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Published byMargaretMargaret Hardy Modified over 9 years ago
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Munjal Mehta
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One assumption ◦ HISTORY REPEATS ITSELF One rule ◦ REWARD:RISK should always be 2:1 Two learnings ◦ Technical analysis is SUBJECTIVE ◦ It should be used alongwith FUNDAMENTAL ANALYSIS to give the best results
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It assumes that the previous price levels shown will act as support and resistances Supports will become resistances if broken Resistances will become supports if broken
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Example ◦ One stock worth 10rs. ◦ The analyst is bullish about the stock at 10rs. ◦ He issues a BUY call with TGT. Of 12rs. And SL of 9rs. ◦ Out of 10 such buy calls given in the month, he succeeds in only 4 (i.e. 40% accuracy) ◦ Still he manages to make money
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Technical analysis cannot be a self fulfilling phenomenon The entire world watches the same charts and the same levels But still half of them make money and half of them loose This is because Technical analysis is subjective The same chart could look bearish to one analyst and bullish to the other
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Technical analysis should only be used as a guiding tool The main use of technical analysis is affirm when to enter the stock Whether to enter the stock or not is a call to be taken on the basis of fundamental analysis
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Take the example of Tata Motors At levels of 140rs stock was highly undervalued according to fundamentals Then at these levels, even if the technical indicators might show weakness in the stock, it might not be advisable to issue a sell call
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Trends Moving Averages Candlestick Patterns Oscillators (RSI, MACD, Stochastic, etc.) Bollinger bands Pivot points Elliot wave patterns And many more….
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Most commonly used tool Uses the previous day’s levels to generate support and resistance levels for today Ignores the open price of the stock, because it is subject to bias Mainly used for intraday trading
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Pivot point = Yesterday’s (High+Low+Close)/3 S1 = (Pivot point*2) – Yesterday’s High R1 = (Pivot point*2) - Yesterday’s Low S2 = Pivot point – Yesterday’s High + Yesterday’s Low R2 = Pivot point + Yesterday’s High - Yesterday’s Low
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Trends are a consistent pattern of highs and lows Can be bullish as well as bearish A series of higher tops and higher bottoms signifies a bullish trend A series of lower tops and lower bottoms signifies a bearish trend
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A very simple tool in analyzing a particular stock An ‘n’ day simple moving average, simply calculates the average of the closing prices of the last ‘n’ days Used to define support and resistance levels Moving average crossovers are very important in gauging the trend
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The larger the value of ‘n’ the more important is the level I have used the 8, 13 and 21 days moving average alongwith the 50 day moving average On careful analysis of the chart, you will see that the 50 day moving average has acted as a major support and resistance level in the past
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Commonly known as momentum indicators Used to gauge three things:- ◦ Overbought or Oversold conditions ◦ Possibility of a Trend Reversal ◦ Increase or Decrease in Momentum Should never be used in Isolation, should always be used alongwith the price chart
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An overbought condition is such that the probability of a downmove is quite high An oversold condition is such that the probability of a upmove or a rally is high
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Can be found out by spotting a divergence between price action and the oscillator readings Divergence means when the scrip and the oscillator moves in the opposite direction Divergences occurring at the bottom are termed as positive divergences, and vice versa They are useful only if they occur in overbought or oversold conditions
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Rate Of Change (ROC) Relative Strength Index (RSI) Moving Average Convergence Divergence (MACD) Stochastic
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Measures the rate of change between the current price and the price ‘n’ days in the past
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The RSI indicates the strength of the scrip relative to itself RSI = 100 – 100/(1+Rs) Where Rs = Avg. daily gain / Avg. daily loss The time period normally selected is 14 days
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This indicator measures plots the difference between a short term moving avg. and a long term moving avg. If the short term avg. is higher than the long term avg., the indicator is positive If the indicator is positive and moves below the zero level, It indicates a possible change in trend
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The stochastic oscillator works on the principle that the stock prices close near the high price of the day when the trend is bullish and vice versa It consists of 2 components:- ◦ %K = 100 (C-L5)/(H5-L5) ◦ %D = moving average of the %K line
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