Technical Analysis Theory

Technical Analysis
3.1. Meaning of Technical Analysis (TA): Technical analysis is an alternative approach

to the study of stock price behavior. A technical analyst believes that share prices are
determined by the demand and supply forces operating in the market. These demand and
supply forces in turn are influenced by a number of fundamental factors as well as certain
psychological or emotional factors. Many of these factors can not be quantified. The
combined factors are reflected in the stock price movement. A Technical analyst
therefore concentrates on the movement of share prices. Technical analysis is concerned
with-
 The analysis of market information
 The projection of trend/movement/pattern/circle
 The making of investment decision on the basis of projection
Range=Highest Price –Lowest Price=130-60=62
A Technical analyst therefore analyzes the price and volume movements of individual
securities as well as the market index. Thus, technical analysis is really a study of past or
historical price and volume movements so as to predict the future stock price behavior.
3.4. Parties involved in the market
There are three parties who are directly or indirectly traded in the stock market. The
parties involved in trading of securities are as follows;
1. Arbitrager: buy the stock at lower price and sell at high price
2. Speculator: sell at high price when the price falls then buy the stock
3. Hedger: Hedger transfers risk to another hedger (Diversification).
3.4. Technical Analysis (TA) - What information/ massages does TA provide?
Technical Analysis provides:-
1. Trend
2. Volatility/ variability
3. Momentum
4. Market strength
5. Circle
1. Trend
Dow Theory
Whatever is generally being accepted today as technical analysis has its roots in the Dow
Theory. The theory is so called because it was formulated by Charles H. Dow who was
editor of the wall street journal in U.S.A. In fact, the theory was presented in a series of
editorials in the wall street journal during 1900-1902.
Charles Dow formulated a hypothesis that the stock market does not move on a random
basis but influenced by three distinct cyclical trends that guide its direction. According to
Dow Theory, the market has three movements and these movements are the primary
movements, secondary reactions and minor movements.
The primary movement is the long range cycle that carries the entire market up or down.
This is the long-term term trend in the market. The secondary reactions act as a
restraining force on the primary movement. For example, when the market is moving
upwards continuously, this upward movement will be interrupted by downward
movements of short durations. These are the secondary reactions. The third movement in
the market is the minor movements which are the day to day fluctuations in the market.
Figure-8.1: shows a line chart of the closing values of the market index. The primary
trend of the market is upwards but there are secondary reactions in the opposite direction.
The primary trend is said to have three phases in it, each of which would be interrupted
by a counter movement or secondary reaction which would retrace about 33-66 percent
of the earlier rise or fall.
Bullish Trend
During a bull market (upward moving market), in the first phase the prices would
advance with the revival of confidence in the future of business. This will prompt
investors to buy shares of company. During the second phase, prices would advance due
to the improvements in corporate earnings. In the third phase, prices advance due to
inflation and speculation. Thus, during the bull market, the line chart would exhibit the
formation of three peaks. The three phases of a bull market are depicted in
Bearish Trend
The bear market is also characterized by three phases. In the first phases, prices begin to
fall due to abandonment of hopes. Investors begin to sell their shares. In the second
phase, companies start reporting lower profits and lower dividends. This causes further
fall in prices due to increased selling pressure. In the final phase, prices fall still further
due to distress selling. A bearish market would be indicated by the formation of lower
tops and lower bottoms. The three phases of a bear market are depicted in
3.6. Price chart

It is the security prices that are charted. A share may be traded in the market at different
prices on the same day. The different prices are of four types. These are the highest price
of the day, the lowest price of the day, the opening price of the day, and the closing price
of the day. The price chart is the basic tool used by the technical analysis to study the
share price movement. The prices are plotted on an XY graph where the X axis represents
the trading days and the Y axis denotes the prices.
Line chart
It is the simplest price chart; the closing prices of a share are plotted on the XY graph on
a day to day basis. The closing prices of a share are plotted on the XY graph on day to
day basis. The closing price of each day would be represented by a point on the XY
graph. All these points would be connected by a straight line which would indicate the
trend of the market. A line chart is illustrated in
Bar Chart
In this chart, the highest price, the lowest price and the closing price of each day are
plotted on a day-to-day basis. A bar is formed by joining the highest price and the lowest
price of a particular day by a vertical line. The top of the bar represents the highest price
of the day, the bottom of the bar represents the lowest price of the day and a small
horizontal hash on the right of the bar is used to represent the closing price of the day.
Sometimes, the opening price of the is marked as a hash on the left side of the bar. An
example of a price bar chart is shown in
Closing price =tk72
Japanese Candlestick Charts

The Japanese candlestick chart shows the highest price, the lowest price, the opening
price and the closing price of shares on a day-to-day basis.
There are mainly three types of candlesticks, viz; the white, the black and doji or neutral
candlestick. A white candlestick is used to represent a situation where the closing price of
the day is higher than the opening price. A black candlestick is used when the closing
price of the day is lower than the opening price. Thus, a white candlestick indicates a
bullish trend while a black candlestick indicates a bearish trend. A doji candlestick is the
one where the opening price and the closing price of the day are the same. Japanese
candlestick chart is illustrated in
White candlestick is when CP>OP
Black candlestick is when CP<OP
Doji/Neutral candlestick is When CP=OP
Share Price Tk20, NOS=1000 Stock Split Ratio: 2 for 1 share: Total share capital=20000
Share Price Tk20/2:Tk10, NOS=1000×2=2000: Total share Capital=20000
2. Volatility/Variability: This is the price risk can be measured by the followings:
 Volatility is measured by the beta factor ( Exponential moving average)
 Variability is measured by the standard deviation (sigma) ( Market
likelihood method)
3. Momentum:- Momentum is measured by the Arithmetic and Geometric method

Arithmetic momentum: 2, 4, 6, 8, 10, 12, 14, 16
Geometric momentum: 2, 4, 8, 16, 32, 64, 128 etc
4. Market strength:- Market strength is measured by the term of Relative strength
index(RSI) where RSI is a technical indicator used to the analysis of stock market. It is
intended to chart the current or historical strength or weakness of a stock or market based
on the closing prices of a recent trading period.
5. Circle: If there is no information in the market and the market price will move ups and
down.
3.7. Technical Analysis:- Indicators
A Technical analysis indicator is a mathematical calculation that can be applied to a
stock’s price, volume, or even, to another technical indicator. The result is a value that is
used to anticipate future changes in prices
There are three types of indicators:
1. Graphical indicators: Price chart, line chart, Bar chart, Japanese candlestick
chart
2. Mathematical indicators: Moving average (simple, exponential), oscillators
(Return on change chart), Rate of change indicator,
Relative strength index (RSI), MACD, etc
3. Market indicators: Breadth analysis, odd-lot analysis etc
4.Other analysis: Expected EPS, Unexpected earnings, price-high and
low, Average price changes, stock beta, price
volatility/variability, and Trade volume of stock, price
performance,
DIFFERENCES BETWEEN TECHNICAL ANALYSIS AND FUNDAMENTAL
ANALYSIS
The key differences between technical analysis and fundamental analysis are as follows:
1. Technical analysis mainly seeks to predict short term price movements, whereas
fundamental Analysis tries to establish long term values.
2. The focus of technical analysis is mainly on internal market data, particularly
price and Volume data. The focus of fundamental analysis is on fundamental
factors relating to the Economy, the industry, and the firm.
3. Technical analysis appeals mostly to short-term traders, whereas fundamental
analysis appeals Primarily to long-term investors.

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Technical Analysis

3.1. Meaning of Technical Analysis (TA): Technical analysis is an alternative approach

3.6. Price chart

Japanese Candlestick Charts

3. Momentum:- Momentum is measured by the Arithmetic and Geometric method

DIFFERENCES BETWEEN TECHNICAL ANALYSIS AND FUNDAMENTAL

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