Charting and technical analysis
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Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Charts are used to identify patterns in price movements and predict future trends. The basic premise is that prices tend to move in trends or waves that are upward or downward over time. Dow theory from the early 1900s laid the foundations for technical analysis and looked at primary, secondary and minor movements in stock prices. Common chart types used are line charts, bar charts, and pattern charts. Mathematical indicators like simple and exponential moving averages are also used to identify trends in price data.
Charting and technical analysis
- 1. Charting And Technical Analysis FINDING FUTURE IN THE PAST
- 2. What is Technical analysis? ď‚— The technical analysis concentrates on the movement of share prices. ď‚— Also the analysis believes by examine past price movements future share prices can be can be accurately predicted. ď‚— The basic premise of technical analysis is that price moves in trends or waves which may be upward or downward.
- 3. Dow Theory ď‚— Dow theory has the roots of present Technical analysis ď‚— It believes the movies of stock market are influenced by three critical trends 1) Primary movements Long range cycle that carries entire market up & down. 2) Secondary reactions These are Barriers & move opposite direction to primary movements. 3) Minor movements These are day today fluctuations in the market.
- 4. Dow theory ď‚— According to Dow theory The Price movements in the market can be derived by a line chart
- 5. Basic principles of Technical Analysis ď‚— The market value of a security is related to demand and supply factors in the market. ď‚— Security prices move same direction for some length of time. ď‚— Stock prices have been seen to change when there is a change in demand and supply factors. ď‚— Shifts of demand and supply can be detected through charts
- 6. Types of charts using in Technical analysis 1) Line charts Closing price of each period is plotted as a point, These points are joined by a line to form a chart.
- 7. Types of charts using in Technical analysis 2) Bar charts A vertical line represents the lowest price, highest prices and closing price of each day..
- 8. Types of charts using in Technical analysis 3) Chart Patterns When price bar charts of several days drawn together certain patterns emerge. These patterns are used to identify trends to predict future movements of prices. Eg:  Support and resistant patterns  Reversal patterns  Continuation patterns
- 9. Mathematical indicators ď‚— Moving Average Trends of price movements can be identified by moving average. There are 2 types. 1) Simple moving average Sum of prices of a share for certain number of days divided by the number of dates.
- 10. Example for SMA Days Closing price Total of price of 5 days Five day MA 1 33 ---- ---- 2 35 ---- ---- 3 37.5 ---- ---- 4 36 ---- ---- 5 39 180.5 36.1 6 40 187.5 37.5 7 8 40.5 193 38.6
- 11. 2) Exponential moving average (EMA) Calculation EMA = (Current Closing price – Previous EMA) * Factor +previous EMA 2 Factor = 𝑛+1
- 12. Example for EMA Days Closing Price EMA 1 33 33 2 35 33.66 3 37.5 34.93 4 36 35.28 5 39 36.51