Theories of securities market price

There are several theories of securities market prices that attempt to explain how prices are
determined and how they change over time. Here are some of the main theories:

Efficient Market Hypothesis (EMH): This theory posits that all available information about
a security is reflected in its price, meaning that it is impossible to consistently beat the market
by trading on publicly available information. The EMH has three forms: weak, semi-strong,
and strong, which differ in terms of what information is already reflected in prices.

Behavioural finance: This theory suggests that market prices can be influenced by
psychological biases and heuristics of investors, such as herding behaviour, overconfidence,
and anchoring. Behavioural finance argues that these factors can lead to irrational pricing and
that investors can exploit these inefficiencies for profit.

Random walk theory: This theory argues that stock prices follow a random walk, meaning
that they are unpredictable and move randomly. According to this theory, it is impossible to
consistently beat the market by trying to predict future price movements.

Dow Theory: The theory is based on the idea that the stock market reflects the overall health
of the economy, and that there are certain patterns that can be observed in the movements of
stock prices over time. The theory is based on six basic tenets:
1. The market reflects all available information:
2. The market moves in trends:
3. The trend is assumed to be in effect until it gives definite signals that it has reversed:
4. Stock prices move in a series of peaks and troughs:
5. Volume should confirm the trend:
6. A trend is likely to continue until it shows definite signs of reversal:

Trends

 Trends are fractal

 Psychology of FOMO
 Trend is directional not line
 Bullish Trend= higher peak & higher trough
 Bearish Trend= Lower peak & lower trough
 Catching lowest and highest point in trend is not possible

Types of Trends

Upside trend, sideway trend, and downside trend are all terms used in technical analysis to
describe the direction of price movements in the stock market

Upside trend: An upside trend, also known as a bullish trend, is a period in which the market
is moving higher over time. In an upside trend, the market is characterized by higher highs
and higher lows, indicating that buyers are in control and demand is strong. Traders may look
to buy during an upside trend and hold their positions until the trend begins to show signs of
reversing.
Sideway trend: A sideway trend, also known as a consolidation phase, is a period in which
the market is moving sideways within a certain range. In a sideway trend, the market is
characterized by relatively equal highs and lows, indicating that buyers and sellers are in
balance and there is no clear direction. Traders may look to trade range-bound strategies
during a sideway trend and avoid directional trades.

Downside trend: A downside trend, also known as a bearish trend, is a period in which the
market is moving lower over time. In a downside trend, the market is characterized by lower
highs and lower lows, indicating that sellers are in control and supply is strong. Traders may
look to sell during a downside trend and hold their positions until the trend begins to show
signs of reversing.

Pros and cons of technical analysis

Technical analysis is a popular approach to trading that involves using charts and technical
indicators to predict future price movements in financial markets. While there are many
benefits to using technical analysis, there are also some drawbacks to consider. Here are some
of the pros and cons of technical analysis:

Pros:

Historical data: Technical analysis is based on historical data, making it useful for
identifying patterns and trends that have occurred in the past.
Objective: Technical analysis is an objective approach that focuses on price movements and
market data, which can help traders avoid emotional biases and make more rational trading
decisions.
Timely: Technical analysis can provide timely information, allowing traders to quickly
identify potential trading opportunities and make decisions based on current market
conditions.
Widely used: Technical analysis is a widely used approach, with many traders and investors
relying on charts and technical indicators to make trading decisions.

Cons:

Limited data: Technical analysis is based on historical data, which can be limited in scope
and may not account for all relevant factors affecting a market.
Interpretation: Technical analysis can be subjective, with different traders interpreting the
same charts and indicators differently.
Limited predictive power: Technical analysis cannot predict market movements with
certainty, and traders can still suffer losses even if they rely on technical analysis.
Over-reliance: Traders may become over-reliant on technical analysis and fail to consider
other important factors, such as economic news or company earnings reports.

Candle Stick

A candlestick is a type of chart used in technical analysis to display price movements of a

financial asset, such as a stock, currency, or commodity. Candlestick charts provide a visual
representation of price movements and are used by traders and investors to identify trends,
support and resistance levels, and potential trading opportunities.
A candlestick consists of a rectangular body and two thin lines, known as shadows or wicks,
which extend from the top and bottom of the body. The body represents the opening and
closing prices of the asset during the period, with a bullish candlestick indicating that the
closing price was higher than the opening price, and a bearish candlestick indicating that the
closing price was lower than the opening price. The shadows or wicks represent the highest
and lowest prices reached during the period.

Marubozu

Marubozu is a Japanese candlestick charting pattern that is characterized by a long

candlestick with little to no shadow or wick at either end.
There are two types of marubozu candlesticks:

Bullish marubozu: A bullish marubozu is a long candlestick with no upper or lower shadow.
It indicates strong buying pressure and suggests that the market opened at the low of the
period and closed at the high of the period.

Bearish marubozu: A bearish marubozu is a long candlestick with no upper or lower

shadow. It indicates strong selling pressure and suggests that the market opened at the high of
the period and closed at the low of the period.

Doji

In candlestick charting, a doji is a candlestick pattern that occurs when the opening and
closing prices of an asset are very close to each other, resulting in a small or non-existent
body.
The appearance of a doji pattern indicates indecision or uncertainty in the market, as buyers
and sellers are in a state of balance. A doji can occur at any point in a trend, and its
significance is determined by its location and the preceding trend.
There are different types of doji patterns, including the standard doji, long-legged doji,
dragonfly doji, and gravestone doji, among others. The long-legged doji has longer wicks and
a smaller body, while the dragonfly doji has a long lower wick and no upper wick, and the
gravestone doji has a long upper wick and no lower wick.

Hammer candle stick

In candlestick charting, a hammer is a bullish reversal pattern that occurs when an asset's
price opens, trades lower during the period, but then recovers to close near its opening price.
The hammer pattern is characterized by a small body near the top of the candlestick and a
long lower wick, which is at least twice as long as the body.
The appearance of a hammer pattern is a bullish signal, as it suggests that buyers have
entered the market and are pushing prices higher.
The inverted hammer has a small body near the bottom of the candlestick and a long upper
wick, indicating that sellers are putting pressure on the market.

spinning top

In candlestick charting, a spinning top is a candlestick pattern that occurs when an asset's
price opens and closes near the same level with a long upper and lower wick. The spinning
top pattern is characterized by a small body that appears in the middle of the candlestick, with
a long wick above and below it.
The appearance of a spinning top pattern indicates indecision or a lack of conviction among
buyers and sellers, with neither side able to gain control of the market. The long upper and
lower wicks indicate that prices moved significantly higher and lower during the period but
ultimately closed near the opening level.
Traders and investors often use spinning tops as an indication of potential trend reversals or
continuations, depending on the context and other technical indicators.

Engulfing

In candlestick charting, an engulfing pattern is a candlestick pattern that occurs when a

smaller candlestick is completely covered by a larger candlestick that follows it. The
engulfing pattern is characterized by a small body for the first candlestick, and a larger body
for the second candlestick.
There are two types of engulfing patterns: bullish engulfing and bearish engulfing. A bullish
engulfing pattern occurs when a small bearish candlestick is followed by a larger bullish
candlestick, which completely engulfs the previous candlestick. This pattern suggests a
potential reversal of a downtrend and the emergence of a new uptrend.
On the other hand, a bearish engulfing pattern occurs when a small bullish candlestick is
followed by a larger bearish candlestick, which completely engulfs the previous candlestick.
This pattern suggests a potential reversal of an uptrend and the emergence of a new
downtrend.

Support and resistance

Support and resistance are two important concepts in technical analysis that help traders and
investors identify key levels in the market where the price of an asset is likely to experience a
reversal or a significant change in direction.
Support is a price level where buying pressure is strong enough to prevent the price from
falling further. It is considered a level of demand where buyers are willing to enter the market
and buy the asset, which creates upward pressure on the price.
Resistance, on the other hand, is a price level where selling pressure is strong enough to
prevent the price from rising further. It is considered a level of supply where sellers are
willing to enter the market and sell the asset, which creates downward pressure on the price.

Donchian Breakout

The Donchian Breakout is a popular trading strategy in technical analysis that involves
identifying and trading breakouts from the high and low price levels of a defined time period,
typically 20 or 30 days.
The basic principle behind the Donchian Breakout strategy is to buy an asset when its price
breaks above the highest high of the defined period and to sell the asset when its price breaks
below the lowest low of the defined period. The idea is that a breakout from these levels
indicates a potential trend continuation or reversal, depending on the direction of the
breakout.
Traders and investors often use the Donchian Breakout strategy to capture large price
movements and to take advantage of trend momentum.
Additionally, the Donchian Breakout strategy may not work well in markets with low
liquidity or high volatility, as false breakouts and whipsaws can occur.
Andrew pitchfork

The Andrew Pitchfork is a technical analysis tool that is used to identify potential support and
resistance levels in a trending market.
The Andrew Pitchfork consists of three parallel lines that are drawn based on three points that
are selected by the trader. The first point is typically the beginning of a trend, the second
point is a significant high or low point in the trend, and the third point is a retracement level
in the trend.
The first line is drawn from the first point to the second point and serves as the median line.
The second and third lines are drawn parallel to the median line, with the second line passing
through the third point and the third line passing through the high or low point of the trend.
In an uptrend, the median line and the lower parallel line can act as support levels, while the
upper parallel line can act as a resistance level. In a downtrend, the median line and the upper
parallel line can act as resistance levels, while the lower parallel line can act as a support
level.

Gann Fan line

The Gann Fan is a technical analysis tool used to identify potential support and resistance
levels in a trending market. It was developed by W.D. Gann
The Gann Fan consists of a series of lines drawn at different angles, typically 45 degrees, that
originate from a significant high or low point in the trend. The angle of the lines is based on
the ratio of time to price movement, which Gann believed was an important factor in market
analysis.
Traders and investors use the Gann Fan to identify potential support and resistance levels
based on the positioning of the lines. In an uptrend, the lines can act as potential support
levels, while in a downtrend, they can act as potential resistance levels.
However, it is important to note that the Gann Fan is not a full proof tool and should be used
in combination with other technical analysis techniques and risk management strategies to
make informed trading decisions.

Fibonacci retracement

Fibonacci retracement is a popular technical analysis tool used by traders and investors to
identify potential levels of support and resistance in a trending market. It is based on the
Fibonacci sequence, a mathematical series in which each number is the sum of the two
preceding numbers.
The Fibonacci retracement levels are calculated by identifying the highest and lowest points
in a given trend and dividing the vertical distance by the key Fibonacci ratios of 23.6%,
38.2%, 50%, 61.8%, and 100%. These levels represent potential areas where the price of an
asset may experience support or resistance.
Traders and investors use Fibonacci retracement levels to identify potential entry and exit
points in a trend, as well as to set stop-loss orders and take-profit levels. The 50%
retracement level is considered a significant level and may act as a pivot point for the trend.
The 61.8% retracement level is also considered significant, as it is derived from the Golden
Ratio, which is believed to be a key ratio found in nature and the universe.
How to confirm breakout

Confirming a breakout is an important step in technical analysis, as false breakouts can lead
to costly trading mistakes. Here are some ways to confirm a breakout:

Volume: One way to confirm a breakout is to look for a significant increase in trading
volume. If the volume is higher than average, it can suggest that there is strong conviction
among traders and investors that the breakout is valid.

Price: Another way to confirm a breakout is to look for follow-through in price action. If the
price continues to move in the direction of the breakout, it can suggest that there is strong
momentum behind the trend.

Timeframe: It is important to confirm the breakout on multiple timeframes. For example, if

the breakout occurs on the daily chart, it should also be confirmed on the weekly or monthly
chart to ensure that it is a strong and valid breakout.

Technical indicators: Technical indicators such as moving averages, oscillators, and trend
lines can also be used to confirm a breakout. For example, if a moving average is trending
higher and the price breaks above it, it can be a strong confirmation of a bullish breakout.

Head and shoulder

The head and shoulders pattern is a popular technical analysis pattern used by traders to
identify potential trend reversals in the market. It is formed by three peaks, with the middle
peak being the highest and the two outer peaks being lower in height, creating a "shoulder"
on either side of the "head".
The pattern is characterized by a gradual decline in the price of an asset leading up to the first
"shoulder", followed by a rebound in price to the "head" peak, and then a subsequent decline
to the second "shoulder". The pattern is confirmed when the price falls below the "neckline",
which is drawn by connecting the two bottoms between the "shoulders" and the "head".
The head and shoulders pattern is typically considered a bearish signal, as it suggests that the
trend is likely to reverse and the price will decline. Traders often use the pattern to identify
potential selling opportunities, with the price target being set at the distance between the head
and the neckline projected below the neckline.

Double top and bottom

Double top and double bottom are two popular technical analysis patterns used by traders to
identify potential trend reversals in the market.

A double top pattern is formed when the price of an asset reaches a high point, pulls back,
rallies to a similar high point, and then declines below the level of the initial pullback. This
pattern is often seen as a bearish signal, as it suggests that the price is struggling to break
through a key resistance level and may be reversing to a downtrend.

A double bottom pattern is formed when the price of an asset reaches a low point, rebounds,
falls back to a similar low point, and then rises above the level of the initial rebound. This
pattern is often seen as a bullish signal, as it suggests that the price is finding support at a key
level and may be reversing to an uptrend.
Back Testing

Back testing is a key component of effective trading system development. Back testing is a
process used in trading to test the performance of a trading strategy or system using historical
data. It involves simulating trades and applying a trading strategy to past market data to see
how it would have performed if it had been used in real-time trading.

• The underlying theory is that any strategy that worked well in the past is likely to work well
in the future, and conversely, any strategy that performed poorly in the past is likely to
perform poorly in the future.

• Back testing can provide plenty of valuable statistical feedback about a given system, TA
etc

Moving Averages

Moving averages (MA) are a commonly used technical analysis tool that helps traders to
identify trends and potential entry and exit points for trades. A moving average is a line that
is plotted on a price chart, which represents the average price of an asset over a specified
period of time.
The most common types of moving averages are the simple moving average (SMA) and the
exponential moving average (EMA).

Moving averages can be used in several ways:

1. Identifying trends
2. Support and resistance levels
3. Entry and exit points
4. Multiple moving averages

Overall, moving averages are a simple and effective tool that can help traders to identify
trends and potential trading opportunities.

DMA Cross-over

DMA cross-over refers to the crossing of two different moving averages, typically the 50-day
moving average and the 200-day moving average. The DMA cross-over is a widely used
technical analysis tool that helps traders to identify potential trends and entry/exit points for
trades.
When the short-term moving average (such as the 50-day moving average) crosses above the
long-term moving average (such as the 200-day moving average), it is considered a bullish
signal. This is because it indicates that the short-term trend is now higher than the long-term
trend, and suggests that the price of the asset may continue to rise.
Conversely, when the short-term moving average crosses below the long-term moving
average, it is considered a bearish signal. This is because it indicates that the short-term trend
is now lower than the long-term trend, and suggests that the price of the asset may continue to
fall.
Bollinger Bands

Bollinger Bands are used to measure the volatility of an asset and to identify potential entry
and exit points for trades.
Bollinger Bands consist of three lines: a simple moving average (usually the 20-day moving
average) in the middle, and an upper band and a lower band that are two standard deviations
away from the moving average. The bands expand and contract based on the volatility of the
asset; when volatility is high, the bands widen, and when volatility is low, the bands contract.

Traders use Bollinger Bands in several ways:

Identifying overbought and oversold conditions: When the price of an asset reaches the
upper band, it is considered overbought, and when the price reaches the lower band, it is
considered oversold. This can be a signal for traders to sell when the price is overbought and
to buy when the price is oversold.

Measuring volatility: The width of the Bollinger Bands can be used to measure the volatility
of an asset. When the bands are wide, it indicates that the asset is more volatile, and when the
bands are narrow, it indicates that the asset is less volatile.

Trend identification: Traders can also use Bollinger Bands to identify potential trend
changes. When the price of an asset breaks above the upper band, it can be a signal that the
trend is turning bullish, while a break below the lower band can signal a bearish trend.
MACD

MACD stands for Moving Average Convergence Divergence, which is a popular technical
analysis indicator that helps traders to identify potential trends and momentum in an asset's
price.
The MACD indicator consists of two lines: the MACD line and the signal line. The MACD
line is calculated by subtracting the 26-day Exponential Moving Average (EMA) from the
12-day EMA, while the signal line is a 9-day EMA of the MACD line. The MACD line
oscillates above and below the zero line, while the signal line provides a smoother view of
the MACD line.

Traders use the MACD in several ways:

Identifying trend changes

Identifying momentum
Divergence

Overall, the MACD is a useful tool for traders to identify potential trends and momentum in
an asset's price.
RSI

RSI stands for Relative Strength Index, which is a popular technical analysis indicator used
by traders to measure the strength of an asset's price trend.
The RSI indicator ranges from 0 to 100 and is calculated based on the average gains and
losses of the asset over a set period of time. Typically, the RSI is calculated using a 14-day
period. If the RSI is above 70, it indicates that the asset is overbought, and if the RSI is below
30, it indicates that the asset is oversold.

Traders use the RSI in several ways:

Identifying overbought and oversold conditions

Confirming trend direction
Divergence

RSI = 100 – 100/1+RS

RS = Up changes for the period under consideration / Down changes for the period under
construction

Volume Analysis

Volume versus Trades Versus Open Interest

Volume refers to the total number of shares or contracts traded during a specific period of
time, usually measured in a day or a week.
Trades, on the other hand, refer to the number of transactions that have occurred during a
specific period of time. Each trade represents a transaction between a buyer and a seller.
Open interest, on the other hand, refers to the total number of contracts that are currently
outstanding, meaning they have not yet been closed out by an offsetting trade.
Free Float Volume

Free float volume refers to the number of shares that are available for trading in the market,
excluding those held by insiders, promoters, or governments. These shares are considered to
be available to the general public and can be freely bought and sold in the market.

Important of Volume Analysis

Volume Validate Price, Volume indicate Liquidity, Volume reveals trend conviction, Volume
indicate Velocity.

Volume Indicators

Volume Chart

A volume chart is a type of financial chart that represents the trading volume of a security,
typically displayed alongside the price chart. The volume chart displays the number of shares
or contracts that were traded during each time interval, such as a day or an hour, allowing
traders to see the level of activity and interest in the security over time.

Volume Profile

Volume profile is a charting technique that shows the volume of trades at different price
levels over a specific time period. It is a way to visualize the distribution of trading activity
and volume across various price levels.

Volume Weighted Average Price (VWAP)

Volume Weighted Average Price (VWAP) is a technical analysis tool that calculates the
average price of a security based on both the price and the trading volume. It is a popular
indicator used by traders to identify potential support and resistance levels, as well as to
determine the fair price of a security over a specific period.

Equivolume Chart

An Equivolume chart is a technical analysis tool that combines price and volume information
in a single chart. The Equivolume chart consists of a vertical axis showing the price scale, a
horizontal axis showing the volume scale, and a series of boxes or rectangles that represent
the trading range and volume of each bar. The width of each box represents the trading range
(the difference between the high and low price) of the bar, while the height of the box
represents the trading volume.

On Balance Volume

On Balance Volume (OBV) is a technical analysis tool that uses volume to predict changes in
the price of a security. OBV measures the cumulative buying and selling pressure of a
security based on its trading volume.
If Current Closing Price > Previous Closing Price, then Previous OBV + Current Volume
If Current Closing Price < Previous Closing Price, then Previous OBV - Current Volume
If Current Closing Price = Previous Closing Price, then Previous OBV

Chaikan Money Flow

Chaikan Money Flow (CMF) is a technical analysis tool that measures buying and selling
pressure by analyzing the accumulation and distribution of a security based on its volume and
price data.
CMF is plotted as a line that moves above and below a zero line. When the CMF line is
above the zero line, it indicates that buying pressure is increasing, and when it is below the
zero line, it indicates that selling pressure is increasing.
One advantage of CMF is that it provides a simple and easy-to-use tool for traders and
investors to better understand market activity and make more informed trading decisions.