TECHNICAL ANALYSIS

A Guide To Technical Analysis

Technical analysis is a method of forecasting price movements by looking at purely market-

generated data. It is the art of charting financial instruments and overlaying mathematical
indicators to derive trading ideas. It is utilized to evaluate price predictability and is based
on the notion that prices do not move randomly but instead move in repeating and
identifiable patterns.

Almost every trader uses some form of technical analysis. Even the most reverent follower
of market fundamentals is likely to glance at price charts before executing a trade. At their
most basic level, these charts help traders determine ideal entry and exit points for a trade.

There are literally hundreds of technical analysis indicators utilized by traders and analysts
to evaluate trading activity. The three key principles of technical analysis are:

1. All market information is discounted and reflected in market prices.

2. Prices move in trends and trends persist.
3. Market action is repetitive.

The following guide describes the most popular technical analysis tools. These technical
analysis tools include:

CHARTS

BAR CHARTS

Bar charts are probably the most widely used by traders and not only give us the closing
price but also the high, low and opening prices. As traders we need to know as much as
possible about a stock and its movements and these bars are the perfect tool for the job.
With a single glance at one of these bars we can get a feel for how investors traded this
stock for the day and their general sentiment towards it.
Small bars (or bodies as they are technically called) are a sign the market maybe
consolidating its position or thinking about its next move. Long bodies could indicate the
market is again on the move and looking to test new levels. Some charting packages will
only show the close on the bar, many traders elect to use this style with great success.
Some say the opening price does not give a true indication of market sentiment and choose
to ignore it. There is a marked difference when drawing trend lines on a line chart compared
to a bar chart. With a bar chart you get the entire trading range and a trend line can be
drawn using these ranges as opposed to only using closing price data on a line chart.

Candle stick Charts

Reading Candle stick charts
Candle stick charting was developed by the Japanese several centuries ago and has
undergone resurgence in popularity in recent times. This form of chart is by far my personal
favorite and I usually use it exclusively. Although more complex to understand, once
mastered, candle charts can give you the best overall view of market sentiment.
BullishCandle Bearish Candle

Line Charts
The line chart is the one most of us would have seen many times before and is usually
plotted

Red Lines
When viewing most charts a pattern of the price formation is usually visible to the naked
eye. This pattern is called a trend and these trends have three distinct patterns.

UP TREND:Prices increasing using closing price data. This chart is good for visualizing the
overall trend of a stock and on some charting programs it will allow you to see more data
over a longer time span
 DOWNTREND: Prices decreasing

A trend line is basically a line drawn joining consecutive lows or highs in a trend pattern.

Draw a line connecting the lowest points on a chart in an up trend.

Draw a line connecting the highest points on a chart in a down trend.

Support Line

When we draw a line joining all the lows of a price pattern together the line is called a
Support Line. These lines are a low point on the chart on which the price bounces off
consistently when reached. Many traders elect to BUY when the price reaches this point. It
is our belief that the market likes to test Support lines more than once and we look for BUY
signals after a second or third testing of this line.
If a support line is broken then the current trend is said to be broken or in a Down Trend
and the market will look for a lower price to set up a new support level.

Resistance Line

When we draw aline joining all the tops of a price pattern together the line is called a
Resistance Line. It is a series of highs on a chart where the market continually rejects the
price thus not allowing it to go any higher. It is basically the exact opposite of the support.
Many traders elect to SELL when the price reaches this point. It is our belief that the market
likes to test Resistance lines more than once and we look for SELL signals after a second or
third testing of this line.

profit at this level. Some traders like to sell small parcels to average out their price paid and
leave the rest in hope of greater gains.
 Price Patterns

We will discuss some of the patterns that form on the charts that help give a further
indication of an impending Trend Reversal. Once again some of the patterns about to be
discussed are very powerful and SHOULD be respected!

Head Shoulders

He head Shoulder Pattern has claim to being one of the most reliable of all chart patterns. It
is usually formed at the end of an upward trend or market rally and acts as a SELL signal.

There are four main components that make up a H pattern:

The Left Shoulder

The Head

The Right Shoulder

The Neckline.

The Left Shoulder

The market looks to test higher price levels. Increasing Volumes, followed by retracement to
neckline.

The Head

Market again looks to test higher ground and succeeds with setting a higher price that was
set by the Left Shoulder. Large Volumes Followed by retracement to neckline.

The Right Shoulder

Once again the market looks to test higher ground but this time fails to achieve the high
price set by Head.Reducing Volumes, again followed by retracement to neckline only this
time there is a good chance of the Neckline being violated and the market MAY look to test
Lower ground.

The Neckline.

Is a line that is drawn connecting consecutive lows. It is a line where the price bounces off
and refuses to go below. It is basically the same as a support line.

Most traders who are familiar with this pattern would try to liquidate at the top of the Head
or as it started to retrace towards the Neckline. If you are still holding a stock during the
Right Shoulder stage it may be your last chance to liquidate before the price tests lower
ground. I advise that you look to liquidate at the top of the Right Shoulder, remember you
can always buy it back at a lower price.

Double TopsBottoms

This is another powerful pattern that MAY indicate that the market is looking to test Lower
levels It occurs at the end of a upward trend or market rally.
Double tops basically tell us that the market has tested a price level on two occasions and
on both times refused to go higher.Double bottoms are identical to double tops except they
work in the opposite way and thus create a Buy signal. Double bottoms basically tell us that
the market has tested a price level on two occasions and on both times refused to go Lower.

Double Tops can also come in the form of triple and quadruple tops. Volumes on the second
top should be lower than the first top. If you hold a stock that exhibits a double top be
ready to liquidate as there is a good chance the market will go lower.Double Bottoms can
also come in the form of triple and quadruple bottoms. Volumes on the second bottom
should be Greater than the first bottom. Double bottoms can give an excellent Buy signal
and most Technical Traders would act on such a sign.

Triple Tops Bottoms

Triple tops basically tell us that the market has tested a price level on three occasions and
on all times refused to go higher.Triple bottoms are identical to triple tops except they work
in the opposite way and thus create a Buy signal. Triple bottoms basically tell us that the
market has tested a price level on three occasions and on all times refused to go lower.
Rounded Tops Bottoms

The formation of a rounded top on a chart is a good indication that the

market will look to test Lower ground soon and thus giving us a Sell signal.
Rounded Bottom has the same characteristics as a rounded top only this
time it works in the opposite way and creates a BUY signal. Rounded
bottoms are sometimes called Saucers or the Accumulation Period. Rounded
top can also be called a saucer or distribution curve and is seen at the end of
an upward trend. It shows the market is running out of steam and cannot
achieve new highs. Volumes will start to reduce as the price reaches its peak
and increase as the price starts to fall. Most experienced Traders would note
this and exit their position.

All of these patterns indicate that the downward trend is running out of
steam and the market is looking to test higher ground once again. Most
experienced traders would be looking to position themselves in this
accumulation period, it is called the accumulation stage as that is exactly
what is happening, traders are accumulating shares. A further extension of
the rounded top/bottom is a formation called a Cup. It is basically a
completed rounded top/bottom with a smaller rounded top/bottom formed
on the right/left hand side thus giving the appearance of a handle for the
cup. Volume should be on the increase as the top/bottom starts to climb
upward/ fall downward.There should be even larger volumes again during
the Handle stage. The Handle is maybe our last chance to take a position
before the market tests higher/lower ground.

DIAMOND

This is also considered as a reversal formation, where the market reverses

from its direction after forming a diamond.

Triangles

Triangles are probably the most frequently occurring pattern to form on the
charts and can give a possible early indication of a trend reversal.As they
occur so frequently they are not as reliable as some patterns previously
discussed but are still a very useful indicator for the Technical Trader.
Drawing Triangles onto charts is basically just drawing BOTH support and
resistance lines at the same time.They can be found nearly anywhere on a
chart. Sometimes an entire up trend or downtrend may be made up of lots
of little triangles.The two main types of triangles that can be found are
Symmetrical Triangles and Right Angled Triangles:

Symmetrical Triangles
These occur when the price is locked into a reducing trading range. Both
support and resistance lines meet in a point The lines are said to be in
Convergence. Volumes slowly reduce as the price nears the point of the
triangle and then on breakout surge considerably As Traders we are looking
for this breakout and would either buy or sell according to the direction of
the breakout.

Please remember that false signals are common with this type of pattern

Right Angled Triangles

Are similar to symmetrical triangle but instead one of the lines drawn will
either have a flat top or flat bottom and is drawn near perfectly horizontal
These triangles are probably more accurate than all others and may also
indicate which way the price could break.
Again extreme caution is needed when using triangles as they DO generate
false signals.

RECTANGLE

Wide range of movements ranging 80 – 100 pips forming big congestion and
breaking out any direction, we can find rectangles.

Flags Pennants Wedges

Flags, pennants and wedges occur on both up and down trends and indicate
the market is reassessing the share price or more simply taking a breather.
They are more often than not formed at the halfway stage of a trend. They
are drawn onto charts by drawing both support and resistance lines
simultaneously Once drawn, they should take on the appearance as their
names imply i.e., A Flag looks like a Flag

A basic rule to follow is ' If a Flag, Pennant or Wedge forms in an up or down

trend, the trend USUALLY continues on the same path'i.e.,An up trend
continues Up.
If holding a stock and one of these patterns forms on the chart it is a signal
for caution and a breach of either the support or resistance should be acted
upon.

PREVIOUS.

As you can see Wedges and Pennants are very similar in appearance but in
essence as Traders we are only interested in which way they will break as
opposed to what to call them.