Project report on sbin technical Analysis 120405014438 Phpapp01

8/12/2019 Project report on sbin technical Analysis 120405014438 Phpapp01

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Technical analysis

(Analysis of State Bank of India)

Rishikesh R Kshirsagar

Masters in Financial Services Management (M.F.S.M)

Academic Year !"##$#!

%nder the &'idance of

rof.Pankaj Bhattacharjee

University of MumbaisAlkesh Dinesh Mody Institute For

Financial and Management Studies

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Declaration

I Mr. Rishikesh Ravindra Kshirsagar *YMFSM St'dent ofAlkesh +inesh Mody Instit'te for Financial and

Management St'dies here,y declare that I have

com-leted the -roect titled *echnical analysis of State

Bank of India d'ring the academic year !"##$!"#!.

*he re-ort /ork is original and the information0data

incl'ded in the re-ort is tr'e to the ,est of my

Kno/ledge. +'e credit is e1tended on the /ork of2iterat're0Secondary S'rvey ,y endorsing it in the

Bi,liogra-hy as -er -rescri,ed format.

Signat're of the St'dent

/ith +ate

Rishikesh Ravindra

Kshirsagar

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University of MumbaisAlkesh Dinesh Mody Institute For

Financial and Management Studies

Certifcate

I rofessor Pankaj Bhattacharjeehere,y certify that

Mr. Rishikesh Ravindra Kshirsagar *YMFSM St'dent of

Alkesh +inesh Mody Instit'te for Financial and

Management St'dies has com-leted a -roect titled

*echnical analysis of State Bank of India in theacademic year !"##$!"#!. *he /ork of the st'dent is

original and the information incl'ded in the -roect is

tr'e to the ,est of my Kno/ledge.

Signat're of &'ide /ith +ate

rof.anka Bhattacharee

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TAB! "F #"$T!$TS

S%$"% &A'TI#UA'S &A(!

$"%

1. Introduction 5

2. Technical analysis 8

3 Dow Theory 10

4 Drawbacks / limitations o technical analysis 15

5 Tools ! Instruments in technical analysis 18

" #hart Ty$es 20

% Trends In Technical &nalysis 3%

8 'hy (olume Is Im$ortant 45) #hart *atterns 48

10 Technical Indicators %3

11 Technical analysis o +,tate -ank o India 8%

12 -ibliora$hy )5

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I$T'"DU#TI"$)*

+,ATS T,IS !-UIT. A$A.SIS/

*roessional inestor will make more money ! less loss than who

let their heart rule. Their head eliminate all emotions or decision makin.

-e ruthless ! calculatin you are out to make money. Decision should be

based on actual moement o share $rice measured both in money !

$ercentae term ! nothin else. reed must be aoided

*atience may be a irtue but im$atience can reuently be

$roitable.

In !0uity Analysis antici$ated rowth calculations are based on

considered T, ! not on 6*7. 7uity analysis is basically a

combination o two inde$endent analyses namely fundamental analysis

1 Technical analysis% The subect o 7uity analysis i.e. the attem$t to

determine uture share $rice moement ! its reliability by reerences to

historical data is a ast one coerin many as$ect rom the calculatin

arious FI$A$#IA 'ATI"S $lottin o #,A'TS to e9tremely

so$histicated indicators.

& eneral inestor can a$$ly the $rinci$les by usin the sim$lest o

tools: $ocket calculator $encil ruler chart $a$er ! your cautious mind

watchul attention. It should be $ointed out that this euity analysis does

not discuss how to buy ! sell shares but does discuss a method which

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enables the inestor to arrie at buyin ! sellin decision. The inancial

analysts always need yardsticks to ealuate the eiciency !

$erormances o any business unit at the time o inestment. undamental

analysis is useul in lon term inestment decision. In undamental

analysis a com$any s oodwill

It;s $erormances liuidity leerae turnoer $roitability ! inancial

health was checked ! analysis with the hel$ o ratio analysis or the

$ur$ose o lon term successul inestment.

Technical analysis reers to the study o market enerated data like

$rices ! olume to determine the uture direction o $rices moements.

Technical analysis mainly seeks to $redict the short term $rice

traels. The ocus o technical analysis is mainly on the internal market

data i.e. $rices ! olume data. It a$$eals mainly to short term traders.

It is the oldest a$$roach to euity inestment datin back to the late

1)th century.

Assum2tions for the !0uity Analysis%

1. 'orks only in normal share


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2. 7uity analysis is $urely based on the I=(7,T>7=T *I?6,6*@

so the inestment obect has ital im$ortance associated to return alon

with risk.

3. #ash manaement ets the manitude role because the scenario o

euity analysis is reolin around the term money

4. *ortolio manaement risk manaement was u$ to the inestor s

knowlede.

5. #a$ital market trend is always a riend whether it is short run or lon

run.

". @ou are buyin stock ! not com$anies so don t are curious or $anic to

do

*ost


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). &n indiidual $erce$tions about the inestment return ! associated

risk may dier rom indiidual to indiidual.

10. &lthouh the euity analysis is art as well as sciences so it also has

some

79ce$tions

!-UIT. A$A.SIS

FU$DAM!$TA T!#,$I#A

A$A.SIS A$A.SIS

Technical analysis)*

Technical analysis refers to the study of market generated data

like prices & volume to determine the future direction of prices

movements.

Technical analysis mainly seeks to $redict the short term $rice

traels. It is im$ortant criteria or selectin the com$any to inest. It also

$roides the base or decision


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reuently used yardstick to check ! analyBe underlyin $rice $roress.

or that matter a erity o tools was consider.

This Technical analysis is hel$ul to eneral inestor in many

ways. It $roides im$ortant ! ital inormation reardin the current

$rice $osition o the com$any.

Technical analysis inoles the use o arious methods or

chartin calculatin ! inter$retin ra$h ! chart to assess the

$erormances ! status o the $rice. It is the tool o inancial analysis

which not only studies but also relectin the numerical ! ra$hical

relationshi$ between the im$ortant inancial actors.

The ocus o technical analysis is mainly on the internal market

data i.e. $rices ! olume data. It a$$eals mainly to short term traders. It

is the oldest a$$roach to euity inestment datin back to the late 1)th

century.

It uses charts and com$uter $rorams to study the stock;s tradin

olume and $rice moements in the ho$e o identiyin a trend.

In act the decision made on the basis o technical analysis is done only

&ter inerrin a trend and udin the uture moement o the stock on

the basis o the trend. Technical &nalysis assumes that the market is

eicient and the $rice has already taken into consideration the other

actors related to the com$any and the industry. It is because o this

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assum$tion that many think technical analysis is a tool which is eectie

or short


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The short swin which usually moes or short time like

two weeks and e9tends u$ to a monthA this moement can

be called a short term moement and

The third moement is also the main moement and it

coers or years in its duration.

&ccordin to the ty$e o moements they hae been ien

s$ecial names.

The narrow moement is called 3fluctuations the short

swin is better known as 3secondary movementsand the

main moement is also called the 32rimary trends%

=arrow moements are called 3fluctuations% ,econdary

moements are those which last only or a short while and

they are also known as 4corrections5% *rimary trends are

thereore the main moement in the stock market. It is

also called 3Bears5 and 3Bulls5 market%

&ccordin to the Dow Theory the $rice moements in a

market can be identiied by means o a line


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In this chart the technical analyst should $lot the $rice o

the share. 'ith it he should also mark the market aerae

eery day.

This would hel$ in identiyin the $rimary and secondary

moements.

Dow theorists beliee in momentum; which accordin to

them kee$s the $rice moin in the same direction.

They beliee in $rimary trends which accordin to them

are momentum or bear and bull markets. The momentum

will carry the $rices urther but momentum o $rimary

trend will be halted by the terminoloy used by technical

analysts called su$$ort areas; and resistance areas;.

#riticism of Do6 Theory

The Dow Theory is subect to arious limitations in actual

$ractice.

Dow has deelo$ed this theory to de$ict the eneral trend

o the market but not with the intention o $roectin the

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uture trend or to dianose the buy and sell sinals in the

market.

These a$$lications o the Dow Theory hae come in the

liht o analytical studies o inancial analysts.

This theory is criticiBed on the round that it is too

subectie and based on historical inter$retationA it is not

inallible as it de$ends on the inter$retatie ability o the

analyst.

The results o this theory do not also ie meaninul and

conclusie eidence o any action to be taken in terms o

buy and sell o$erations.

#andlestick #harting

The candle is com$rised o two $arts the body and the

shadows. The body encom$asses the o$en and closin

$rice or the $eriod. The candle body is black i the

security closed below the o$en and white i the close was

hiher than the o$en or the $eriod. The candlestick

shadow encom$asses the intra $eriod hih and low.

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,istory of Technical Analysis)

Technical &nalysis as a tool o inestment or the aerae inestor

thried in the late nineteenth century when #harles Dow then editor o

the 'all ,treet Cournal $ro$osed the Dow Theory. e reconiBed that the

moement is caused by the action/reaction o the $eo$le dealin in stocks

rather than the news in itsel.

Technical analysis is a method o ealuatin securities by

analyBin the

,tatistics enerated by market actiity such as $ast $rices and olume.

Technical analysts do not attem$t to measure a securityEs intrinsic alue

but instead use charts and other tools to identiy $atterns that can suest

uture actiity. Cust as there are many inestment styles on the

undamental side

There are also many dierent ty$es o technical traders. ,ome rely on

chart $atternsA others use technical indicators and oscillators and most

use some combination o the two. In any case technical analystsE

e9clusie use o historical $rice and olume data is what se$arates them

rom their undamental counter$arts. Fnlike undamental analysts

technical analysts donEt care whether a stock is underalued the only

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thin that matters is a securityEs $ast tradin data and what inormation

this data can $roide about where the ,ecurity miht moe in the uture.

Basic 2remises of technical analysis)

7% >arket $rices are determined by the interaction o su$$ly ! demand

orces.

8% ,u$$ly ! demand are inluenced by ariety o su$$ly ! demand

ailiated

actors both rational ! irrational

9% These include undamental actors as well as $sycholoical actors.

:% -arrin minor deiations stock $rices tend to moe in airly $ersistent

trends.

;% ,hits in demand ! su$$ly brin about chane in trends.


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Dra6backs = limitations of technical analysis)

1. Technical analysis does not able to e9$lain the reBones behind the

em$loyment or selection o s$eciic tool o Technical analysis.

2. The technical analysis ailed to sinal an u$trend or downtrend in time.

3. The technical analysis must be a sel deeatin $ro$osition. &s more !

more $eo$le use em$loy it the alue o such analysis trends to reduce.

+hy 6e use T!#,$I#A A$A.SIS/

1G Technical analysis $roides inormation on the best entry and

79it $oints or a trade.

2G 6n a chart the trader can see where momentum is risin a

Trend is ormin a $rice is di$$in or other eents are deelo$in that

show the best entry $oint and time or the most $roitable trade. 'ith the

constant moement o arious currencies aainst each other in the ore9

market most

Traders will ocus on usin technical indicators to ind and $lace their

Trades

IS T!#,$I#A A$A.SIS DIFFI#UT/

1G Technical analysis is not diicult but it reuires studyin

Dierent ty$es o charts such as the hourly or daily charts knowin

which technical indicators to use and how to use them.

2G #om$uters and the Internet hae made this $rocess much easier.

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>ost brokers $roide basic charts and technical indicators or ree or at a

ery low cost.

3G 6ne way to aoid ettin rustrated by all the lines colours and

ra$hics is to ocus on usin only a ew indicators that will

*roide you with the inormation needed. Try not to clutter your

#hart with too much inormation.

Fundamental vs% Technical Analysis

Technical analysis and undamental analysis are the two main

schools o thouht in the inancial markets. &s weEe mentioned

technical analysis looks at the $rice moement o a security and uses this

data to $redict its uture $rice moements. undamental analysis on the

other hand looks at economic actors known as undamentals.

undamental analysis takes a relatiely lon


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I $rices are based on inestor e9$ectations then knowin what a

security should sell or Hi.e. undamental analysisG becomes less

im$ortant than knowin what other inestors e9$ect it to sell or. ThatEs

not to say that knowin what a security should sell or isnEt im$ortant


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"2en


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"2en Interest


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2G ?ine #hart.

It ies the detailed inormation about eery as$ect.

The e9chane rates or each time $eriod are $lotted in a diaram and the

$oints are oined. *rices on the y


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The relatiely easy handlin o line charts is a reat adantae. ?ine

charts do not show $rice moements within a time $eriod. This can be a

$roblem because im$ortant inormation or e9chane rate analysis can be

lost. This *roblem was remedied with the deelo$ment o bar charts that

re$resent a more so$histicated orm o line chart.

3G #andlestick #hart.

& candlestick is black i the closin $rice is lower than the o$enin $rice.

& candlestick is white i the closin $rice is hiher than the o$enin $rice.

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!3


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8@ ,ammer% This is a bullish line i it occurs ater a siniicant

downtrend. I the line occurs ater a siniicant u$an. & ammer is identiied by a small real body Hi.e.

a small rane between the o$en and closin $ricesG and a lon

lower shadow Hi.e. the low is siniicantly lower than the o$en

hih and loseG. The body can be em$ty or illed


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:@ Bullish engulfing lines% This $attern is stronly bullish i it occurs

ater a siniicant downtrend Hi.e. it acts as a reersal $atternG. It

occurs when a small bearish Hilled


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7@ ong black ?filled*in@ line% This is a bearish line. It occurs when

$rices o$en near the hih and close siniicantly lower near the

$eriodEs low.

8@ ,anging Man% These lines are bearish i they occur ater a

siniicant u$trend. I this $attern occurs ater a siniicant

downtrend it is called a ammer. They are identiied by small real

bodies Hi.e. a small rane between the o$en and closin $ricesG and

a lon lower shadow Hi.e. the low was siniicantly lower than the

o$en hih and closeG. The bodies can be em$ty or illed


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9@ Dark cloud cover% This is a bearish $attern. The $attern is more

siniicant i the second lineEs body is below the centre o the

$reious lineEs body Has illustratedG.

:@ Bearish engulfing lines% This $attern is stronly bearish i it

occurs ater a siniicant u$trend Hi.e. it acts as a reersal $atternG.

It occurs when a small bullish Hem$tyG line is enuled by a lare

bearish Hilled


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;@ !vening star% This is a bearish $attern siniyin a $otential to$.

The star indicates a $ossible reersal and the bearish Hilled


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@ Shooting star% This $attern suests a minor reersal when it

a$$ears ater a rally. The starEs body must a$$ear near the low $rice

and the line should hae a lon u$$er shadow.

'eversal &atterns

7@ ong*legged doi% This line oten siniies a turnin $oint. It occurs

when the o$en and close are the same and the rane between the hih

and low is relatiely lare.

3#


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8@ Dragon*fly doi% This line also siniies a turnin $oint. It occurs

when the o$en and close are the same and the low is siniicantly

lower than the o$en hih and closin $rices.

9@ (ravestone doi% This line also siniies a turnin $oint. It occurs

when the o$en close and low are the same and the hih is

siniicantly hiher than the o$en low and closin $rices.

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:@ Star% ,tars indicate reersals. & star is a line with a small real body

that occurs ater a line with a much larer real body where the real

bodies do not oerla$. The shadows may oerla$.

;@ Doi star% & star indicates a reersal and a doi indicates indecision.

Thus this $attern usually indicates a reersal ollowin an indecisie

$eriod. @ou should wait or a conirmation He.. as in the eenin star

illustrationG beore tradin a doi star.

$eutral &atterns

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7@ S2inning to2s% These are neutral lines. They occur when the

distance between the hih and low and the distance between the

o$en and close are relatiely small.

8@ Doi% This line im$lies indecision. The security o$ened and

closed at the same $rice. These lines can a$$ear in seeral

dierent $atterns. Double doi lines Htwo adacent doi linesG

im$ly that a orceul moe will ollow a breakout rom the

current indecision.

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:@ &oint And Figure #harts

The $oint and iure chart is not well known or used by the

aerae inestor but it has had a lon history o use datin back to the

irst technical traders. This ty$e o chart relects $rice moements and is

not as concerned about time and olume in the ormulation o the $oints.

The $oint and iure chart remoes the noise or insiniicant $rice

moements in the stock which can distort tradersE iews o the $rice

trends. These ty$es o charts also try to neutraliBe the skewin eect that

time has on chart analysis.

'hen irst lookin at a $oint and iure chart you will notice a series o

Js and 6s. The Js re$resent u$ward $rice trends and the 6s re$resent

downward $rice trends. There are also numbers and letters in the chartA

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these re$resent months and ie inestors an idea o the date. 7ach bo9

on the chart re$resents the $rice scale which adusts de$endin on the

$rice o the stock: the hiher the stockEs $rice the more each bo9

re$resents. 6n most charts where the $rice is between K20 and K100 a

bo9 re$resents K1 or 1 $oint or the stock. The other critical $oint o a

$oint and iure chart is the reersal criteria. This is usually set at three

but it can also be set accordin to the chartistEs discretion. The reersal

criteria set how much the $rice has to moe away rom the hih or low in

the $rice trend to create a new trend or in other words how much the

$rice has to moe in order or a column o Js to become a column o 6s

or ice ersa. 'hen the $rice trend has moed rom one trend to another

it shits to the riht sinallin a trend chane.

Summary of charts

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T'!$DS I$ T!#,$I#A A$A.SIS

The Use of Trends

6ne o the most im$ortant conce$ts in technical analysis is that o

trend. The meanin in inance isnEt all that dierent rom the

eneral deinition o the term < a trend is really nothin more than

the eneraldirection in which a security or market is headed. Take

a look at the chart below:

Isn;t it hard to see that the trend is u$L oweer itEs not always

this easy to see a trend:

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It is an e9am$le o an u$trend. *oint 2 in the chart is the irst hih which

is determined ater the $rice alls rom this $oint. *oint 3 is the low that is

established as the $rice alls rom the hih. or this to remain an u$trend

each successie low must not all below the $reious lowest $oint or the

trend is deemed a reersal.

Ty2es of Trend

There are three ty$es o trend:

1. F$trend

2. Downtrend

3. ,ideways/oriBontal Trends

&s the names im$ly when each successie $eak and trouh is

hiher itEs reerred to as an u$ward trend. I the $eaks and trouhs are

ettin lower itEs a downtrend. 'hen there is little moement u$ or down

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in the $eaks and trouhs itEs a sideways or horiBontal trend. I you want

to et really technical you miht een say that a sideways trend is

actually not a trend on its own but a lack o a well


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'hen analyBin trends it is im$ortant that the chart is constructed

to best relect the ty$e o trend bein analyBed. To hel$ identiy

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trend line is as sim$le as drawin a straiht line that ollows a

eneral trend. These lines are used to clearly show the trend and

are also used in the identiication o trend reersals.

&n u$ward trend line is drawn at the lows o an u$ward trend.

This line re$resents the su$$ort the stock has eery time it moes

rom a hih to a low. =otice how the $rice is $ro$$ed u$ by this

su$$ort. This ty$e o trend line hel$s traders to antici$ate the $oint

at which a stockEs $rice will bein moin u$wards aain.

,imilarly a downward trend line is drawn at the hihs o the

downward trend. This line re$resents the resistance leel that a

stock aces eery time the $rice moes rom a low to a hih.

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#hannels

& channel or channel lines is the addition o two $arallel

trend lines that act as stron areas o su$$ort and resistance. The

u$$er trend line connects a series o hihs while the lower trend

line connects a series o lows. & channel can slo$e u$ward

downward or sideways but reardless o the direction the

inter$retation remains the same. Traders will e9$ect a ien

security to trade between the two leels o su$$ort and resistance

until it breaks beyond one o the leels in which case traders can

e9$ect a shar$ moe in the direction o the break. &lon with

clearly dis$layin the trend channels are mainly used to illustrate

im$ortant areas o su$$ort and resistance.

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& descendin channel on a stock chartA the u$$er trend line has

been $laced on the hihs and the lower trend line is on the lows.

The $rice has bounced o o these lines seeral times and has

remained rane


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the olume Hu$ or downG chartists look at the olume bars that can

usually be ound at the bottom o any chart. (olume bars illustrate

how many shares hae traded $er $eriod and show trends in the

same way that $rices do.

+hy >olume Is Im2ortant/

(olume is an im$ortant as$ect o technical analysis

because it is used to conirm trends and chart $atterns. &ny $rice

moement u$ or down with relatiely hih olume is seen as a

stroner more releant moe than a similar moe with weak

olume. ,ay or e9am$le that a stock um$s 5M in one tradin day

ater bein in a lon downtrend. Is this a sin o a trend reersalL

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This is where olume hel$s traders. I olume is hih durin the

day relatie to the aerae daily olume it is a sin that the

reersal is $robably or real. 6n the other hand i the olume

is below aerae there may not be enouh coniction to su$$ort a

true trend reersal. (olume should moe with the trend. I $rices

are moin in an u$ward trend olume should increase Hand ice

ersaG. I the $reious relationshi$ between olume and $rice

moements starts to deteriorate it is usually a sin o weakness in

the trend. or e9am$le i the stock is in an u$trend but the u$

tradin days are marked with lower olume it is a sin that the

trend is startin to lose its les and may soon end. 'hen olume

tells a dierent story it is a case o dierence which reers to a

contradiction between two dierent indicators. The sim$lest

e9am$le o dierence is a clear u$ward trend on declinin

olume.

>olume and #hart &atterns

The other use o olume is to conirm chart $atterns.

*atterns such as head and shoulders trianles las and other $rice

$atterns can be conirmed with olume a $rocess which weEll

describe in more detail later in this tutorial. In most chart $atterns

there are seeral $iotal $oints that are ital to what the chart is

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able to coney to chartists. -asically i the olume is not there to

conirm the $iotal moments o a chart $attern the uality o the

sinal ormed by the $attern is weakened.

>olume &recedes &rice

&nother im$ortant idea in technical analysis is that $rice is

$receded by olume. (olume is closely monitored by technicians and

chartists to orm ideas on u$comin trend reersals. I olume is startin

to decrease in an u$trend it is usually a sin that the u$ward run is about

to end. =ow that we hae a better understandin o some o the im$ortant

actors o technical analysis we can moe on to charts which hel$ to

identiy tradin o$$ortunities in $rices moements.

#,A'T &ATT!'$S)*

& chart $attern is a distinct ormation on a stock chart that creates

a tradin sinal or a sin o uture $rice moements. #hartists use these

$atterns to identiy current trends and trend reersals and to trier buy

and sell sinals.

In the irst section o this tutorial we talked about the three

assum$tions o technical analysis the third o which was that in technical

analysis history re$eats itsel. The theory behind chart $atterns is based

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on this assum$tion. The idea is that certain $atterns are seen many times

and that these $atterns sinal a certain hih $robability moe in a stock.

-ased on the historic trend o a chart $attern settin u$ a certain $rice

moement chartists look or these *atterns to identiy tradin

o$$ortunities. 'hile there are eneral ideas and com$onents to eery

chart $attern there is no chart $attern that will tell you with 100M

certainty where a security is headed. This creates some leeway and debate

as to what a ood $attern looks like and is a maor reason why chartin is

oten seen as more o an art than a science. There are two ty$es o

$atterns within this area o technical analysis reersal and continuation.

& reersal $attern sinals that a $rior trend will reerse u$on com$letion

o the $attern. & continuation $attern on the other hand sinals that a

trend will continue once the $attern is com$lete. These $atterns can be

ound oer charts o any timerame. In this section we will reiew some

o the more $o$ular chart $atterns.

7% ,ead And Shoulders

This is one o the most $o$ular and reliable chart $atterns in

technical analysis. ead and shoulders is a reersal chart $attern that

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when ormed sinals that the security is likely to moe aainst the

$reious trend. &s you can see there are two ersions o the head and

shoulders chart $attern. ead and shoulders to$ Hshown on the letG is a

chart $attern that is ormed at the hih o an u$ward moement and

sinals that the u$ward trend is about to end. ead and shoulders bottom

also known as inerse head and shoulders Hshown on the rihtG is the

lesser known o the two but is used to sinal a reersal in a downtrend.

CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC

CCC

5"


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u$ward trend has $aused but will continue in an u$ward direction once

the $attern is conirmed.

The $rice $attern orms what looks like a cu$ which is $receded by an

u$ward trend. The handle ollows the cu$ ormation and is ormed by a

enerally downward/sideways moement in the securityEs $rice. 6nce the

$rice moement $ushes aboe the resistance lines ormed in the handle

the u$ward trend can continue.

9% Double To2s and Bottoms

This chart $attern is another well


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$rice moement tests su$$ort or resistance leels twice and is unable to

break throuh. This $attern is oten used to sinal intermediate and lonany traders who bein usin technical analysis ind this conce$t

hard to beliee and donEt realiBe that this $henomenon occurs rather

reuently een with some o the most wellTG chart between 2003 and 200". =otice how the role o the

K51 leel chanes rom a stron leel o su$$ort to a leel o

resistance.

In almost eery case a stock will hae both a leel o su$$ort and a

leel o resistance and will trade in this rane as it bounces

between these leels.

The Im2ortance of Su22ort and 'esistance

6"


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im$ortant su$$ort leel do not $lace the trade at the su$$ort leel.

Instead $lace it aboe the su$$ort leel but within a ew $oints. 6n the

other hand i you are $lacin sto$s or short sellin set u$ your trade

$rice at or below the leel o su$$ort.

M">I$( A>!'A(!S)*

>ost chart $atterns show a lot o ariation in $rice

moement. This can make it diicult or traders to et an idea o a

securityEs oerall trend. 6ne sim$le method traders use to combat

this is to a$$ly moin aeraes. & moin aerae is the aerae

$rice o a security oer a set amount o time. -y $lottin a

securityEs aerae $rice the $rice moement is smoothed out. 6nce

the day


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more im$ortant and thereore it should also hae a hiher

weihtin. This ty$e o criticism has been one o the main

actors leadin to the inention o other orms o moin

aeraes.

8% inear +eighted Average

This moin aerae indicator is the least common out o the

three and is used to address the $roblem o the eual weihtin. The

linear weihted moin aerae is calculated by takin the sum o all the

closin $rices oer a certain time $eriod and multi$lyin them by the

$osition o the data $oint and then diidin by the sum o the number o

$eriods. or e9am$le in a ie


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calculation is not enerally reuired or most traders because most

chartin $ackaes do the calculation or you. The most im$ortant thin to

remember about the e9$onential moin aerae is that it is more

res$onsie to new inormation relatie to the sim$le moin aerae.

This res$onsieness is one o the key actors o why this is the moin

aerae o choice amon many technical traders. & 15& raises

and alls aster than a 15&. This sliht dierence doesn;t seem

like much but it is an im$ortant actor to be aware o since it can aect

returns.

Maor Uses of Moving Averages

>oin aeraes are used to identiy current trends and trend

reersals as well as to set u$ su$$ort and resistance leels. >oin

aeraes can be used to uickly identiy whether a security is moin in

an u$trend or a downtrend de$endin on the direction o the moin

aerae. 'hen a moin aerae is headin u$ward and the $rice is

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aboe it the security is in an u$trend. #onersely a downward slo$in

moin aerae with the $rice below can be used to sinal a downtrend.

&nother method o determinin momentum is to look at the order o a

$air o moin aeraes. 'hen a short


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The other sinal o a trend reersal is when one moin aerae crosses

throuh another. or e9am$le i the 15


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I the $eriods used in the calculation are relatiely short or e9am$le 15

and 35 this could sinal a short


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>oin aeraes are a $owerul tool or analyBin the trend in a security.

They $roide useul su$$ort and resistance $oints and are ery easy to

use. The most common time rames that are used when creatin moin

aeraes are the 200


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B"I$(!' BA$DS

"vervie6

-olliner -ands are similar to moin aerae enelo$es. The

dierence between -olliner -ands and enelo$es is enelo$es are

$lotted at a i9ed $ercentae aboe and below a moin aerae whereas

-olliner -ands are $lotted at standard deiation leels aboe and below

a moin aerae. ,ince standard deiation is a measure o olatility the

bands are sel


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ollowin are characteristics o -olliner -ands.

P ,har$ $rice chanes tend to occur ater the bands tihten as olatility

lessens.

P 'hen $rices moe outside the bands a continuation o the current trend

is im$lied

P -ottoms and to$s made outside the bands ollowed by bottoms and to$s

made inside the bands call or reersals in the trend.

P & moe that oriinates at one band tends to o all the way to the other

band. This obseration is useul when $roectin $rice tarets.

MA#D

"vervie6

The >D H>oin &erae #onerence/DierenceG is a trend

ollowin momentum indicator that shows the relationshi$ between two

moin aeraes o $rices. The >D was deelo$ed by erald &$$el

$ublisher o ,ystems and orecasts. The >D is the dierence between

a 2"


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and 20M res$ectiely.G

Inter2retation

The >D $roes most eectie in wideD: crossoers

oerbouht/oersold conditions and dierences.

#rossovers

The basic >D tradin rule is to sell when the >D alls below its

sinal line. ,imilarly a buy sinal occurs when the >D rises aboe its

sinal line. It is also $o$ular to buy/sell when the >D oes

aboe/below Bero.

"verbought="versold #onditions

The >D is also useul as an oerbouht/oersold indicator. 'hen the

shorter moin aerae $ulls away dramatically rom the loner moin

aerae Hi.e. the >D risesG it is likely that the security $rice is

oere9tendin and will soon return to more realistic leels. >D

oerbouht and oersold conditions e9ist ary rom security to security.

Divergences

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"vervie6

(olume is sim$ly the number o shares Hor contractsG traded durin

a s$eciied time rame He.. hour day week month etcG. The analysis o

olume is a basic yet ery im$ortant element o technical analysis.

(olume $roides clues as to the intensity o a ien $rice moe.

Inter2retation

?ow olume leels are characteristic o the indecisie e9$ectations

that ty$ically occur durin consolidation $eriods Hi.e. $eriods where

$rices moe sideways in a tradin raneG. ?ow olume also oten occurs

durin the indecisie $eriod durin market bottoms. ih olume leels

are characteristic o market to$s when there is a stron consensus that

*rices will moe hiher. ih olume leels are also ery common at the

beinnin o new trends Hi.e. when $rices break out o a tradin raneG.

Cust beore market bottoms olume will oten increase due to $anicr

#handrashekhar Vhamkar HNeliance ,ecuritiesG who has

ood knowlede o technical analysis.
http://www.investopedia.com/http://www.onlincetradingconcepts.com/http://www.nseindia.com/http://www.bseindia.com/http://www.onlincetradingconcepts.com/http://www.nseindia.com/http://www.bseindia.com/http://www.investopedia.com/

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