Introduction to Technical Analysis
- 1. Introduction to Technical Analysis Karel De Bie Market Strategist BNP Paribas Fortis Global Markets FI Research. Blanmont, May 18, 2011
- 2. Introduction to Technical Analysis TA: Basics Different TA subdisciplines Basic Formations Japanese Candlestick Theory Technical Indicators Fibonacci
- 3. TA vs FA Michigan Confidence Indicator New Home Sales Durable Goods Orders Jobless Claims ISM Manufacturng Change in Nonfarm Payrolls Unemplyment Rate Trade Balance CPI P(fa) P(fa)>P=> buy P(fa)<P=> sell … FA A fundamental analyst only analyzes a handful of stocks or currencies Geopolitical Situation TA Basics
- 4. Technical analysts only look at the price (sometimes also at volumes). TA Basics PRICE CHART
- 5. John J. Murphy: TA is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. We look at price formations and technical indicators (which are all based on price and/or volume) in order to know whether to enter the market or not, and if yes: to go long or short. TA Definition PRICE CHART
- 6. Loss of information : per period just the close (no OHL), the H&L are important when drawing resistance/support lines The chart: line chart
- 7. The chart: bar chart Bar = 1 period, 1 min to 1 year
- 8. The chart: candle stick chart Candle = 1 period, 1 min to 1 year Advantage: Jap candlestick clearly visible
- 9. TA basic assumptions We assume that all the relevant information regarding the price (political, economic, fundamental, … ) is already priced in or discounted in the price and that the (mass)psychology of the market participants produces recognisable recurring formations.
- 10. TA can be applied on… Virtually all markets, provided that there is enough liquidity, volume and that there are enough market participants. Stock indices, individual stocks, currencies, commodities, interest rates, futures…
- 11. TA advantages Allows us to quickly assess the market : is the market bullish, bearish or neutral? Allows us to spot opportunities . Can be applied on virtually all markets: Stock indices, individual stocks, currencies, commodities, interest rates, futures… Applicable on all timeframes : the same techniques can be applied from intraday time frames all the way up to multi-year timeframes. Is pretty much simple and straight forward.
- 14. TA Basics: The Trend Zig-zag pattern Uptrend = sequence of higher tops ànd higher bottoms Downtrend = sequence of lower tops ànd lower bottoms Know what timeframe you’re talking about: the long term trend may be up, but the short term trend may be down.
- 15. Higher bottom Higher top
- 16. EUR/USD
- 17. Bund
- 20. Trend, reversal & continuation patterns Reversal pattern Reversal pattern Continuation pattern
- 21. Introduction to Technical Analysis TA: Basics Different TA subdisciplines Basic Formations Japanese Candlestick Theory Technical Indicators Elliott Wave Theory Fibonacci
- 22. Basic Formations: Trend Line Simplest tool within TA Connects the lows in an uptrend Below every 2 bottoms, it is possible to fine such a line, but it needs 3 points to be a valid one = support line
- 23. connects the tops in a downtrend 3 tops needed to make it a valid trendline Basic Formations: Trend Line = resistance line
- 24. Uptrend Support Line 3 & 4: buying opportunities 5: selling opportunity pull-back possible: previous support line becomes resistance
- 25. Downtrend Resistance Line similar
- 26. AEX 1 december 2010: long or short?
- 27. AEX : another buy signal
- 28. AEX : and now?
- 30. 20.90 13.70 24.25 28.50 25.50
- 33. EUR/USD, weekly bars chart buy sell
- 35. Basic Formations: Channel Uptrend channel resistance line over the tops, parallel to the uptrendline at least 2 à 3 times touched channel break-out => expect a move into the same direction with as target the vertical width of the channel projected from the break-out level. downtrend channel similar
- 36. (analogous for downtrend channel) Basic Formations: Channel Target Target Break-out Break-out Uptrend channel, break-out and target
- 37. Bund 125.40 124.00 122.05 fibo target
- 40. Channel
- 41. 71.50 67.00 63.00 58.00
- 42. Reversal Formation: Head & Shoulders
- 45. S&P 500, daily bars
- 48. Reversal Formation: Double & Triple Top Similar for a double (or triple) bottom No previous top in the double top space
- 49. Brent Oil
- 51. Dollar index
- 52. Reversal Formation: Falling/Rising wedge at the end of a trend : a reliable pattern break-out is most often powerful and targets the beginning of the wedge
- 55. (Key) Reversal day & Island reversal
- 57. S&P 500 daily bars bearish key reversal bullish key reversal bullish key reversal
- 58. EUR/USD, daily candlesticks Bullish key reversal day Bearish reversal day
- 59. Gold, weekly bars Bullish reversal weeks Bearish reversal week
- 60. Continuation Pattern: Flags Uptrend during a strong trend buy the break-out in the same direction as the underlying trend flag hangs “half way” exists out of 5 to max 15 bars or candlesticks Downtrend similar
- 61. 1.4144 1.4225 1.4122 25 tics risk for 80 tics potential profit
- 62. Example
- 63. EUR/USD, 30min bars, Oct 5th 2010 long stop loss target 20 tics ris vs 100 tics potential profit
- 66. EUR/USD
- 68. Triangle: Reversal or Continuation Pattern
- 69. Triangle Formation Result of doubt in the market in 2/3 of the cases : continuation pattern, in 1/3 of the cases: reversal pattern volumes should decrease during the formation break-out must happen with strong volume pull-back is possible break-out between 2/3 & 3/4 are the most reliable
- 72. Driehoek
- 75. Bund voorbeelden
- 76. Bund voorbeelden
- 77. Introduction to Technical Analysis TA: Basics Different TA subdisciplines Basic Formations Japanese Candlestick Theory Technical Indicators Fibonacci
- 78. The Candlestick
- 79. Hammer & Hanging Man
- 84. EUR/USD, 60 min bars
- 85. Introduction to Technical Analysis TA: Basics Different TA subdisciplines Basic Formations Japanese Candlestick Theory Technical Indicators Fibonacci
- 86. Technical Indicators 1.500 Keep it simple all based on price (sometimes also on volume) Moving Average MACD RSI Slow Stochastics
- 87. Moving Average 3 kinds of MA : the simple MA the weighted MA the exponential MA simple MA is most used takes the prices of the X last periods and devides them by X. Frequently used periods are 20/50/100/200.
- 88. Moving Average the movement of the MA is less capricious gives the direction of the trend the further prices move from the MA, the bigger the oversold/overbought character. Buy/sell signal when price crosses (or closes above/below) the MA.
- 89. Moving Averages are the building blocks of the MACD Different kinds of Moving Averages exist: simple MA : takes the prices of the X last periods and devides them by X weighted MA : cfr simple MA, but more weight is given to the more recent closing prices exponential MA : cfr simple MA, but the more recent prices get exponentially more weight. Frequently used periods are 20/50/100/200.
- 90. How could a MA be used? A moving average gives the direction of the trend The further price moves away from its MA, the bigger the overbought/oversold character Possible ways to trade the moving average: If price crosses above the MA on a closing basis: long, if price crosses below the MA on a closing basis: short If the MA is rising: long, if the MA is falling: short
- 91. Long if closing price is above MA (a 25 period simple MA), short if closing price is below MA. Bel20, weekly bars Example of using the MA
- 92. Long if closing price is above MA (a 25 period simple MA), short if closing price is below MA. Bel20, daily bars Example of using the MA
- 93. Criticism on the MA It works very nice when the market is in an uptrend or in a downtrend. But, when the market is trading sideways, you will lose money using MAs. Which MA to use? A 20/50/100/200 period? The simple/exponential… ? In hindsight it is always easy to tell which one we should have used.
- 94. 100 days MA MA: great results when the market is in a clear up- or downtrend Sideways trading: you lose money when trading the MA signals
- 95. 100 days MA 50 days MA 20 days MA Which MA to use? Afterwards, it is always clear…
- 96. Moving Average Convergene Divergence Purpose = to generate less false signals Instead of looking at the crossings of price with a MA, one looks at the crossings of 2 MAs with a different timeframe A short term exponential MA of 12 periods is compared with a longer term exponential MA of 26 periods. MACD = Exp MA (12) – Exp MA (26) The original use of the MACD was: to buy when the MACD crosses above the zero line (i.e. when the short term MA crosses above the longer term MA) to sell when the MACD crosses below the zero line (i.e. when the short term MA crosses below the longer term MA) MACD: calculation
- 97. 12 periods 26 periods the “0” level MACD: comparing 2 moving averages MACD = Exp MA of 12 periods – Exp MA of 26 periods MACD: the white line Crossing below zero: sell signal Crossing above zero: buy signal
- 98. Problem This looks nice, but in reality, the results of using the MACD this way are pretty poor.
- 100. Solution On the MACD line (white), a exponential moving average of 9 periods is calculated. This line is called the signal line. Crossings of the MACD with the signal line in general give earlier and better signals than crossings of the MACD with the zero line.
- 101. Bel20, monthly bars
- 102. So, how is the MACD nowadays used? MACD crosses the signal line to the upside: buy signal MACD crosses the signal line to the downside: sell signal
- 103. Positive and negative divergence Positive divergence: price is still making new lows while the indicator is not making new lows Negative divergence: price is still making new highs while the indicator is not making new highs
- 104. Positive divergence: a rise is very probable Positive divergence: announces a rise
- 105. Positive divergence: a rise is very probable Positive divergence: announces a rise
- 107. Negative divergence: a decline is very probable Negative divergence: announces a decline
- 108. Negative divergence: a decline is very probable Negative divergence: announces a decline
- 110. Combining timeframes Weekly MACD & signal line are both rising => watch the bullish signals on the daily MACD. Weekly MACD & signal line are both falling => watch the bearish signals on the daily MACD.
- 111. Daily MACD WEEKLY MACD EUR/USD, daily bars
- 112. Bel20, monthly bars
- 113. Donc, comment utiliser le MACD? Ligne blanche croise au dessous de la ligne rouge: signal de vente . Ligne blanche croise au dessus de la ligne rouge: signal d’achat .
- 114. Mais, on peut encore faire mieux… divergence positive divergence négative
- 115. Divergence positive: hausse très probable Divergence positive: annonce une hausse
- 116. Divergence positive: hausse très probable Divergence positive: annonce une hausse
- 117. Divergence negative: baisse très probable Divergence negative: annonce une baisse
- 118. Divergence negative: baisse très probable Divergence negative: annonce une baisse
- 120. Introduction to Technical Analysis TA: Basics Different TA subdisciplines Basic Formations Japanese Candlestick Theory Technical Indicators Fibonacci
- 121. 1170-1250 Fibonacci
- 122. Fibonacci
- 123. .618 2 = 1 - .618, .618 3 = .618 - .618 2 , .618 4 = .618 2 - .618 3 , .618 5 = .618 3 - .618 4 , etc. 1.618 2 = 1 + 1.618, 1.618 3 = 1.618 + 1.618 2 , 1.618 4 = 1.618 2 + 1.618 3 , 1.618 5 = 1.618 3 + 1.618 4 , etc. 1.618 - .618 = 1, 1.618 x .618 = 1, 1 - .618 = .382, .618 x .618 = .382, 2.618 - 1.618 = 1, 2.618 x .382 = 1, 2.618 x .618 = 1.618, 1.618 x 1.618 = 2.618. Fibonacci: 0.618 & 0.382
- 124. Fibonacci: 1 + 0.618 => golden spiral
- 127. Fibonacci in the finacial markets
- 128. Fibonacci retracements are calculated relative to a previous move. Fibonacci retracements
- 130. S&P 500
- 131. BEL 20
- 132. Fibonacci extensions A A*1.618 B B*1.618 C C*1.618
Editor's Notes
- #3: Market capitalization has increased from EUR 2.6 billion in 1990 to EUR 20 billion at 30 June 2003. Fortis ranks among the 20 largest financial institutions in Europe. First bank in Belgium, fourth bank in the Netherlands. First insurer in the Benelux countries, second insurer via intermediaries in the Netherlands. In the United States Fortis has become number 2 in the field of &quot;Preneed&quot;, in other words funeral insurance. The acquisition of the voluntary dental insurance division of Protective Life in 2001 makes Fortis number one in the United States in this specific market. Fortis is very successful in the bancassurance market. Bancassurance is the sale of insurance products via the banking channel and banking products via the insurance channel. The joint venture of Maybank in 2001 underscores Fortis' intention to further expand its expertise in the field of bancassurance in Asia.
- #22: Market capitalization has increased from EUR 2.6 billion in 1990 to EUR 20 billion at 30 June 2003. Fortis ranks among the 20 largest financial institutions in Europe. First bank in Belgium, fourth bank in the Netherlands. First insurer in the Benelux countries, second insurer via intermediaries in the Netherlands. In the United States Fortis has become number 2 in the field of &quot;Preneed&quot;, in other words funeral insurance. The acquisition of the voluntary dental insurance division of Protective Life in 2001 makes Fortis number one in the United States in this specific market. Fortis is very successful in the bancassurance market. Bancassurance is the sale of insurance products via the banking channel and banking products via the insurance channel. The joint venture of Maybank in 2001 underscores Fortis' intention to further expand its expertise in the field of bancassurance in Asia.
- #78: Market capitalization has increased from EUR 2.6 billion in 1990 to EUR 20 billion at 30 June 2003. Fortis ranks among the 20 largest financial institutions in Europe. First bank in Belgium, fourth bank in the Netherlands. First insurer in the Benelux countries, second insurer via intermediaries in the Netherlands. In the United States Fortis has become number 2 in the field of &quot;Preneed&quot;, in other words funeral insurance. The acquisition of the voluntary dental insurance division of Protective Life in 2001 makes Fortis number one in the United States in this specific market. Fortis is very successful in the bancassurance market. Bancassurance is the sale of insurance products via the banking channel and banking products via the insurance channel. The joint venture of Maybank in 2001 underscores Fortis' intention to further expand its expertise in the field of bancassurance in Asia.
- #86: Market capitalization has increased from EUR 2.6 billion in 1990 to EUR 20 billion at 30 June 2003. Fortis ranks among the 20 largest financial institutions in Europe. First bank in Belgium, fourth bank in the Netherlands. First insurer in the Benelux countries, second insurer via intermediaries in the Netherlands. In the United States Fortis has become number 2 in the field of &quot;Preneed&quot;, in other words funeral insurance. The acquisition of the voluntary dental insurance division of Protective Life in 2001 makes Fortis number one in the United States in this specific market. Fortis is very successful in the bancassurance market. Bancassurance is the sale of insurance products via the banking channel and banking products via the insurance channel. The joint venture of Maybank in 2001 underscores Fortis' intention to further expand its expertise in the field of bancassurance in Asia.
- #121: Market capitalization has increased from EUR 2.6 billion in 1990 to EUR 20 billion at 30 June 2003. Fortis ranks among the 20 largest financial institutions in Europe. First bank in Belgium, fourth bank in the Netherlands. First insurer in the Benelux countries, second insurer via intermediaries in the Netherlands. In the United States Fortis has become number 2 in the field of &quot;Preneed&quot;, in other words funeral insurance. The acquisition of the voluntary dental insurance division of Protective Life in 2001 makes Fortis number one in the United States in this specific market. Fortis is very successful in the bancassurance market. Bancassurance is the sale of insurance products via the banking channel and banking products via the insurance channel. The joint venture of Maybank in 2001 underscores Fortis' intention to further expand its expertise in the field of bancassurance in Asia.