PRESENT BY STOXMEE

TECHNICAL
ANALYSIS
EBOOK
STOCK MARKET, CRYPTO, FOREX
 Present By StoxMee

written by Ankush Ambilduke

 CHAPTER - 1

Types of Charts

Charts are two-dimensional representation of price over time. There are many types of

charts available. But most popular and widely used among them are Line Charts, Bar

Charts and the Candlestick Charts. The X axis, i.e. the time axis is crucial. The unit can be

month, week, day, hour, 5 min or few seconds. The shorter the time period, more detailed

the chart becomes. The beauty of time in technical analysis is that the same concepts

apply to charts irrespective of time-frame of observation. However, the success rate of

individual patterns or indicators-based decisions may vary across time frames.

Generally higher the time frame of chart, relatively higher is the probability of any

concept in market.

Line Charts

in line chart each and every price point is represented as a dot. The X axis represents the

time scale and the Y axis represents the price. Each dot or point represents the closing

price at the end of a unit of time. These points are then joined to form a line. This is the

simplest form of chart. But this is quite good if we want to plot 3-4 similarly priced

stocks in a single chart and compare. Moreover, the line chart gives the clearest idea

about price direction of a stock

 Bar Charts

A bar chart is comprised of a series of bars. Every bar has four important price points -

open close high and low. The bars are represented in green or blue color when close is

higher than open and red color when close is lower than open. The bar charts are

more detailed than the line chart and are good for demonstrating or spotting the

classical price patterns. We will discuss about the classical chart patterns in

appropriate time.

Candlestick Chart

The concept of candlestick charts came from Japan. That is why they are often referred

to as Japanese candlestick charts. These charts are the most versatile and popular

form of chart representation. Price behavior during each time unit is represented in the

form of a candle. If the closing price of a stock is higher than open price during a

particular time period, then the candle is green, if the close price is below the open price

then the candle is red. Each candle has a body and two wicks. The distance between open

to close is represented by the body of a candle and the upper and lower wicks

represent the highs and lows of a candle.

highest price highest price

closing price OPENING price

OPENING price OPENING price

LOWEST price LOWEST price

Candlestick chart is special not only because it adds a special visual clarity about the

price action, but also because often a single candle stick or two or three consecutive

candlesticks together form a pattern that indicate reversal of a prior move or give

conviction on continuation of the ongoing move. These are called candlestick

patterns. We will discuss about them in due course of time

Candlestick Chart Pattern Example

CHAPTER - 2

Trends

Market Trend and Range-Bound

Consolidation

Often market movements happen in the form of trends. A price trend is a continuous or

a directional price movement in upward or downward direction. We call them up -

trend and down -trend respectively. Now if we look at price action in market through

charts, we will find that no price movement happens in a straight line.

Suppose we are looking at a broader uptrend represented as primary move, we may find

intermediate corrections represented as secondary trend and minor counter moves

among the secondary moves represented as minor trend. This is how the market behaves

generally in both the up and the down trends

 Market Trends

primary Trend

Often an up- trend is represented in the form of a sequence of higher highs and higher

lows. Similarly a downtrend is represented as a sequence of lower lows and lower

highs. A trend is said to reverse when the sequence is broken.

Trend Reversal

lower high- up trend over

up trend down trend

higher highs and lower highs and

higher lows lower lows

higher low- down trend over

We should remember a simple point that market is not trending all the time. Often the

market consolidates within a small range and goes nowhere. Then suddenly it can

break on the upside or downside.

 Market Consolidation

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consolidation n
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Trendline & Channels

Trendline and Channels are one of the most simple and useful tools in the

market. During an uptrend, a trendline is formed by joining lowest points of

periodic pull-backs, defined as secondary moves in the previous section. The up-

trend line has positive slope. To be precise we need two lows to join to form a

trendline during an up-move. This line is then extended in the upward direction;

the third move towards the trend-line is used to validate the trend line. If the

trend line is not broken in the pull back, then it is called trend-line validation.

It is often observed that price pulls back towards the trend line and moves

higher. In an uptrending market it is often easier to make money if one buys near

the trend line and sells higher. The more number of time the trend-line is

validated, more important it becomes. An upward trend line is said to be the

area of support. The selling pressure meets the buying pressure here and

eventually overtime when buying pressure is higher than selling pressure price

sees an upward bounce.

up trend

buying opportunities

stoploss
Now when one buys he or she is looking for the prices to move higher. But this

may or may not happen. Hence the investor should maintain a stop loss point

below which he-or she should cut his position, i.e. book loss. When a trend line

is broken, either the market may reverse the trend, continue the uptrend with

little less force or just go sideways

Uptrend Reversal trend reversal

trend reversal sideways moments

trend reversal

Similarly, during a down-trend: a trendline is formed by joining pull-back

highs. They slope downwards. Just like an up-trend line a down-trend line is

formed by joining two points and then extended in downward direction. Pull

backs towards the trend-lines are low risk points for short selling with a

stop loss little above the trend line. More number of times the line is validated,

more it grows in importance.

Downtrend
hl

Similar to an uptrend-line, when a down trending trend line is broken the trend may

continue with less pace, or reverse or may go side-ways. A downward trend line is said

to be area of resistance. The selling pressure meets the buying pressure here and

eventually overtime when selling pressure is higher than buying pressure price sees a

decline.
 Role Reversal

Once a trendline support or resistance is broken, its role is reversed. If the price falls

below a support line, that line will become resistance. If the price rises above a

resistance line, it will often become support. As the price moves past a line of support

or resistance, it is considered that supply and demand have shifted, causing the breached

line to reverse its role. For a true reversal to occur, however, it is important that the

prices make a strong move through either the support or resistance line.

1 2
3 4

Role Reversal

Channels

The concept of channel is much similar to trend lines. When in an uptrend or in a down

trend or in a consolidation, we see rhythmic movement in form of parallelogram, we

can draw channels. The channel boundaries are good points for reversal trades with

small stop losses

Once price is out of the channel, the trend or range of the stock is broken
 Volume

In this section we introduce the second aspect of charting. This is called volume. Traded

volume is the number of quantity of stocks which change hand. The volume is shown as

a sub graph in the price-time chart, below the price window. Higher the volume in any

particular move, the greater is the conviction in that move to continue greater

distance in that direction. However, if volume is on the lower side during a move, the

stock is generally bound to lose momentum. Generally, during range bound phases, the

volume is low.

An important point regarding volume is that traded volume in absolute term has no

significance. When we talk about higher or lower volume, it is relative to average

volume over certain time periods.

Trend Volume Interpretation

Uptrend may go
Up High
greater distance

Lack of conviction/

participation in
UP Low
uptrend. Likely to

retrace

Down move may

Down High cover greater

distance

Less conviction in

Down low the down move, may

reverse
Apart from traded volume, one important concept regarding volume is

delivery %. In the market a person can first buy shares and sell by the end of
the day. He or she can do the reverse too. This is called intra-day trading.

However, if an investor is having a positive view he may buy the share and

carry forward it for a number of days. This is called taking delivery of a

share. Hence if there is a price rise of a stock with high % of delivery volume,
then this signifies a positive conviction in the stock. Similarly, if a lot of

people are long term negative about a stock, they may sell the stock and

give delivery. Markets are driven by buyers and sellers. People who have

positive view on a security are called bulls and people who have negative

view are called bears. The price of a security in a market is determined by

supply-demand dynamics of any stock. If the supply is high and a lot of

people look to sell the stock, than there are available buyers, the price is

likely to decline. Hence a fall in price with high delivery % is known as

negative for a stock.

 Classical Chart

patterns

As we have discussed in the previous section, that market can be either in

trending phase or in a range-bound phase. No trend generally lasts forever

in the market. After prolonged or medium or shorter duration up and

downtrend, the market often reverses and a move starts in the opposite

direction of the prior move. Often we find that well defined geometrical

patterns are formed in the chart which provides good indication of price

reversals. These patterns are called reversal classical chart patterns. When

they are formed as a bullish reversal pattern they are said to be part of

accumulation. On the other hand if they are formed at the top of a price

move just before bearish reversal,

then they are part of distribution. However, a geometrically shaped

consolidation does not necessarily mean price reversal. Often price

resumes the erstwhile trend post the consolidation move. These are called

continuation classical chart pattern. We will discuss about few of the

classical chart patterns in the following section.

Head and Shoulder & Inverse Head & Shoulder:

Head and Shoulder pattern is a bearish reversal pattern. This pattern

appears after an uptrend. This pattern is formed with three consecutive tops

with middle one being higher than the other two. The middle top is called

the head and the two side peaks are called the shoulders. On joining the

intermediate troughs, we get the neck-line. On ultimate break below the

neckline, usually a short trade is taken with a stop-loss above the top of

the nearest shoulder. The target is usually considered as the distance

between the neckline and head, projected from the point of break. If the

volume in the down leg of the right shoulder is on the higher side and break

happens with high volume, the conviction is on the higher side for the

reversal.

head

right shoulder

left shoulder

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klin
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An Inverse Head and Shoulder is just mirror image of the Head and Shoulder

pattern. This should appear after a sustained down trend, the rule of stop

loss and target are similar. This often acts as a very effective bullish

reversal pattern.

Double Tops and Bottoms

These chart patterns are well-known patterns that signal a trend reversal

– these are considered to be one of the most reliable patterns and are

commonly used. These patterns are formed after a sustained trend and

signal to chartists that the trend is about to reverse. These patterns are

created when price movement tests support or resistance levels twice and is

unable to break through. These patterns are often used to signal

intermediate and long-term trend reversals.

top 1 top 2

Double Top

double Bottom

Bottom 1 Bottom 2
 Triple Tops and Bottoms

These are another set of reversal chart patterns in chart analysis. These are

not as prevalent in charts as Head and Shoulders and Double Tops and

Bottoms, but 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 through. They signal a reversal of the

prior trend. A trade entry is initiated at the break of a neckline with a small

stop-loss and the target is measured as the distance between peaks/troughs

and the neckline

1 2 3

triple Top

triple Bottom

1 2 3
 Triangles

Triangles are one of the most well-known chart patterns used in technical

analysis. The three most common types of triangles, which vary in

construction and implications, are Symmetrical Triangle, Ascending

Triangle and Descending Triangle. These chart patterns are considered to

last anywhere from a couple of weeks (ideally more than 12 weeks ) to

several months. These are areas of consolidations after a trending move

and are generally continuation patterns, i.e. the erstwhile trends resumes

after the breakout. However, in certain cases they act as reversal patterns.

They can appear both in up-trend and down-trend.

symmetrical Triangles

breakout

ascending Triangles

breakout
 support break

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. The patterns are generally thought to last from

one to three weeks (Can last from 1 to 12 week but ideally they should last

)
between 1 and 4 weeks . They can appear both in up-trend and down-trend.
 Candlestick

Reversal Patterns

When we had discussed about the candlestick charts, we had said that they

have an edge over many other types of charts representation due to

recognizable chart patterns which are easy to define and which work

beautifully in the market. In this section we will discuss about few chart

popular candlestick patterns. Candlestick patterns provide entry and stop-

loss criteria, but there are no target setup as available in classical chart

patterns.

Hammer

Hammer is a single candlestick bullish reversal pattern. This occurs after a

prolonged down trend. Ideally there should be a gap down opening and

bears should be able to push the price lower as a continuation of a

downmove. At this point, bulls should overpower bears and push price

higher and make close near to the opening price. The candle formed in this

process should be having a small body, a big lower shadow and a

negligibly small upper shadow. Ideally the lower shadow should be at least

twice the length of the body. The color of the body can be either green or

red, but if the body color is green, then the hammer is considered a little

more bullish, as the bulls were strong enough to close the price higher

than the open price. The next day or in next two three days, ideally there

should be a gap up opening or price should move above the high of the

hammer candle. This is called confirmation or validation of the pattern. A

hammer like candle, without validation has no real significance. If price

moves above the high of the hammer a buy trade can be taken with a stop

loss below the low of the candle

 the highest price of the day

opening price

closing price

Hammer

the lowest price of the day

Hammer
 Shooting Star

A shooting star is just like a mirror image of a hammer candle. First there

should be a sustained up trend and then there has to be a gap up opening.

The bulls should push price higher in the initial part of the day. Then, later

in the day bears should take in the control of the stock and push prices

down. Eventually the closing price should be very close to the opening

price, resulting in a candle with a small green or red body, a big upper

shadow and a small or negligible lower shadow. The upper shadow of the

candle should be at least twice the length of the body. Now a confirmation

of the shooting star pattern comes if price moves below the low of the

candle within next 2-3 candles. On confirmation, a short trade should be

taken with stop loss above the high of the high of the candle. A shooting

star pattern with a red body is considered slightly more bearish than one

with a green body. It is often observed that shooting star candlestick

pattern acts as bearish reversal pattern and triggers a down move after an

uptrend.

long upper

shadow

high high

low low

little to no

upper shadow

 Inverted-Hammer

An inverted hammer is a single candlestick bullish reversal pattern. The

pattern appears after a sustained down-trend. At the beginning of the day

there should be a gap-down opening. However, bulls should push the price

higher during the course of the day. Eventually the bears should push the

price lower during the course of the day and close near the open price. The

resulting candle should have a small body, red or green, the upper wick

should be at least twice the body of the candle and the lower shadow

should be quite small or negligible in size. If the body is green it is relatively

bullish than if it is red. This looks like an inverted hammer as the name

suggests. The philosophy is that bears were not able to push the price below

the opening price during the course of the day. This pattern, however, is

considered to be little less bullish than the hammer itself, because in hammer

bulls are able to force a higher close by the end of the day. The

confirmation of the pattern comes once the price moves above the high of

the candle. On confirmation a buy trade can be initiated with a stop loss

below the low of the candle. Inverted hammer occurs little less frequently

in market as compared to hammer pattern.

CONFIRMATION COMES

WHEN PRICE moves above

the high of the candle

 Hanging Man

Hanging Man is a single candlestick bearish reversal pattern. This appears

after a sustained up-move. The candle looks like a hammer; only difference is

that it appears at the end of an up-trend. The candle should have a small

body at the top (red/green) and a lower shadow at least twice the length

of the body. There should be very small or no upper shadow. A red colored

body of hanging man pattern is more bearish than a hanging man pattern

with green body. The confirmation of the pattern happens when price moves

below the low of the candle. On confirmation a trader may take short

trade with stop-loss above the high of the candle. The hanging man pattern

is bearish counterpart of Bullish inverted hammer. However this appears

much less frequently than shooting star which is another bearish reversal

pattern
 Bullish Engulfing Pattern

Bullish candlestick pattern is a two-candlestick bullish reversal pattern.

First there should be a downtrend. Then we should have a red candle

followed by a green candle. The body of the green candle should engulf the

body of the first red candle. The idea is in the second candle that

constitutes the pattern, the day started below the previous day’s close on

a bearish note. However, as the day progresses, the bulls take-over the

charge and eventually succeed to close above previous day’s high. In such a

scenario, if the highest point of these two candlesticks is breached on the

upside within next 2-3 candles, the bearish engulfing pattern is said to be

confirmed. A buy trade can be initiated upon confirmation with stop-loss

below the low of the two candlestick patterns.

 Bearish Engulfing Pattern

Bearish Engulfing pattern is just mirror image of bullish engulfing pattern

with bearish implication. First, we should be having an up-trend. Then we

should have a green candle as continuation. The next day should see a gap

up above the close of previous day. The 2nd day candle should eventually

close red with its body totally engulfing the body of the first candle. The

confirmation comes when within next 2-3 candles the price moves below the

low of the two candles forming the Bearish Engulfing pattern. On

confirmation a trader may take a short trade with stop loss above the top

of the two candlestick patterns. Larger the 2nd candle, more bearish is the

pattern
 Doji

The Doji is a single candlestick pattern. The Doji assumes significance, when

it appears after a trending move, be it up or down. The Doji symbolizes

indecision and after a Doji the incumbent trend can reverse, go sideways or

continue uptrend. However, appearance of a Doji is a signal of caution that

the probability is high that the erstwhile trend may be coming to an end.

Doji is a candle which has open and close almost at similar level. There can

be upper shadows and lower shadows of various proportions.

 Indicators

Indicators are tools to aid decision making in the market. There are various

types of indicators which measures or indicate the trend, the momentum, the

volatility and various other aspects in the market. There are thousands of

indicators which are derived out of the price and volume data over time.

Here we introduce you with four very useful indicators.

Simple Moving Average

Simple Moving Average or SMA is a moving

average which is calculated by adding the

closing price of security prices for the last n-

periods and dividing it by the total number of

time periods.

For example, suppose we want to calculate the 9

periods SMA of a security price.

First, we will add the last 9 Days Closing Price

of the security and then it will be divided by the

9 periods. Calculation for 9 periods

SMA:

(P9+P8+P7+P6…. +P1)/9
Where,

P=Price
P9= Closing Price 9 days ago

SMA is a Technical indicator which is represented

by a line and it is directly plotted on the

security price. As per the choice of the trader,

the periods can be changed in the SMA indicator.

For shorter-term SMA, we can use 5,8,13 etc. For

Medium term 20, 34, 50 and for longer term

100,200 can be used

If a medium term moving average is having a positive slope, the trend is

considered to be positive in medium term and vice versa. Price breaching a

particular moving average from down to up is considered a bullish sign.

Similarly, price breaching a particular moving average from upside and

closing below is considered bearish. If we find a shorter term moving

average crossing a medium term moving average from below, often this is

called bullish crossover. On the other hand if a shorter term moving

average crosses a medium term moving average from upside to below that is

called a bearish crossover and often considered a signal of bearishness.

 RSI

Relative Strength Index (RSI) is a momentum oscillator, developed by J.

Welles Wilder, which measures the speed and velocity of price movement of

trading instruments (stocks, commodity futures, bonds, forex etc. ) over a

specified period of time.

The objective of RSI indicator is to measure the change in price momentum. It

is a leading indicator and is widely used by Technical Analysts over the

globe. RSI can be used to spot a general trend. It is considered overbought

when it goes above 70 and oversold when it goes below 30. 30-70 region of

RSI is considered to be normal zone.

Calculation
The formula for calculating Relative Strength Index is as follows

RSI = 100 – 100 / (1 + RS)

RS = Average Gain over specified period/ Average loss over the same period

The default setting for Relative Strength Index is 14, but you

may change this value to decrease or increase

sensitivity based on your requirement.

Usage

There are many kinds of usage of RSI. However most popularly, if we find

that, RSI breaching the 70 level and at the same time we spot a bearish

reversal pattern, then there is opportunity to take short trade with stop

loss. Similarly if RSI breaches 30 from below and we observe a bullish

reversal pattern, there is opportunity to take long trade with stop loss.
 ADX

1987 J. Welles Wilder developed the Average Directional Index (ADX) as an

indicator of trend strength.

ADX quantifies the velocity of price regardless of its

north/south/eastward movement. Hence, two other lines i.e. Positive

Directional Indicator (+DI) and Negative Directional Indicator (-DI) are used

on the charting system which act as complements to ADX. When ADX is above

20 or 25, generally Market is considered to be in a trending phase. The trend

can be up or down. On the other hand, +DI crosses -Di line from below, the

market generally moves up and when the -DI line crosses the + DI line from

below, market generally moves in the downward direction