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Technical Analysis- Basic Level
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Disclaimer
This presentation is being provided solely for informational purposes. Mercantile Exchange Nepal Limited does not warrant the accuracy or completeness of any information provided in this presentation and such information is provided without any correctness or condition of any kind. Neither Mercantile Exchange Nepal Limited nor any other person associated with the creation of this presentation or its contents shall be liable or responsible to any person for any harm, loss or damage that may arise in connection with the use of this presentation, including without limitation, any indirect, third party, or consequential damages.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Flow of Presentation
• What is Technical Analysis?• Basis of Technical Charts• Chart Analysis• Support & Resistance Levels• Leading Vs Lagging Indicators• Strengths of Technical Analysis• Weaknesses of Technical Analysis
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
What is Technical Analysis?
• Forecasting of future financial price movements based on past price movements
• Weather Forecasting-does not result in absolute predictions about the future
• Helps investors anticipate what is “likely” to happen to prices over time
• Uses a wide variety of charts
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Basis of Technical Analysis
• Charles Dow propagated the Dow Theory• Laid the foundation for modern technical
analysis• Pieced together from the writings of
Charles Dow over several years
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Basis of Technical Analysis
• Price Discounts Everything Price reflects all information Represents the fair valueReflects the sum knowledge of all
participants, including traders, investors, etc.
Utilizes the price to interpret the nature of the market
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Basis of Technical Analysis
• Price Movements are not Totally Random
Prices trend but sometimes prices do not trend too
Possible to identify a trend, invest or trade
Possible to identify both short and long-trends
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Basis of Technical Analysis
• What is more important than why Fundamentalists are concerned with why
the price is what it is Technicians are concerned with What is the current price What is the history of the price
movements?
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Chart Analysis
• Supports technical analysis• Prices Open-Price at which the market opens at High-Highest Price attained Low- Lowest Price reached Close-Price at which the market closes at
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Chart Analysis
Line Chart-Uses only the Closing Prices
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Chart Analysis
Bar Chart - Open, High, Low and Closing Prices
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Chart Analysis
Japanese Candlesticks
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Support & Resistance• Represents key levels where demand and
supply meet• Prices are driven by excessive demand
and supply• Demand is synonymous with bulls &
buying• Supply is synonymous with bears &
selling• If the levels are broken, the relationship
between demand and supply has changed
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Support & ResistanceSupport• Price level at which demand is
strong enough to prevent it from declining further
• Normally lies below the current price
• As price declines towards support, buyers become more inclined to buy and sellers become less inclined to sell
• When price reaches support level, demand will overcome supply, preventing prices from further decline RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Support & Resistance
Resistance• Price level at which selling is strong
enough to prevent the prices from rising further
• Normally lies above the current price
• As price rises towards resistance, sellers become more inclined to sell and buyers become less inclined to buy
• When price reaches resistance level, supply will overcome demand , preventing prices from further rise RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Support & Resistance
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Leading Indicators
• Leading indicators are designed to lead price movements
• Represent a form of price momentum over a fixed look-back period
• Some of the more popular leading indicators include Relative Strength Index (RSI)
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Leading Indicators
• Momentum Oscillators Momentum measures the rate-of-change
of a security's price As the price of a security rises, price
momentum increases Once this rise begins to slow, momentum
will also slow As a security begins to trade flat,
momentum starts to actually decline from previous high levels
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Leading Indicators
• Benefits of Leading Indicators Early signaling for entry and exit is the
main benefit Leading indicators generate more signals
and allow more opportunities to trade Leading indicators are best used in
trending markets
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Leading Indicators
• Drawbacks of Leading IndicatorsWith early signals comes the prospect of
higher returns and with higher returns comes the reality of greater risk
More signals and earlier signals mean that the chances of false signals and whipsaws increase
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Lagging Indicators
• Follow the price action and are commonly referred to as trend-following indicators
• Trend-following indicators work best when markets or securities develop strong trends
• These indicators are not effective in trading or sideways markets
• Some popular trend-following indicators include moving averages (exponential, simple) and MACD.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Lagging Indicators
• Benefits of Lagging Indicators Ability to catch a move and remain in a
move Indicators can be enormously profitable
and easy to use
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Lagging Indicators
• Drawbacks of Lagging Indicators Lost when a security moves in a trending
range Signals tend to be late
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Strengths of Technical Analysis
• Focus on Price Sense to focus on price movements Price movements usually precede
fundamental developments Technicians are automatically focusing
on the future
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Strengths of Technical Analysis
• Supply, Demand and Price Action Use the OHLC when analyzing the price
actions OHLC reflects forces of demand and
supply Higher prices reflect increased demand
and lower prices reflect increased supply
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Strengths of Technical Analysis
• Support/Resistance Identify support and resistance levels Prices move within a confined range for
an extended period which means supply and demand are deadlocked
If prices moves out of the range, it means either supply or demand has changed
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Strengths of Technical Analysis
• Pictorial Price History Reactions prior to and after important
events. Past and present volatility. Historical volume or trading levels.
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Strengths of Technical Analysis
• Assist with Entry Point Help with timing a proper entry Fundamental analysis decides what to
buy and technical decides when to buy
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Weaknesses of Technical Analysis
• Analyst Bias Subjective and personal biases can be
reflected Important to be aware of such biases If the analyst is a perpetual bull, then a
bullish bias will overshadow the analysis If the analyst is a disgruntled eternal bear,
then the analysis will probably have a bearish tilt
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Weaknesses of Technical Analysis
• Open to Interpretation Different technicians will paint different
scenarios or patterns Both will come up with logical support to
support their notion Technical analysis is more like an art than
a science
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Weaknesses of Technical Analysis
• Always Another Level Always another important level close at
hand Accused of sitting on the fence and failing
to spot the developing trend
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
Weaknesses of Technical Analysis
• Trader’s Remorse Not all technical signals and patterns
work Each Asset class will have its own
idiosyncrasies
RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED
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RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED