Brain Teasers  You have 8 red and 16 blue socks. There’s no light in your room, so you have to choose your socks in the dark. What’s the minimum # of socks you need to choose to ensure you have at least a matching pair.

Answer  Three Two socks can be different, but a third must match one of the first two

Technicals + Algo. Trading 3

What is Technical Analysis (TA)  What determines the price of ____?  Fundamental vs. Technical Analysis Fundamentals = Valuations Technicals = Market Action  TA is probabilistic Says that this is “likely” to happen 4

Assumptions  Prices SOMETIMES move in trends “Markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal is to identify those periods” – Shcwager  History repeats itself Because of market psychology  Market efficiency 5

Charting Patterns  Visualize price movements  Can be simple “eyeballing intuition” or looking for specific patterns  Many charts use Candlesticks 6

Eyeballing  Trade on up/downtrends Breaks support/resistance 7

Head and Shoulders 8

 Target = High/low point -/+ neckline  The more level the neck, the more reliable the pattern 9

Double Top/Bottom  Have to keep tight stops in case support/resistance is broken 10

Combination Patterns  Strong signal 11

Hook Reversal  Most reliable after strong trends 12

Hammers 13

RSI  Momentum indicator Shows breakouts or trend reversals  Leading indicator  RSI=Avg closes up / Avg closes down  14,16,9,25 day lookback 14

MACD  Momentum indicator  Lagging indicator  MACD = difference b/w fast and slow moving averages Generally 12, 26 period EMA’s  Signal line 9 period EMA  Can turn into leading indicator  Works best when used with another indicator 15

MACD 16

Bollinger Bands  Price/Volatility levels over time  Consists of 3 bands Usually 20 bar SMA, 2 std devs  Gives a relative level of high/low  Multiple ways of trading Most effective is range trading during low vol periods  Options implications too 17

Bollinger Bands 18

When to use TA  “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Buffet  Entry/Exit prices  Algorithmic Traders (computers)  Markets Currencies = Great Futures = Great Stocks = Decent 19

Algorithmic Trading  All you know is prices Understandable why algorithms almost always are technicals based  All algos have a thesis behind them (when X happens, Y is likely to happen)  Can be very hard to code ideas sometimes 20