SECTION 1 - CHAPTER 1 - THE BASIC PRINCIPAL OF TECHNICAL ANALYSIS - THE TRENDS
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The document discusses the fundamental principles of technical analysis, emphasizing the importance of trends in market analysis. It defines trends as the general price direction and categorizes them into uptrends, downtrends, and sideways trends, while also highlighting the role of investor psychology in influencing these trends. Various methods for identifying trends, such as trend lines, averages, and momentum indicators, are also detailed, along with the fractal nature of trends.
SECTION 1 - CHAPTER 1 - THE BASIC PRINCIPAL OF TECHNICAL ANALYSIS - THE TRENDS
- 1. Chapter - 1 The Basic Principle of Technical Analysis CMT LEVEL - I
- 2. Learning Objectives • Trend in Technical Analysis • Why Trend is Important for Technical Analyst • Identify Various types of Trend • Art of Technical Analysis • Fractal Importance in Describing Price Action
- 3. What is Trend? • A trend is the general direction of a market or an asset's price. • In technical analysis, trends are identified by price action that highlights: • Uptrend - when the price is making higher swing highs and higher swing lows, • Downtrend – When the Price is Making lower swing lows and lower swing highs . • A sideways or flat trend occurs when prices trade in a range without significant underlying upward or downward movement.
- 4. Type of Trends • Time Based/ Fractal - short, intermediate- and long-term. • Price Based/Directional - Uptrend , Down Trend , SideWays Trend
- 5. Time Based/ Fractal Trends •Trends are fractal (According to Dow Theory) - Major Trend –above one year - Intermediate Trend -3 weeks to many months - Minor term Trend – below 3 weeks
- 7. How Does Investor Psychology Impact Trends? • Power of the buyers or sellers • Aggressiveness or anxiousness of buyers and sellers • Emotions of fear or greed propelling their action • Broad expectations
- 8. How Technical Analyst Make Money? • “The Trend is Your Friend” – Play the Trend • Don't lose—Control risk of capital loss. • Manage your money—Avoid ruin.
- 9. Major Assumption of Technical Analysis • The Interaction of Supply & Demand determine price. • Supply and demand are affected by investors' emotions and biases, particularly fear and greed. • Price discounts everything. • Prices trend. • Recognizable patterns form within trends. • Patterns are fractal.
- 10. Trend Develop from Supply & Demand • The Price is Change or Reflect due to change in Demand & Supply • If something is in demand and supply begins to shrink, prices will rise. • If supply increases beyond current demand, prices will fall. • If supply is relatively stable, prices can fluctuate higher and lower as demand increases or decreases. • These factors can cause both short- and long-term fluctuations in the market
- 11. Price discounts everything • Dow theory suggests that all information – past, current and even future – is discounted into the markets and reflected in the prices of stocks and indexes. • Technical analysis one need only look at price movements •The only information excluded is that which is unknowable, such as a massive earthquake
- 12. Price moves in trends. • The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends. • In fact, most of the techniques used in this approach are trend-following in nature, meaning, that their intent is to identify and follow existing trends • Trend in motion will continue in the same direction until it reverses. The entire trend-following approach is predicated on riding existing trend until it shows signs of reversing.
- 13. Recognizable Patterns (History Repeat Itself) • When a set of factors that have panned out in the past tends to repeat itself in the future, we expect the same outcome to occur, as was observed in the past. • The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement. • Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends.
- 14. Patterns are fractal • The trading markets are similar in that any period we look at—long, medium, or very short—produces trends with the same characteristics and patterns as each other. • The trend length of interest is determined solely by the investor's or trader's period of interest. • Shorter trends make up longer trends, any analysis of a period of interest must include analysis of the longer and shorter trends around it.
- 16. How Trends are Identified? • Trend traders attempt to isolate and extract profit from trends. • Trends Identified by various methods: - Trend lines & Channels - Averages - Momentum Indicators - Chart Patterns