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Technical Analysis

This is the presentation on the technical analysis and the tools used for technical analysis and types of charts used in the technical analysis

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Harsharaj Melanta
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134 views17 pages

Technical Analysis

This is the presentation on the technical analysis and the tools used for technical analysis and types of charts used in the technical analysis

Uploaded by

Harsharaj Melanta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TECHNIC AL ANALYSIS

DATE OF PRESENTATION : 29/09/2020

HARSHARAJ U MELANTA | AKSHAY N S | G THANUSHA | AMARESH PATIL |

K N SANDESH | BIBI HAJEERA


What is Technical Analysis?
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities
by analyzing statistical trends gathered from trading activity, such as price movement and volume.

Dow Theory:
The Dow theory is a financial theory that says the market is in an upward trend if one of its averages (i.e. industrials or
transportation) advances above a previous important high and is accompanied or followed by a similar advance in the
other average.

• It was developed by Charles H Dow, with Edward Jones and Charles Bergstresser

• Charles Dow died in 1902, and due to his death, he never published his complete theory on the markets
Components to the Dow Theory:
 The Market Discounts Everything
 There Are Three Primary Kinds of Market Trends
 Primary Trends Have Three Phases
 Indices Must Confirm Each Other
 Volume Must Confirm the Trend
 Trends Persist Until a Clear Reversal Occurs

Special Considerations:
 Closing Prices and Line Ranges
 Signals and Identification of Trends
 Reversals
Types of Charts:
1. Line Chart 2. Bar Chart

3. Candlestick Charts 4. Point and Figure Chart


Price Patterns:
1. Continuation Patterns:
• Pennants
• Flags
• Wedges
• Triangles

2. Reversal Patterns:
• Double Tops/ bottoms
• Triple Tops/Bottoms
• Head-and-Shoulders Top/bottom
What is a Trendline?
Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices together or show some
data's best fit. The resulting line is then used to give the trader a good idea of the direction in which an investment's
value might move.

Types of Trendlines:
 The Standard Trend Line

 The Parallel Trend Line

 Supplement Trend Lines


Advanced Technical Tools:
 On-Balance Volume

 Accumulation/Distribution Line

 Average Directional Index

 Aroon Indicator

  MACD

 Relative Strength Index

 Stochastic Oscillator
Elliott Wave Theory:
Elliott wave theory is a method of technical analysis that looks for recurrent long-term price patterns related to persistent
changes in investor sentiment and psychology. The theory identifies waves identified as impulse waves that set up a
pattern and corrective waves that oppose the larger trend.

Elliott Wave Cycle:


• Impulse wave/dominant wave/Five wave pattern
• Corrective wave/Three wave pattern

Elliott Wave Theory Interpretation:


• Five waves move in the direction of the main trend, followed by three waves in a correction (totaling a 5-3 move).
This 5-3 move then becomes two subdivisions of the next higher wave move.
• The underlying 5-3 pattern remains constant, though the time span of each wave may vary.
Elliott Wave Rules:
• Wave 2 never retraces more than 100% of wave 1.
• Wave 3 cannot be the shortest of the three impulse waves, namely waves 1,3 and 5.
• Wave 4 does not overlap with the price territory of wave 1, except in the rare case of a diagonal triangle formation.
Capital Market Theory: CAPM
Capital Asset Pricing Model (CAPM), depicts the trade-off between risk and return for efficient portfolios. It is a
theoretical concept that represents all the portfolios that optimally combine the risk-free rate of return and the market
portfolio of risky assets.

CAPM formula:

Ra​=Rrf​+βa​∗(Rm​−Rrf​)
where:
Ra​=Expected return on a security
Rrf​=Risk-free rate
Rm​=Expected return of the market
βa​=The beta of the security
(Rm​−Rrf​)=Equity market premium​
Capital Market Theory: Arbitrage Pricing
Theory
• APT is a multi-factor technical model based on the relationship between a financial asset's expected return and its risk.
• The model is designed to capture the sensitivity of the asset's returns to changes in certain macroeconomic variables.
• Investors and financial analysts can use these results to help price securities.

APT Formula:

E(Rp​)=Rf​+β1​f1​+β2​f2​+…+βn​fn​
where:
E(Rp​)=Expected return
Rf​=Risk-free return
βn​=Sensitivity to the factor of n
fn​=nth factor price​
Capital Market Theory: Utility Theory
• It refers to how much benefit investors obtain from portfolio performance.
• Risk and return are trade-offs and follow a linear relationship.
• High-risk investments present a high likelihood of an investor losing all his/her money.

Marginal Utility:
Marginal utility refers to how much incremental u an individual derives from obtaining one additional
unit of a certain good or service.

Types of Utility Curves:

• Type I – Risk Averse


• Type II – Risk Neutral
• Type III – Risk Loving
Capital Market Theory: Portfolio
Theory
• Portfolio theory is a theory on how risk-averse investors can construct portfolios to maximize expected return based
on a given level of market risk.

• Harry Markowitz pioneered this theory in his paper "Portfolio Selection," which was published in the Journal of
Finance in 1952.

• He was later awarded a Nobel Prize for his work on modern portfolio theory.

• Portfolio theory argues that an investment's risk and return characteristics should not be viewed alone, but should be
evaluated by how the investment affects the overall portfolio's risk and return. 

• Portfolio Theory assumes that investors are risk-averse

• The expected return of the portfolio is calculated as a weighted sum of the individual assets' returns.
Capital Market Theory: Multi-factor
Model
• A multi-factor model is a financial model that employs multiple factors in its calculations to explain market
phenomena and/or equilibrium asset prices.
• A multi-factor model can be used to explain either an individual security or a portfolio of securities.
• Multi-factor models are used to construct portfolios with certain characteristics, such as risk, or to track indexes
• Models are judged on historical numbers, which might not accurately predict future values.  

Multi-factor Model Formula:

Ri = ai + _i(m) * Rm + _i(1) * F1 + _i(2) * F2 +...+_i(N) * FN + ei


Where:
Ri = return of security
Rm = market return
F(1, 2, 3 ... N) = each of the factors used
_  = the beta with respect to each factor including the market (m)
e = error term
a = intercept
Difference Between Fundamental and Technical Analysis:
Basis for Comparison Fundamental Analysis Technical Analysis
Meaning Fundamental Analysis is a Technical analysis is a
practice of analyzing method of determining the
securities by determining future price of the stock
the intrinsic value of the using charts to identify the
stock. patterns and trends.
Relevant for Long-term Investments Short-term Investments
Function Investing Trading
Objective To identify the intrinsic To identify the right time
value of the stock. to enter or exit the market.
Decision making Decisions are based on the Decisions are based on
information available and market trends and prices of
statistic evaluated. stock.
Focuses on Both Past and Present data. Past data only
Form of data Economic reports, news Chart analysis
events and industry
statistics.
Basis for Comparison Fundamental Analysis Technical Analysis
Future prices Predicted on the basis of Predicted on the basis of
past and present charts and indicators.
performance and
profitability of the
company.
Type of trader Long term position trader. Swing trader and short
term day trader.
THANK YOU!

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