, 100, 200EMA (Long term Trend) Combination of 10, 20, 40EMA (Short term trading) 200EMA is the most popular long term trendline that traders use. Serves as a major support/ resistance level.
Trading Daily MDEX KPOc3 with Moving Averages
Sell when 50EMA cuts the 200EMA. CPO = 3200RM??
Uptrend intact
What is wrong here?!
Buy when 50EMA > 100EMA > 200EMA. CPO = 1450 RM
Whipsaws abound in a ranging market.
MACD
Moving Average Convergence Divergence
Lagging Centered Oscillator (MACD = 12EMA 26 EMA of price, 9EMA) MACD > 0 bullish, MACD < 0 bearish MACD lags but histogram leads Weekly HSI Trend reversal confirmed by MACD crossover
MACD crossover MACD line MACD crossover whipsaw MACD histogram = Area between MACD Line & 9EMA. 9 EMA
+ve -ve
MACD histogram crosses over 0.
RSI Relative Strength Index
Index from 0 to 100. Upper (70) and lower (30) band. Ranging oscillator. Momentum indicator. Works best in ranging market. Common settings are RSI 5, 7 and 14. 4H USDJPY
Overbought Regions
Extreme volatility
Oversold Regions
RSI = 9
Fibonacci Retracement
Fibonacci retracement is used for finding support/resistance levels. 38.2% & 50% retracement levels are most common.
Fibonacci Retracement
50% retracement
Classical Reversal Patterns
Island Reversals Head & Shoulders Double Tops/ Bottoms Triple Tops/ Bottoms Bullish/Bearish Engulfing
Island Reversal Formation
Bearish top Weekly HSI Island Reversal Top Bullish bottom
Head & Shoulders Formation
Weekly USDJPY
Head
Left Shoulder
Right Shoulder
Neckline Support turned resistance
[Daily DJIA] Failed Head & Shoulder
Head L. Shoulder R. Shoulder
Neckline
False Breakout!
[Daily DJIA] Inverted Head & Shoulder
Major Trend Reversal
R. Shoulder L. Shoulder Head
[Weekly AUDUSD] Double Bottom Formation
Panic selling, carry trade unwind.
Crucial Support/ Resistance
W-shaped Double Bottom
Higher lows
Weekly EURUSD Double Top Formation
Support
M-shaped Double Top
Weekly EURUSD Triple Bottom Formation
Resistance turned support
Higher Lows
Weekly EURJPY Triple Top Formation
Daily GBPJPY Bullish Engulfing Reversal
Bullish Engulfing Reversal
Bearish Engulfing Formation
What is one observation about engulfing reversals?
Continuation Patterns
Triangles
Triangles
Triangles precede a large move.
Triangle Triangle Ascending Triangle Triangle
Trading Divergences
MACD/RSI Divergences
Daily USDJPY Bearish Divergence
Despite USDJPY making new highs, RSI shows weakness with new lows.
Weekly EURJPY Bullish Divergence
Despite EURJPY making new lows, RSI shows strength with higher lows.
RSI hit extreme levels.
Daily KPOc3
Divergences on Daily KPOc3
Not exactly a divergence
Bearish
Bullish Bearish
No signal on MACD
No signal on MACD
Bullish
Bullish
Bullish
Market Quotes
The futures market will let you have a realistic appreciation of who you are. For momentum trades, work fast, exit fast. There are no old and bold traders around. George Soros: Courageous in situational environment. No news but market moves, price moves first, fundamentals come 2nd. There are insiders Sensitivity unequals to hope. Sensitivity is when you can sense danger, whereas hope is a sign of danger! Quality trades rather than quantity trades.
Trade to win, not trade to win when view is right. At right time and right price, do SIZE!
Recommended Readings
Market Wizards J. D Schwager
How to Trade in Stocks Jesse Livermore
Trading For a Living Dr. Alexander Elder
Technical Analysis of the Financial Market -John J. Murphy
The Complete Turtle Trader Michael [Link]
Japanese Candlestick Charting Techniques -Steve Nison
Thank you! Any Questions?
