FIN 555 Introduction To Technical Analysis PDF

FIN 555 INTRODUCTION TO TECHNICAL ANALYSIS CHAPTER 1 INTRODUCTION TO TECHNICAL ANALYSIS 1. The definition and Interaction of Trends Chapter Outline: 2. Dow Theory and Random Walk Theory 3. Efficient Market Hypothesis 4. Typical Parameters for Intermediate Trends 2 7 - The Definition - price - volume...

FIN 555 INTRODUCTION TO TECHNICAL ANALYSIS CHAPTER 1 INTRODUCTION TO TECHNICAL ANALYSIS 1. The definition and Interaction of Trends Chapter Outline: 2. Dow Theory and Random Walk Theory 3. Efficient Market Hypothesis 4. Typical Parameters for Intermediate Trends 2 7 - The Definition - price - volume Technical analysis is a method of forecasting the direction of financial market prices through the evaluation of historic price and, where available, volume data. *https://www.sta-uk.org/technical-analysis/ MARTIN J. PRING Art to identify a trend reversal early on and ride on that trend FRED K.H. TAM A study of human psychology, manifested in the charts through price and volume, for the purpose of forecasting future price behavior. CLIFFORD PISTOLESE The use of price and volume charts as the basis for investment decisions. 3 The Definition A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Stock prices is a function of supply and demand for shares of stock. The historical data of prices and volumes are transformed and expanded into graphic forms. It is the science of recording the actual history of trading. Generated by market activity, such as past prices and volume. good bad news -> demand t > news- , demandt supply t , , price supply t , price + The Definition TA believes that the prices movement of a stock has a kind of a pattern. It attempts to detect patterns in the market action that they can identify as having happened often enough in the past to be reliable as an indicator of future prices levels. Investors began keeping “charts” of stock market movements to look for patterns, or “formations” that indicated whether to buy or sell. The way to predict stock prices is to develop a & familiarity with past patterns of price behaviour in order to recognize situations of likely reoccurrence. No intrinsic value in technical analysis!!! - price - if next pattern nail sharp -history -Saham , jatuh repeat slow chapter sharp akan itself steady is safer The Definition WHO IS TECHNICAL ANALYSIST? A technical analyst, or technician, is a securities researcher who analyzes investments based on past market prices and technical indicators. ↳ price -analyse an volume or justify , no need calculate manually 6 Among the analyst: 1. Dato Nazri Khan (Chief Executive Officer and Chief Investment Officer Hermana Capital Berhad dan Chairman & Lifetime Fellow Malaysian Association of Technical Analysts) 2. Martin J. Pring 3. Guido Riolo (Head Technical Analysis of Bloomberg) 4. Nik Mohd Ihsan Raja Abdullah (MSTA (Distinction), CFTe, is a Chartist at Maybank Investment Bank Berhad) 7 covid-19 + sentiment > - stock price towards covid + healthcare , stock ↑ examine what investors fear or think about those developments and whether or not investors have the wherewithal to -breakout -ada teknik untuk invest ( investment back up their opinions; these two concepts are called psych (psychology) and supply/demand. chart strategy Technicians employ many techniques, one of which is the use of charts. Technicians use various methods and tools, the study of price charts is but one. - technical investment Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Supply/demand indicators monitor investors' liquidity; margin levels, short interest, cash in brokerage accounts, etc. 8 Stock price start uptrend (only insider know, baleal dapat project 1. Market action discounts everything This means that the actual price is a reflection of everything that is known to the market that could affect it. Some of these factors are:fundamentals (inflation, interest rates, etc.), supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes. 2. Prices move in trends. uptrend / downtrend Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. There are also recognized patterns that repeat themselves on a consistent basis. 3.History repeats itself. intechnical repeat history , pattern Forex chart patterns have been recognized and categorized for over 100 years, and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little overtime. Since patterns have worked well in the past, it is assumed that they will continue to work well into the future. Philosophy of TechnicalAnalysis 1. Interaction of Trends A trend is a period in which a price moves in an irregular but persistent direction. It may also be described as a time measurement of the direction inprice levels covering different time spans. Three Important Trends: 1. Primary 2. Intermediate 3. Short-term 10 The Market Cycle Model > - dalam ada short term uptrends Source : Pring (2014) intermediate y9 down trend 11 Two Supplementary Trends: 1. Intradays 15-30 minute a b scalper, buye buy too intraday sell tommorow The principles of technical analysis apply equally to these very short- term movements, and are just as valid. ↓ There are two main differences; reversals in the intraday charts only have a very shortterm implication and are not a significant for longerterm price reversals. extremely short-term price movements are much more influenced by psychology and instant reaction to news events than are longer- term ones. 12 2. Secular Trend The primary trend consists of several intermediate cycles, but the secular, or very long-term, trend is constructed from a number of primary trends. This “super cycle,” or long wave, extends over a substantially greater period, usually lasting well over 10 years, and often as long as 25 years, though most average between 15 and 20 years. 13 The Relationship Between Secular and Primary Pool (bear( (bull ( Trends market Source : Pring (2014) 14 PEAK-and-TROUGH PROGRESSION Peak and trough progression is the simplest of trend determining technique. This technique was developed by Charles Dow's original observation, that a rising market moves in a series of waves. As we all know prices never move in a straight line, it always moves up and down. When a series of peaks and troughs are interrupted a trend reversal is signalled. - ↳ Traversal - lukis till Saham higher high peak zigzag makin vendah , akan start jatuh 1 5 16 sell signal i Don't be attached !! The figure shows that the price is advancing in a series of waves, with each peak and trough higher than its predecessor. Then at point A the rally fails to move to a new high, and the reaction pushes it below the previous trough (Point B) and gives a signal the trend has reversed The figure shows a declining market where the process above is reversed, at point C the price fails to take out the final low point. This indicates that a reversal is on the way, but the actual trend reversal is not signalled until it crosses point D. It is the not surprising that the price may fall below D again, however as long as the price stays above the previous trough the trend is still classified as bullish. - makiu - peak nail # - - #through makin I ecoupe oribal naik - - Buy - Reversal after new bullish through cross at peak higher cross - occur as long even higherD if as peal D higher don't signal A PEAK-andTROUGH DILEMMA In Figure 1.5, example a, the market has been advancing in a series of rising peaks and troughs, but following the highest peak, the price declines at point X to a level that is below the previous low. At this juncture, the series of rising troughs has been broken, but not the series of rising peaks. In other words, at point X, only half a signal has been generated. The complete signal of a reversal of both rising peaks and troughs arises at point Y, when the price slips below the level previously reached at point X. A G highera low through G - - - - reversal uptrend - C - - 19 WHAT CONSTITUTES A LEGITIMATE PEAK AND TROUGH? Most of the time, the various rallies and reactions are selfevident, so it is easy to determine that these turning points are legitimate peaks and troughs. Technical lore has it that a reaction to the prevailing trend should retrace between one-third and two- thirds of the previous move. Tangan amik yg amik nail stock pullbackCepat & , pasta jatuh Mendadak + weak Jaham Likit 20 Sideway -break support pupae downtrend xo ↳ e 21 2. Dow Theory  Derived from 255 Wall Street Journal editorials by Charles H.Dow (1981-1902).  Charles H Dow, known as “Guru” of technical analysis.  One of the oldest technical methods for analyzing security prices.  It is an aggregate measure of a security prices hence does not predict the direction of a change in individual stock prices  Show a direction that the market will take.  Partly based on empirical observation, partly based on intuition- to identify the primary trend in the stock market.  Identifies the top of bull market and the bottom of a bear market. 22 I 23 ~ market average must more industry, transponee e in same direction 1. The averages discount everything 6 BasicTenets of Dow Theory 2. The market has three trends 3. Major trends has three phase 4. The averages must confirm each others 5. Volume must confirm the trend 6. A trend is assumed to be in effect until it gives definite signals that it has reversed 1. The average discount everything Dow believes that every possible factor affecting supply and demand must be reflected in the market averages. Stock prices quickly incorporate new information as soon as it become available. Once news is released, stock prices will change to reflect this new information 25 2. The market has three trends Primary @ Major trends – Usually last for more than a year and possibly several years. It can be bullish or bearish trend, Secondary @ Intermediate trends – Represents correction in the primary trends and usually last for 3 weeks to 3 months with retracement normally between 1/3 & 2/3 of major trends. Minor trends – Shorter term fluctuation in the intermediate trends, less than 3 weeks @ 1 month @ below 26 3. Major trends has three phase sideways > - First @ Accumulation phase – Investors “in the know” are actively buying (selling) stock against the general opinion of the market. – The stock price does not change much because these investors are in the minority demanding stock jerung d beli - Second phase uptren mark sideways up retailer before. masue – Most technical followers participate with improved business news – The market catches on to these astute investors and a rapid price change occurs Third @ Final phase > - distribution + anfred may – The astute investors begin to distribute their holdings to the market 27 4. The average must confirm each others Dow believed that the bull and bear market signal could take place only if both average give the same signal The signal not necessarily occur simultaneously, but closer together the better If the two average diverge from one another, Dow believed that the prior trend is assumed to be still in effect or try have reversal.? 28 5. Volume must confirm the trend Important as a secondary factor in confirming the signals generated in price charts Volume should expand in the direction of the major trend It means that if the major trends is up, volume should expand while prices move higher but volume should diminish while prices dip Conversely, when major trend is down, volume should expand while priced drop and should diminish as prices rebound higher. p Bulls pV} he Base 29 6. A trend is assumed to be in effect until it gives definite signals that it has reversed This tenet in other words means that a trend in motion tends to continue until it gives clear indication that the trend has been aborted 30 experience 2 years still known Critism on the Basics Tenets of Dow Theory as not a pro ! 1. The signals are too late It comes on the second phase of the uptrend. It needs 2 rising highs and 2 rising lows to confirm the uptrend. By the time a signal appears the investors are deprive about 20 to 30 percent of the move. trustworthy absolutely 2. It is not infallible Investors have to use their own skill to interpret the charts. This leaves a lot of rooms for doubts. > - Critism on the Basics Tenets of Dow Theory 3. It does not help the intermediate trend investors. Changes in the intermediate cannot be interpreted well in advance because the theory is mainly concerned with the primary trends. The theory does not give any warning of changes in the intermediate trend. 4. Trading is not done onaverages. Dow theory does not and will not inform you which stocks to buy or sell Introduce in 1973 when Burton Malkiel wrote "A Random Walk Down Wall Street", a book that is now regarded as an investment classic. Random Walk Theory Sideways + Students stock cannot predict - practice knowledge Describing the behavior of equity prices. Stock prices move up and down randomly. Stock cannot be determined from historical price information. Investors cannot expect price movements to follow any pattern. A “fair game” pattern. 28 3. Efficient Market Hypothesis The Efficient Market Hypothesis (EMH) essentially says that all known information about investment securities, such as stocks, is already factored into the prices of those securities. Therefore, assuming this is true, no amount of analysis can give an investor an edge over other investors, collectively known as "the market." EMH does not require that investors be rational; it says that individual investors will act randomly, but as a whole, the market is always "right.“ In simple terms, "efficient" implies "normal.“ For example, an unusual reaction to unusual information is normal. If a crowd suddenly starts running in one direction, it's normal for you to run in that direction as well, even if there isn't a rational reason for doing so. 30 There are three forms of EMH: 1. Weak Form EMH: Suggests that all past information is priced into securities. Fundamental analysis of securities can provide an investor with information to produce returns above market averages in the short term, but there are no "patterns" that exist. Therefore, fundamental analysis does not provide long-term advantage and technical analysis will not work. Idah reflect all info fro 2. Semi-Strong Form EMH: Implies that neither fundamental analysis nor technical analysis can provide an advantage for an investor and that new information is instantly priced in to securities. - effected past priced volume , public info , private into 3. Strong Form EMH. Says that all information, both public and private, is priced into stocks and that no investor can gain advantage over the market as a whole. Strong Form EMH does not say some investors or money managers are incapable of capturing abnormally high returns because that there are always outliers included in the averages. Buy on Malaysian company bulan : : bulan : 12 bar I , sell market tutup 2 bulan rumor very on news strong 31 a announced dak naik (thrun 4. TYPICAL PARAMETERS FOR INTERMEDIATE TRENDS Successful analysis of intermediate trends for any market or stock offers the following advantages: Changes in intermediate trends aid in identification of turning points in the primary trend. Intermediate-term trading involves fewer transactions than trading of minor price movements and, therefore, results in lower commission and execution costs. Intermediate-trend reversal points occur several times a year and can, if properly interpreted, allow a relatively high and quick return on capital. Intermediate Cycles Defined A primary trend typically consists of five intermediate trends, three of which form part of the prevailing trend, while the remaining two run counter to that trend. In a bull market, the intermediate countertrends are represented by price declines; in a bear market, they form rallies that separate the three intermediate down waves, as shown in Figure 4.1. Intermediate-term trends that move in the same direction as the primary trend are generally easier to profit from. Those who do not have the patience to invest for the longer term will find that successful analysis of intermediate movements offers superior results, especially as the day-to- day or minor swings are, to a large degree, random in nature and, therefore, even more difficult to capitalize on. Intermediate movements can go either with or against the main trend, which means that there is an intermediate cycle similar to a primary one. An intermediate cycle consists of a primary intermediate price movement and a secondary reaction. It extends from the low of one intermediate trend to the low of the other, as shown in Figure 4.2. sentiment need plan cannot control Causes of Secondary Reactions The primary trend of stock prices is determined by the attitudes of investors to the future flow of profits. This is will determined to a large degree by the course of the business cycle, it would seem illogical at first to expect longer-term movements to be interrupted by what often prove to be very uncomfortable reactions (or in the case of a bear market, very deceptive rallies). However, at any one time, there are four influences on prices. They are psychological, technical, economic, and monetary in nature. Using Intermediate Cycles to Identify Primary Reversals 1.Number of Intermediate Cycles A primary movement may normally be expected to encompass two and a half intermediate cycles (see Figure 4.3). Unfortunately, not all primary movements correspond to the norm; an occasional primary movement may consist of one, two, three, or even four intermediate berlaken Amax cycles. Furthermore, these intermediate cycles may be of very unequal length or magnitude, making their classification and identification possible only after the event. Even so, intermediate-cycle analysis can still be used as a basis for identifying the maturity of the primary + divergent , if berlake bearish - - berlatt - - Isah ↑ - reversal upward - - - volume trend in most cases Price E tinggi - volume , ↓ - merisankan 2. Characteristics of the Final Intermediate Cycle in a Primary Trend In addition to actually counting the number of intermediate cycles, it is possible to compare the characteristics of a particular cycle with those of a typical pivotal or reversal cycle of a primary trend. These characteristics are discussed in the following sections: a) Reversal from Bull to Bear Market Since volume leads price, the failure of volume to increase above the levels of the previous intermediate-cycle up phase is a bearish sign. Alternatively, if over a period of 3 to 4 weeks, volume expands on the intermediate rally close to the previous peak in volume but fails to move prices significantly, it represents churning and should also be treated bearishly. b) Reversal from Bear to Bull Market The first intermediate up phase of a bull market is usually accompanied by a substantial expansion in volume that is significantly greater than those of previous intermediate up phases. In other words, the first up leg in a bull market attracts noticeably more volume than any of the intermediate rallies in the previous bear market. Another sign of a basic reversal occurs when prices retrace at least 80 percent of the previous decline. Again, the greater the proportion of retracement, the greater the odds of a reversal in the basic trend. If the retracement is greater than 100 percent, the odds clearly indicate that a reversal in the downward trend has taken place because the series of declining peaks will have broken down.