Introduction to

Technical Analysis
Contents
1. What’s Technical Analysis?
2. Graphs
3. Trends
4. The Golden Rule
5. Trends Lines, Support and Resistance
Levels
6. Retracements
7. Summary
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What’s Technical Analysis?
A method for estimating the future prices of
securities based chiefly on two parameters:
1.Price History
2.Trade Volumes

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Technical Analysis Does Not Look At…

Quarterly Reports, Macro/Micro

Indicators, Interest Rates, Stock
Market Indices, Predictions,
Statements, News, Rumors…
Because *:
1. Security prices are ultimately set by market
forces – buyers and sellers.
2. History repeats itself, so…
3. Historic price and volume data is sufficient to
assess and predict buyer and seller behavior
* Per Technical Analysis theory

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Candlestick Charts
Most popular type of graph to use in Tech Analysis

High Price
Opening of period
Closing
Price price

Closing Opening
Low Price
Price Price
Dow of period Up
n
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 Graph Time Resolutions
• Daily – 1 candle = 1day
– Useful for analyzing short-term
trends

• Weekly – 1 candle = 1 week

– Useful for analyzing
intermediate trends

• Monthly – 1 candle =
1month
– Useful for long-term analysis

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Trend – The Direction of Prices
3 Types of Trends:

Uptrend

Downtrend

Sideways Trend
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Golden Rule of T. Analysis Trading

Trade With The

Trend
(The Trend is your Friend)

• In an uptrend – Buy (Long)

• In a downtrend – Sell/Don’t Buy/Short
• In a sideways-trend – Sell/Don’t Buy

So, how do you recognize a trend?

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Trend Characteristics - Price
Formal Uptrend
1. Every peak is higher than the
previous peak
2. Every trough is higher than the
previous trough 

Formal Downtrend
1. Every peak is lower than the
previous peak
2. Every trough is lower than
the previous trough 

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Trend Characteristics - Volume
• Trade volume = amount of securities traded
• In distinct trends volumes typically:
– Are larger than in periods of sideways trends
– Grow with the trend

uptrend
sideways

sideways uptrend

growing Medium volumes growing

Small volumes

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Trend Characteristics – Time Period
Trends are limited to a time period:
– Long Term Trend – 1 year or more
• AKA Main Trend
• Use monthly chart to detect
– Intermediate Trend – 2-12 months
• Most investors use it
• Use weekly or daily chart to analyze
– Short term Trend – 1 month or less
• Use daily chart
Important: Long-term trends will almost always include
intermediate and short term trends in the opposite
direction

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Trendline
• Trendline = A line drawn over highs or
under lows to show the prevailing direction
of price
– Needs to touch at lin e
trend
least 3 peaks or troughs rm
ia te te
rm ed
Int e
– Helps determine future
prices, change rates, m
t ter e
buy/sell opportunities o r
Sh endli
n
tr
and more

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Support and Resistance Levels
Horizontal trendlines may indicate Support and Resistance levels
– Support level – The price level which the security has had difficulty
falling below. It is thought of as the level at which a lot of buyers tend
to enter the stock.
– Resistance level - The price level which the security has had
difficulty rising over. It is thought of as the level at which a lot of
sellers tend to offload.
Note: Round numbers (100, 800, etc.) tend to create support/resistance
levels

Resistance Level

Breakout

Support Level

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Support and Resistance - 2
Trendlines may
indicate the change Resistance
in support and line
resistance levels
during a trend Breakout
Support
line

Example: an uptrending security

with parallel support and
resistance lines (price channel)
Note: support and resistance
trendlines are not always
parallel 14
Support and Resistance Role Reversal

• When a support level is broken it

may turn into a resistance level
• And vice-versa
Breakout of
support level
turns it into a
resistance level

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Retracements
• Retracement = A temporary reversal in the direction of the price of a
security, countering the prevailing trend.
• Retracements usually occur due to profit-taking
• Retracements break the distinctiveness of trends
– In uptrends – create a trough that is lower than the previous trough
– In downtrends – create a peak that is higher than the previous trough

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The Risk of Retracements
• Retracements may fool
us into thinking the
trend has stopped or
reversed
• Trading based on
retracements will cause
us to lose or profit less
Example: in this
downtrend there are two
retracements. Buying
the security at these
. times will result in loss
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Retracement Indicators- Price
1. Price should retrace by no more
than 66% of the size of the previous
move
• In theory the change would often
correlate with Fibonacci’s ratios:
Retracement
size
23.6%, 38.2%, 50%, 61.8%
0%
• Fibonacci retracements is a
popular tool to predict Uptrend
retracement end prices Move 38.2%
– Draw a line between the high and size 50%
low of the last trend and the tool will
show relative Fibonacci levels 61.8%
Retracement

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Retracement Indicators - Other
2. Duration - retracements are short-lived
– No more than 2-3 weeks in intermediate term
2. Usually arrive after strong price moves
– Inducing profit taking
2. Volumes decline as the retracement progresses
3. Contradicting/Weak strength indicators
– We’ll discuss those in the next slide deck
2. Invariably followed by a higher/lower peak/trough

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 Summary - Med-Short Trends Example
Uptrend stopped at 1000

Uptrend stopped Sideways

at 900 Up
Trend
Retracement

Retracement
Starts at 700
Uptrend
and stops at 800
Strong 900 level
Sideway Trend broken
down-
b/w 630-700 800 level induces
trend
a retracement

level breakout 700

High
Volume growth
Volumes Small volumes

Note how support and resistance level build at round numbers:*

…700, 800, 900
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How Should We Trade?

Sell Long
Buy Short Hold

Hold short

Sell Short Buy long

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Photo Credits
• Stopwatch / casey.marshall -
http://www.flickr.com/photos/rsdio/3642425935

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