01 Technical Analysis - Level 1 - Kunal Joshi

STOCK MARKET - BASICS
KUNAL JOSHI
Definition: Stocks are A type of security that signifies
ownership in a corporation and represents a claim on part

of the corporation's assets and earnings.
Capital Gain: Profit that results when the price of a
security held by a mutual fund rises above its purchase
price and the security is sold (realized gain). If the security
continues to be held, the gain is unrealized. A capital loss
would occur when the opposite takes place.
Growth Stock: A stock that experiences a continued period
of growth exceeding that of the economy. Generally, the
duration is over a year in length.
Income Stock: A stock that has a high, consistent,
dividend paid annually.
Speculative Stock: Stocks that offer the potential for
substantial price appreciation, usually because of some
special situation such as new management or the
introduction of a promising new product.
KUNAL JOSHI
Reading Stock Quotes
Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a
stock has traded over the previous 52 weeks (one year). This typically does not include the
previous day's trading.
Column 3: Company Name & Type of Stock - This column lists the name of the company. If there
are no special symbols or letters following the name, it is common stock(EQ). Different symbols
imply different classes of shares.
Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you
watch financial TV(like CNBC ), you have seen the ticker tape move across the screen, quoting
the latest prices alongside this symbol. If you are looking for stock quotes online, you always
search for a company by the ticker symbol. If you don't know what a particular company's ticker is
you can search for it at: http://finance.yahoo.com/.
KUNAL JOSHI
Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this
space is blank, the company does not currently pay out dividends.
Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual
dividends per share divided by price per share.
Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by
earnings per share from the last four quarters. For more detail on how to interpret this, see
our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day,
listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.
Column 9 & 11: Day High , Low and Close - This indicates the price range at which the stock
has traded at throughout the day. In other words, these are the maximum and the minimum
prices that people have paid for the stock.
Column 12: Net Change - This is the dollar value change in the stock price from the previous
day's closing price. When you hear about a stock being "up for the day," it means the net
change was positive.
KUNAL JOSHI
Fundamental Analysis
KUNAL JOSHI
Types of analysis
y Technical Analysis
y Charting
y Patterns in Price Behaviour or volume history
y Predict future price movement
y Fundamental analysis
y Determining value without price
y Analyzing and Interpreting the fundamentals
KUNAL JOSHI
Research analysis
y Economic Wide factors
y Industry factors
y Company Factors
y Others
KUNAL JOSHI
=
30 - 35 %
15 - 20%
=
30 - 35%
=
15 - 20%
Fundamental analysis
y Understanding the Economic Environment
y Analyzing the Industry
y Assessing the projected performance of the
Company
(One must hone the skill needed for the above)

4
KUNAL JOSHI
Economic Environment
y Global economic scenario
y Central Government Policy
y Key Variables
y Growth rate of GDP
y Industrial Growth rate,
y Agriculture and Monsoon,
y Savings and investments,
y Price level and inflation,
y Interest rates
y Infrastructure facilities
5
KUNAL JOSHI
Industry analysis
y Analyze the prospects of each industry
y Difficult to forecast the future
y Consists of 4 parts
y Sensitivity to the business cycle
y Industry life cycle analysis
y Structure and characteristics
y Profit Potential of the industry
KUNAL JOSHI
Industry analysis
y Sensitivity to the business cycle
y Eg: Auto industry vs Pharmaceutical
y Industry life cycle analysis
y What stage of industry eg Start phase,
growth phase, maturity or decline stage

KUNAL JOSHI
Industry analysis
y Nature of competition
y Demand Prospects
y Technology and research
y Porter: Threat of new entrants, Rivalry
among existent firms, substitute products ,

bargaining power of buyers and sellers
KUNAL JOSHI
y To determine the valuation of the share, the
analyst must forecast earnings, dividend and

the appropriate discount rate
y Earnings potential and the risk are linked to
the prospects of the industry and the
developments in the macro economy
KUNAL JOSHI
From Business Activities to Financial Statements

Business
Environment
Labor Market
Capital Market
Product Market:
Suppliers
Customers
Accounting
Environment
Capital Market
Structure,
GAAP,Audit,
&Legal system
Business
Activities
Operating
Investment
Financing
Accounting
System
Measurement
&
Reporting
Financial
Statements
10
KUNAL JOSHI
Business
Strategy
Key factors
And Risk
Accounting Strategy
Choice of:
Accounting Policy
Reporting Format
SupplementaryDisclosures
4 Step Process of analysis

y Strategy analysis
y Accounting analysis
y Financial analysis
y Prospective Analysis (Growth etc)
11
KUNAL JOSHI
others
y Order positions
y Regulatory framework
y Technology capabilities
y HR
y Evaluation of management mark of a good
management is not how it runs its business

but how it changes them
12
KUNAL JOSHI
Company Analysis
y Important parameters for analysis
y EPS of the coming years
y And a reasonable earnings multiple,
given the growth prospects, risk

exposure and other characteristics of
the firm
y For this we need historical data
y Of Earnings, Growth, Risk and
Valuation
13
KUNAL JOSHI
Earnings Level
y Return of Equity
y Equity Earnings
Net worth
Denoting the earnings for the shareholder
14
KUNAL JOSHI
Earnings analysis
y ROE can be decomposed into
y PAT
Sales
X
Asset
Sales
Assets
NW(SC+RS)
y PBIT X Sales X
PBT X PAT X Asset
Sales
Assets PBIT PBT Equity
Op. eff Asset eff, int , tax, Leverage
15
KUNAL JOSHI
Other important
calculations
y Book Value of the share
y Paid up capital / number of shares
y Earnings per share
PAT / number of Equity shares

y Dividend Payout
y Equity Dividend / PAT
y Dividend per share

y Growth performance of sales and
EPS(CAGR)
y Look out for Beta
16
KUNAL JOSHI
Growth
y Look at Growth : Compounded annual growth
rate
y Sustainable growth rate without Loans:
= ROE X retention ratio
where retention ratio = ( PAT Dividend) / PAT

Using this model: we can estimate the stock
price as
17
KUNAL JOSHI
Stock Price Model 1

y If Rs. 2 per share is the dividend and 15% is
ROE and .6 is the retention ratio, estimate

the share price ?
Price = Div per share / ROE Growth

rate
y = 2 / (.15 -.06) = Rs. 22.22
y
y Useful for sensitivity analysis
18
KUNAL JOSHI
Intrinsic value using PE

Ratio
y Estimate the future EPS
y Based on correct forecasting of the PAT in the
future based on growth assumptions etc)

y Establish a PE multiple
y based on last years earnings or trailing 12 month
PE or based on some expected earnings also look

out for similar companies PE
y Projected EPS X Projected PE = Value
Anchor
y Always give a range
19
KUNAL JOSHI
Strategy for identifying

securities
20
y Intrinsic Value > Market Value
Buy
y Intrinsic Value < Market Value
Sell
y Intrinsic Value = Market Value
Hold
KUNAL JOSHI
Some keys to investing

y Establish Value Anchors
y Assess the market Price behaviour
(Psychology)
y Combine fundamental and technical analysis
y Develop sound strategies for growth stocks
y Beware of games operators play
y Take Swift corrective action ie keep stop loss
y Have discipline
y Source: Investment Analysis and Portfolio Management by
Prasanna Chandra
21
KUNAL JOSHI
Thanks
22
KUNAL JOSHI
KUNAL JOSHI
The Father of Fundamental Analysis:

Benjamin Graham
Who was Benjamin
Graham?
Fundamental
Analysis:
A
method of evaluating a security
factors. Fundamental analysts
attempt to study everything that
can affect the security's value,
including macroeconomic factors
(like the overall economy and
industry
conditions)
and
individually
specific
factors
(like the financial condition and
management of companies).
2
Sources: Security Analysis (Graham and Dodd);

KUNAL JOSHI
The Intelligent Investor (Graham)
Ben Graham and Mr. Market

Long ago Ben Graham described the mental attitude toward
market fluctuations that I believe to be most conducive to
investment success. He said that you should imagine market
quotations coming from a remarkably accommodating fellow named
Mr. Market who is your partner in a private business. Without fail,
Mr. Market appears daily and names a price at which he will either
buy your interest or sell you his. Even though the business that the
two of you own may have economic characteristics that are stable,
Mr. Markets quotations will be anything but stable. For, it is sad to
say, Mr. Market is a fellow who has incurable emotional problems.
At times he falls euphoric and can see only the favorable factors
effecting the business. When in that mood, he names a very high
buy-sell price because he fears that you will snap up his interest
and rob him of imminent gains. At other times he is depressed and
can see nothing but trouble ahead for both the business and the
world. On these occasions he will name a very low price, since he
is terrified that you will unload your interest on him.
3
KUNAL JOSHI
Continued
Mr. Market has another endearing characteristic: He doesnt
mind being ignored. If his quotation is uninteresting to you today,
he will be back with a new one tomorrow. Transactions are
strictly at your option. Under these conditions, the more manicdepressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning
or everything will turn into pumpkins and mice: Mr. Market is
there to serve you, not to guide you. It is his pocketbook, not his
wisdom, that you will find useful. If he shows up someday in a
particularly foolish mood, you are free to either ignore him or to
take advantage of him, but it will be disastrous if you fall under
his influence. Indeed, if you arent certain that you understand
and can value your business far better than Mr. Market, you dont
belong in the game. As they say in poker, If youve been in the
game 30 minutes and you dont know who the patsy is, youre
the patsy.
4
KUNAL JOSHI
Grahams Fundamental
Investment Rules
Adequate Size
Sufficient Strong Financial Condition
Earnings Stability
Dividend Record
Earnings Growth
Moderate Price/Earnings Ratio
Moderate Ratio of Price to Assets
KUNAL JOSHI
Grahams 14 Investment Points

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Be an investor, not a speculator.

Know the asking price.
Search the market for bargains.
Determine if the stock is undervalued.
Regard corporate figures with suspicion.
Dont stress out.
Dont sweat the math.
Diversify among stocks and bonds.
Diversify among stocks.
When in doubt, stick to quality.
Use dividends as a clue for success.
Defend your shareholder rights.
Be patient.
Think for yourself.
KUNAL JOSHI
Philip Fisher
The characteristics of a business that most impressed Fisher was:
A companys ability to grow sales and
profits over the years at rates greater

than the industry average.
In order to do so, a company needed
to possess products or services with
sufficient market potential to make it
possible for a sizable increase in
sales for at least several years.
Fisher was not so much concerned
with the consistent annual increase in
sales in any given year, rather, he
judged a companys success over a
period of several years. He was
aware that changes in the business
cycle could and would have a
material
KUNAL
JOSHIeffect on sales and earnings
in any given year.
Philip Fisher
Fisher identified companies that, decade by decade,
showed promise of above-average growth. The two

types of companies that could expect to achieve
above-average growth were companies that, were
(1) fortunate and able and were (2) fortunate
because they are able.
Fisher also found that a companys research and
development efforts contribute mightily to the
sustainability of the companys above-average
growth in sales. Even non-technical businesses
need a dedicated research effort to produce better
products and more efficient services.
8
KUNAL JOSHI
Philip Fisher
Sales
Organization: Fisher also examined a

companys sales organization. According to him, a
company could develop outstanding products and
services, but unless they were expertly
merchandised, the research and development effort
would never translate into revenues.
Profits and Costs: Fisher also examined a
companys profit margins, its dedication to
maintaining and improving profit margins, and,
finally, its cost analysis and accounting controls.
Fisher sought companies that were not only the
lowest-cost producer of products or services but
were dedicated to remaining that way.
KUNAL JOSHI
Peter Lynchs
Peter Lynchs Ten Golden Rules of Investing
1. Dont be intimidated by experts (ex spurts).
2. Look in your own backyard.
3. Dont buy something you cant illustrate with
a crayon.
4. Make sure you have the stomach for stocks.
5. Avoid hot stocks in hot industries.
6. Owning stocks is like having children. Do
not have more than you can handle.
7. Dont even try to predict the future.
8. Avoid weekend worrying. Do not get scared
out of good stocks. Own your mind.
9. Never invest in a company without first
understanding its finances.
10. Do not expect too much, too soon. Think
long-term.
10
KUNAL JOSHI
Peter Lynchs
Peter Lynchs mistakes to avoid
1.
Thinking that this year will be any different

than any other year
2.
Becoming too concerned over whether the
stock market is going up or down
3. Trying to time the market
4. Not knowing the story behind the company in
which you are buying stock
5. Buying stocks for the short-term
11
KUNAL JOSHI
Peter Lynchs
Lynch Maxims:
1.
A good company usually increases its dividends every year.
2.
You can lose money in a very short time, but it takes a

time to make money.
3.
The stock market isnt a gamble as long as you pick good

companies that you think will do well and not just because of the
stock price.
4.
You have to research the company before you put money into it.
5.
When you invest in the stock market you should always diversify.
6.
You should invest in several stocks (5).
7.
Never fall in love with a stock, always have an open mind.
8.
Do your homework.
9.
Just because a stock goes down doesnt mean it cant go lower.
long
10. Over the long-term it is generally better to buy stocks in small

12
companies.
KUNAL
JOSHI
11. Never buy a stock because it is cheap, but because you know a
Sir John Marks Templeton

Who is Sir John Marks Templeton?
John Templeton borrowed $10,000 and started a
brilliant investment career, which enabled him to
be one of two investors to become billionaires
solely through their investment prowess.
Templeton has had decade after decade of 20%
plus annual returns and managed over $6 Billion in
assets. Templeton is generally regarded as one of
the worlds wisest and most successful investors.
Forbes Magazine said,
13
Templeton is one of a handful of true investment

greats in a field of crowded mediocrity and bloated
reputations. Templeton holds that the common
denominator connecting successful people with
successful enterprises is a devotion to ethical and
spiritual principles. Many regard Sir John as the
KUNALWallstreet
JOSHI
greatest
Investor of all time.
Sir John Mark Templeton

Sir Johns 16 Rules for Investment Success:
1. Invest for maximum total real return including taxes
and inflation.
2. Invest. Dont trade or speculate.
3. Remain flexible and open-minded about types of
investments. No one kind of investment is always best.
4. Buy at a low price. Buy what others are despondently
selling. Then sell what others are despondently buying.
5. Search for bargains among quality stocks.
6. Buy value not market trends or economic value.
7. Diversify. There is safety in numbers.
8. Do your homework. Do not take the word of experts.
Investigate before you invest.
14
KUNAL JOSHI
Templetons 16 Rules
9. Aggressively monitor your investments.
10. Dont panic. Sometimes you wont have everything sold as the
market crashes. Once the market has crashed, dont sell unless
you find another more attractive undervalued stock to buy.
11. Learn from your mistakes, but do not dwell on them.
12. Begin with prayer, you will think more clearly.
13. Outperforming the market is a difficult task, you must outthink the
managers of the largest institutions.
14. Success is a process of continually seeking answers to new
questions.
15. There is no free lunch. Do not invest on sentiment. Never invest
in an IPO. Never invest on a tip. Run the numbers and research
the quality of management.
16. Do not be fearful or negative too often. For 100 years optimists
have carried the day in U.S. Stocks.
15
KUNAL JOSHI
THANKS
16
KUNAL JOSHI
Technical Analysis Of the

Financial Markets
Kunal Joshi
Background
y Main approaches to valuing stocks include
y Risk-return analysis
y Fundamental analysis
y Technical analysis
y Some technicians use only technical analysis
while others use both fundamental and

technical analysis
y Technicians (AKA: chartists) focus on charts
of market prices and transactions statistics
y Think that these statistics will reveal all
y Technicians study patterns in security prices

2
Kunal Joshi
Theoretical Foundation
y Edwards & Magee (1997) state the basic
assumptions of technical analysis

y A securitys market value is based on supply and
demand
y Supply and demand are based on both rational and
irrational factors
y Security prices tend to move in persistent trends
y Changes in trends occur due to shifts in supply and
demand
y Shifts in supply and demand can be detected using
charts of market transactions
y Some chart patterns tend to repeat themselves
3
Kunal Joshi
y Technicians believe past patterns will
recur
Therefore can be predicted
y Technical analysts estimate prices

Whereas fundamental analysts estimate value
y Technicians tend to ignore issues such
as a firms riskiness and earnings

growth
Instead focus on barometers of supply and demand
Kunal Joshi
y Technicians claim technical analysis is
y Easier
y Faster
y Can be applied simultaneously to more stocks than
fundamental analysis
y But, does technical analysis work?
y Technicians argue that when using
fundamental analysis
y Must wait until market realizes a stock is
undervalued
y Must rely on inadequate accounting statements
y It is hard work
Kunal Joshi
y Must use ambiguous estimates of growth
Whatista?
y Forecasting of future financial price movements
based on an examination of past price

movements
y Like weather forecasting, does not provide an
absolute prediction
y Offers a glimpse at where prices are most likely to
go in the future
6
Kunal Joshi
Generalstepstotechnicalevaluation
TOP-DOWN
approach
1. Broad Market
Analysis
2. Sector Analysis
3. Individual Security
Analysis
y
The Principles behind

TA are
Kunal Joshi
UNIVERSAL!
Trading Floor, CBOT
Whohasmademoneywithta?
y Larry Williams, regarded as one of the great technicians,
entered a trading competition and returned over 20,000%

in a year trading TECHNICAL picks
y Daughter, actress Michelle Williams returns 10,000% in
same competition using her fathers strategies
8
Kunal Joshi
TAmasters
y Kenneth Griffin, CEO, Citadel Financial uses a computerized
form of TA he programmed to assist in his implementation of

convertible arbitrage trading strategies
y Paul Tudor Jones, Tudor Investments inc, Net worth
$9,000,000,000
9
Kunal Joshi
Thetechniciansmission
y BEAT THE CROWD!
y Markets are 80% psychological and 20%
logical
y Thousands and Thousands of people make
their first trade every day, and 90% of them
have no idea what they are doing
y Technicians employ tricks to take advantage
of Dumb Money
10
Kunal Joshi
Finalthoughts
y Develop a strategy unique to your personality and
comfort levels
y Tweak your strategy until it works the best that it
can
y Test it using virtual (paper) trading
y DO NOT STRAY FROM THE SYSTEM!
11
Remember that 1% every day leads to about 290%

year!
A little goes a long way!
Kunal a
Joshi
Thanks
12
Kunal Joshi
The Dow Theory
KUNAL JOSHI
The Dow Theory

Charles Dow known as the Godfather of TA
Dow Theory pieced together from the writings of Charles Dow over several
years
2
KUNAL JOSHI
The Dow Theory

y Originated by Charles Dow
y Founder of the Dow Jones Company and editor of Wall Street
Journal
y Dow Theory presumes market moves in persistent
bull and bear trends

y Often used for market as a whole, but used for individual
securities also
y Types of movements defined by Dow theorists

y Primary trends (bull or bear market)
y Secondary trends (corrections)
y Market collapses or upward surges lasting a few weeks or months
y Tertiary moves (little daily fluctuations)

y Meaningless random wiggles but should be studied to determine if
relate to a primary trend
KUNAL JOSHI
The Dow Theory
Most Dow theorists do not think a new primary trend has been confirmed until
pattern of ascending or descending tops occur.
4
KUNAL JOSHI
Charlesdowsmainideas
y Price Discounts Everything
y Price Movements are NOT always random
y What more important than Why
y You show me the chart and I will tell you the
news.
5
KUNAL JOSHI
Testing the DOW Theory

y Brown, Goetzmann & Kumar (BGK) tested
Dow theory using event study

y 255 WSJ editorials used as events
y Neural net estimation used to identify optimal
trading rules during 1902-1929

y Results indicate forecasts based on 4
discernable patterns
y
y
y
y
Recent downward trends in DJIA are sell signals

DJIA falls from recent peaks are sell signals
Recent upward trends in DJIA are buy signals
Recoveries from recent declines in DJIA are buy
signals
KUNAL JOSHI
Testing the DOW Theory

y When a buy or neutral signal was
detected, a hypothetical portfolio is fully

invested in DJIA
y When a sell signal was detected, a
hypothetical portfolio is fully invested in
cash
y Tested from 1930-1997
y Results indicate that some trend-predicting power
existed, but not enough to generate large excess
returns
7
KUNAL JOSHI
Thanks
KUNAL JOSHI
KunalJoshiTheDowTheorySource:Investopedia.com
The Dow Theory

Introduction
Any attempt to trace the origins of technical analysis would inevitably lead to Dow Theory.
Whilemorethan100yearsold,DowTheoryremainsthefoundationofmuchofwhatweknow
todayastechnicalanalysis.
DowTheorywasformulatedfromaseriesofWallStreetJournaleditorialsauthoredbyCharles
H.Dowfrom1900untilthetimeofhisdeathin1902.TheseeditorialsreflectedDowsbeliefs
onhowthestockmarketbehavedandhowthemarketcouldbeusedtomeasurethehealthof
thebusinessenvironment.Duetohisdeath,Downeverpublishedhiscompletetheoryonthe
markets,butseveralfollowersandassociateshavepublishedworksthathaveexpandedonthe
editorials.SomeofthemostimportantcontributionstoDowtheorywereWilliamP.Hamilton's
"The Stock Market Barometer" (1922), Robert Rhea's "The Dow Theory" (1932), E. George
Schaefer's"HowIHelpedMoreThan10,000InvestorsToProfitInStocks"(1960)andRichard
Russell's"TheDowTheoryToday"(1961).
Dow believed that the stock market as a whole was a reliable measure of overall business
conditionswithintheeconomyandthatbyanalyzingtheoverallmarket,onecouldaccurately
gauge those conditions and identify the direction of major market trends and the likely
directionofindividualstocks.DowfirstusedhistheorytocreatetheDowJonesIndustrialIndex
and the Dow Jones Rail Index (now Transportation Index), which were originally compiled by
Dow for The Wall Street Journal. Dow created these indexes because he felt they were an
accurate reflection of the business conditions within the economy because they covered two
major economic segments: industrial and rail (transportation). While these indexes have
changed over the last 100 years, the theory still applies to current market indexes. Much of
what we know today as technical analysis has its roots in Dows work. For this reason, all
1|P a g e
traders using technical analysis should get to know the six basic tenets of Dow theory. Lets
explorethem.
TheMarketDiscountsEverything
The first basic premise of Dow Theory suggests that all information past, current and even
futureisdiscountedintothemarketsandreflectedinthepricesofstocksandindexes.That
information includes everything from the emotions of investors to inflation and interestrate
data, along with pending earnings announcements to be made by companies after the close.
Based on this tenet, the only information excluded is that which is unknowable, such as a
massiveearthquake.Buteventhentherisksofsuchaneventarepricedintothemarket.It's
importanttonotethatthisisnottosuggestthatmarketparticipants,oreventhemarketitself,
areallknowing,withtheabilitytopredictfutureevents.Rather,itmeansthatoveranyperiod
oftime,allfactorsthosethathavehappened,areexpectedtohappenandcouldhappenare
pricedintothemarket.Asthingschange,suchasmarketrisks,themarketadjustsalongwith
theprices,reflectingthatnewinformation.Theideathatthemarketdiscountseverythingisnot
new to technical traders, as this is a major premise of many of the tools used in this field of
study. Accordingly, in technical analysis one need only look at price movements, and not at
otherfactorssuchasthebalancesheet.(Formoreonthis,seeTheBasicsOfTechnicalAnalysis.)
Likemainstreamtechnicalanalysis,DowTheoryismainlyfocusedonprice.However,thetwo
differinthatDowTheoryisconcernedwiththemovementsofthebroadmarkets,ratherthan
specificsecurities.
For example, a follower of Dow Theory will look at the price movement of the major market
indexes. Once they have an idea of the prevailing trend in the market, they will make an
investment decision. If the prevailing trend is upward, it follows that an investor would buy
individual stocks trading at a fair valuation. This is where a broad understanding of the
fundamentalfactorsthataffectacompanycanbehelpful.It'simportanttonotethatwhileDow
Theory itself is focused on price movements and index trends, implementation can also
2|P a g e
incorporate elements of fundamental analysis, including value and fundamentaloriented

strategies.Havingsaidthat,DowTheoryismuchmoresuitedtotechnicalanalysis.
TheThreeTrendMarket
An important part of Dow Theory is distinguishing the overall direction of the market. To do
this,thetheoryusestrendanalysis.BeforewecangetintothespecificsofDowTheorytrend
analysis,weneedtounderstandtrends.First,it'simportanttonotethatwhilethemarkettends
tomoveinageneraldirection,ortrend,itdoesn'tdosoinastraightline.Themarketwillrally
uptoahigh(peak)andthensellofftoalow(trough),butwillgenerallymoveinonedirection.
Figure1:Anuptrend
Anupwardtrendisbrokenupintoseveralrallies,whereeachrallyhasahighandalow.Fora
markettobeconsideredinanuptrend,eachpeakintherallymustreachahigherlevelthanthe
previousrally'speak,andeachlowintherallymustbehigherthanthepreviousrally'slow.A
downwardtrendisbrokenupintoseveralselloffs,inwhicheachselloffalsohasahighanda
low.TobeconsideredadowntrendinDowterms,eachnewlowintheselloffmustbelower
3|P a g e
thanthepreviousselloff'slowandthepeakintheselloffmustbelowerthenthepeakinthe
previousselloff.
Figure2:Adowntrend
NowthatweunderstandhowDowTheorydefinesatrend,wecanlookatthefinerpointsof
trendanalysis.DowTheoryidentifiesthreetrendswithinthemarket:primary,secondaryand
minor.Aprimarytrendisthelargesttrendlastingformorethenayear,whileasecondarytrend
isanintermediatetrendthatlaststhreeweekstothreemonthsandisoftenassociatedwitha
movementagainsttheprimarytrend.Finally,theminortrendoftenlastslessthanthreeweeks
andisassociatedwiththemovementsintheintermediatetrend.
Letusnowtakealookateachtrend.
PrimaryTrendInDowTheory,theprimarytrendisthemajortrendofthemarket,whichmakes
it the most important one to determine. This is because the overriding trend is the one that
affects the movements in stock prices. The primary trend will also impact the secondary and
minortrendswithinthemarket.(Forrelatedreading,seeShort,IntermediateandLongTerm
Trends.)
4|P a g e
Dowdeterminedthataprimarytrendwillgenerallylastbetweenoneandthreeyearsbutcould
varyinsomeinstances.
Figure3:anuptrendwithcorrections
Regardless of trend length, the primary trend remains in effect until there is a confirmed
reversal.(Formoreinsight,seeRetracementorReversal:KnowtheDifferenceandSupportand
Resistance Reversals.) For example, if in an uptrend the price closes below the low of a
previously established trough, it could be a sign that the market is headed lower, and not
higher.Whenreviewingtrends,oneofthemostdifficultthingstodetermineishowlong the
pricemovementwithinaprimarytrendwilllastbeforeitreverses.Themostimportantaspect
istoidentifythedirectionofthistrendandtotradewithit,andnotagainstit,untiltheweight
ofevidencesuggeststhattheprimarytrendhasreversed.
Secondary, or Intermediate, Trend In Dow Theory, a primary trend is the main direction in
whichthemarketismoving.Conversely,asecondarytrendmovesintheoppositedirectionof
the primary trend, or as a correction to the primary trend. For example, an upward primary
trend will be composed of secondary downward trends. This is the movement from a
5|P a g e
consecutively higher high to a consecutively lower high. In a primary downward trend the
secondarytrendwillbeanupwardmove,orarally.Thisisthemovementfromaconsecutively
lowerlowtoaconsecutivelyhigherlow.
Belowisanillustrationofasecondarytrendwithinaprimaryuptrend.Noticehowtheshort
termhighs(shownbythehorizontallines)failtocreatesuccessivelyhigherpeaks,suggesting
thatashorttermdowntrendispresent.SincetheretracementdoesnotfallbelowtheOctober
low,traderswouldusethistoconfirmthevalidityofthecorrectionwithinaprimaryuptrend
Figure4:asecondarytrendw/aprimaryuptrend
Ingeneral,asecondary,orintermediate,trendtypicallylastsbetweenthreeweeksandthree
months,whiletheretracementofthesecondarytrendgenerallyrangesbetweenonethirdto
twothirdsoftheprimarytrend'smovement.Forexample,iftheprimaryupwardtrendmoved
theDJIAfrom10,000to12,500(2,500points),thesecondarytrendwouldbeexpectedtosend
the DJIA down at least 833 points (onethird of 2,500). Another important characteristic of a
secondarytrendisthatitsmovesareoftenmorevolatilethanthoseoftheprimarymove.
6|P a g e
Minor Trend The last of the three trend types in Dow Theory is the minor trend, which is
definedasamarketmovementlastinglessthanthreeweeks.Theminortrendisgenerallythe
correctivemoveswithinasecondarymove,orthosemovesthatgoagainstthedirectionofthe
secondarytrend.
Figure 5
DuetoitsshorttermnatureandthelongertermfocusofDowTheory,theminortrendisnot
ofmajorconcerntoDowTheoryfollowers.Butthisdoesn'tmeanitiscompletelyirrelevant;the
minor trend is watched with the large picture in mind, as these shortterm price movements
are a part of both the primary and secondary trends. Most proponents of Dow Theory focus
their attention on the primary and secondary trends, as minor trends tend to include a
considerable amount of noise. If too much focus is placed on minor trends, it can to lead to
irrationaltrading,astradersgetdistractedbyshorttermvolatilityandlosesightofthebigger
picture.Statedsimply,thegreaterthetimeperiodatrendcomprises,themoreimportantthe
trend.
7|P a g e
TheThreePhasesofPrimaryTrends
Sincethemostvitaltrendtounderstandistheprimarytrend,thisleadsintothethirdtenetof
Dow theory, which states that there are three phases to every primary trend the
accumulation phase (distribution phase), the public participation phase and a panic phase
(excessphase).Letusnowtakealookateachofthethreephasesastheyapplytobothbull
andbearmarkets.
PrimaryUpwardTrend(BullMarket)
TheAccumulationPhase
Thefirststageofabullmarketisreferredtoastheaccumulationphase,whichisthestartof
theupwardtrend.Thisisalsoconsideredthepointatwhichinformedinvestorsstarttoenter
the market. The accumulation phase typically comes at the end of a downtrend, when
everythingisseeminglyatitsworst.Butthisisalsothetimewhenthepriceofthemarketisat
itsmostattractivelevelbecausebythispointmostofthebadnewsispricedintothemarket,
thereby limiting downside risk and offering attractive valuations. However, the accumulation
phasecanbethemostdifficultonetospotbecauseitcomesattheendofadownwardmove,
whichcouldbenothingmorethanasecondarymoveinaprimarydownwardtrendinsteadof
being the start of a new uptrend. This phase will also be characterized by persistent market
pessimism, with many investors thinking things will only get worse. From a more technical
standpoint, the start of the accumulation phase will be marked by a period of price
consolidation in the market. This occurs when the downtrend starts to flatten out, as selling
pressure starts to dissipate. The midtolatter stages of the accumulation phase will see the
priceofthemarketstarttomovehigher.
8|P a g e
Anewupwardtrendwillbeconfirmedwhenthemarketdoesn'tmovetoaconsecutivelylower
lowandhigh.
PublicParticipationPhase
Wheninformedinvestorsenteredthemarketduringtheaccumulationphase,theydidsowith
theassumptionthattheworstwasoverandarecoverylayahead.Asthisstartstomaterialize,
thenewprimarytrendmovesintowhatisknownasthepublicparticipationphase.Duringthis
phase, negative sentiment starts to dissipate as business conditions marked by earnings
growthandstrongeconomicdataimprove.Asthegoodnewsstartstopermeatethemarket,
moreandmoreinvestorsmovebackin,sendingpriceshigher.Thisphasetendsnotonlytobe
the longest lasting, but also the one with the largest price movement. It's also the phase in
whichmosttechnicalandtrendtradersstarttotakelongpositions,asthenewupwardprimary
trendhasconfirmeditselfasigntheseparticipantshavewaitedfor.
9|P a g e
TheExcessPhase
Asthemarkethasmadeastrongmovehigherontheimprovedbusinessconditionsandbuying
bymarketparticipantstomovestartstoage,webegintomoveintotheexcessphase.Atthis
point,themarketishotagainforallinvestors.Thelaststageintheupwardtrend,theexcess
phase,istheoneinwhichthesmartmoneystartstoscalebackitspositions,sellingthemoffto
those now entering the market. At this point, the market is marked by, as Alan Greenspan
mightsay,"irrationalexuberance".Theperceptionisthateverythingisrunninggreatandthat
only good things lie ahead. This is also usually the time when the last of the buyers start to
enterthemarketafterlargegainshavebeenachieved.Likelambstotheslaughter,thelate
entrantshopethatrecentreturnswillcontinue.Unfortunatelyforthem,theyarebuyingnear
thetop.Duringthisphase,alotofattentionshouldbeplacedonsignsofweaknessinthetrend,
suchasstrengtheningdownwardmoves.Also,iftheupwardmovesstarttoshowweakness,it
couldbeanothersignthatthetrendmaybenearthestartofaprimarydowntrend.
10|P a g e
PrimaryDownwardTrend(BearMarket)
TheDistributionPhase
The first phase in a bear market is known as the distribution phase, the period in which
informedbuyerssell(distribute)theirpositions.Thisistheoppositeoftheaccumulationphase
during a bull market in that the informed buyers are now selling into an overbought market
instead of buying in an oversold market. In this phase, overall sentiment continues to be
optimistic, with expectations of higher market levels. It is also the phase in which there is
continuedbuyingbythelastoftheinvestorsinthemarket,especiallythosewhomissedthebig
movebutarehopingforasimilaroneinthenearfuture.Aswasthecaseintheaccumulation
phase,thedistributionphasecanbedifficulttospotinitsearlystages.Thereasonforthisis
that it may be disguised as a secondary downward trend within the primary upward trend.
Fromatechnicalstandpoint,thedistributionphaseisrepresentedbyatoppingofthemarket
where the price movement starts to flatten as selling pressure increases . The mid to latter
stages of the distribution phase will see prices start to fall as more and more investors,
anticipatingweakness,exittheirpositions.Anewdownwardtrendwillbeconfirmedwhenthe
previoustrendfailstomakeanotherconsecutivehigherhighandlow.
PublicParticipationPhase
Thisphaseissimilartothepublicparticipationphasefoundinaprimaryupwardtrendinthatit
laststhelongestandwillrepresentthelargestpartofthemoveinthiscasedownward.During
this phase it is clear that the business conditions in the market are getting worse and the
sentimentisbecomingmorenegativeastimegoeson.Themarketcontinuestodiscountthe
worsening conditions as selling increases and buying dries up. This is also the point at which
most trend followers and technical traders start to dump their positions and take short
positionsasthenewdownwardtrendhasconfirmeditself.
11|P a g e
ThePanicPhase
Thelastphaseoftheprimarydownwardmarkettendstobefilledwithmarketpanicandcan
lead to very large selloffs in a very short period of time. In the panic phase, the market is
wroughtupwithnegativesentiment,includingweakoutlooksoncompanies,theeconomyand
the overall market. During this phase you will see many investors selling off their stakes
inpanic.Usuallytheseparticipantsaretheonesthatjustenteredthemarketduringtheexcess
phase of the previous runup in share price. But just when things start to look their worst is
whentheaccumulationphaseofaprimaryupwardtrendwillbeginandthecyclerepeatsitself.
12|P a g e
MarketIndexesMustConfirmEachOther
Under Dow theory, a major reversal from a bull to a bear market (or vice versa) cannot be
signaled unless both indexes (traditionally the Dow Industrial and Rail Averages) are in
agreement.
Forexample,ifoneindexisconfirminganewprimaryuptrendbutanotherindexremainsina
primarydownwardtrend,itisdifficulttoassumethatanewtrendhasbegun.Thereasonfor
this is that a primary trend, either up or down, is the overall direction of the stock market,
which in Dow theory is a reflection of business conditions in the economy. When the stock
marketisdoingwell,itisbecausebusinessconditionsaregood;whenthestockmarketisdoing
poorly,itisduetopoorbusinessconditions.IfthetwoDowindexesareinconflict,thereisno
clear trend in business conditions. If business conditions cause the major indexes to travel in
oppositedirections,thisdisparitysuggeststhatitwillbedifficultforaprimarytrendtodevelop.
When trying to confirm a new primary trend, therefore, it's vital that more than one index
showssimilarsignalswithinarelativelycloseperiodoftime.Iftheindexesareinagreement,it
is a sign that business conditions are moving in the indicated direction. Thus, rising indexes
signalanewuptrend.
13|P a g e
VolumeMustConfirmtheTrend
According to Dow Theory, the main signals for buying and selling are based on the price
movementsoftheindexes.Volumeisalsousedasasecondaryindicatortohelpconfirmwhat
thepricemovementissuggesting.
Fromthistenetitfollowsthatvolumeshouldincreasewhenthepricemovesinthedirectionof
the trend and decrease when the price moves in the opposite direction of the trend. For
example, in an uptrend, volume should increase when thepricerises and fall when the price
falls. The reason for this is that the uptrend shows strength when volume increases because
tradersaremorewillingtobuyanassetinthebeliefthattheupwardmomentumwillcontinue.
Lowvolumeduringthecorrectiveperiodssignalsthatmosttradersarenotwillingtoclosetheir
positionsbecausetheybelievethemomentumoftheprimarytrendwillcontinue.Conversely,if
volumerunscountertothetrend,itisasignofweaknessintheexistingtrend.Forexample,if
the market is in an uptrend but volume is weak on the up move, it is a signal that buying is
startingtodissipate.Ifbuyersstarttoleavethemarketorturnintosellers,thereislittlechance
thatthemarketwillcontinueitsupwardtrend.Thesameistrueforincreasedvolumeondown
days, which is an indication that more and more participants are becoming sellers in the
market.AccordingtoDowTheory,onceatrendhasbeenconfirmedbyvolume,themajorityof
moneyinthemarketshouldbemovingwiththetrendandnotagainstit.
14|P a g e
TrendRemainsinEffectUntilClearReversalOccurs
The reason for identifying a trend is to determine the overall direction of the market so that
tradescanbemadewiththetrendsandnotagainstthem.Aswasillustratedinthethirdtenet,
trends move from uptrend to downtrend, which makes it important to identify transitions
betweenthesetwotrenddirections.
InDowTheory,thesixthandfinaltenetstatesthatatrendremainsineffectuntiltheweightof
evidencesuggeststhatithasbeenreversed.Traderswaitforaclearpictureofatrendreversal
becausethegoalisnottoconfuseatruereversalintheprimarytrendwithasecondarytrend
orbriefcorrection.Rememberthatasecondarytrendisamoveintheoppositedirectionofthe
primarytrendthatwillnotcontinue.Forexample,imaginethattheprimarytrendisup,butthe
indexesarecurrentlysellingoff.Ifaninvestorweretotakeashortposition,concludingthatthe
selloffisthestartofanewprimarydownwardtrend,theycouldgetburnedwhentheprimary
trend continues. Unless you can safely conclude, based on the weight of evidence, that the
trend has changed, you will be trading against the trend. As a generalrule, this isnot a wise
idea,asmanyhavebeenhurtbytradingagainstthemarket.
15|P a g e
DowTheorySpecifics
Sofar,wehavediscussedalotoftheideasbehindDowtheoryalongwithitsmaintenets.In
this section, we'll take a look at the technical approach behind Dow theory, such as how to
identifytrendreversals.
ClosingPricesandLineRanges
Charles Dow relied solely on closing prices and was not concerned about the intraday
movements of the index. For a trend signal to be formed, the closing price has to signal the
trend, not an intraday price movement. Another feature in Dow theory is the idea of line
ranges,alsoreferredtoastradingrangesin
other areas of technical analysis. These periods of sideways (or horizontal) price movements
areseenasaperiodofconsolidation,andtradersshouldwaitforthepricemovementtobreak
thetrendlinebeforecomingtoaconclusiononwhichwaythemarketisheaded.Forexample,
ifthepriceweretomoveabovetheline,it'slikelythatthemarketwilltrendup
SignalsandIdentificationofTrends
One difficult aspect of implementing Dow theory is the accurate identification of trend
reversals.Remember,afollowerofDowtheorytradeswiththeoveralldirectionofthemarket,
soitisvitalthatheorsheidentifiesthepointsatwhichthisdirectionshifts.
OneofthemaintechniquesusedtoidentifytrendreversalsinDowtheoryispeakandtrough
analysis.Apeakisdefinedasthehighestpriceofamarketmovement,whileatroughisseenas
lowest price of a market movement. Note that Dow theory assumes that the market doesnt
moveinastraightlinebutfromhighs(peaks)tolows(troughs),withtheoverallmovesofthe
markettrendinginadirection.AnupwardtrendinDowtheoryisaseriesofsuccessivelyhigher
peaksandhighertroughs.
16|P a g e
Figure1:UpwardTrend
Adownwardtrendisaseriesofsuccessivelylowerpeaksandlowertroughs.
Figure2:DownwardTrend
ThesixthtenetofDowtheorycontendsthatatrendremainsineffectuntilthereisaclearsign
thatthetrendhasreversed.MuchlikeNewton'sfirstlawofmotion,anobjectinmotiontends
to move in a single direction until a force disrupts that movement. Similarly, the market will
continuetomoveinaprimarydirectionuntilaforce,suchasachangeinbusinessconditions,is
strongenoughtochangethedirectionofthisprimarymove.
A reversal in the primary trend is signaled when the market is unable to create another
successive peak and trough in the direction of the primary trend. For an uptrend, a reversal
wouldbesignaledbyaninabilitytoreachanewhighfollowedbytheinabilitytoreachahigher
17|P a g e
low.Inthissituation,themarkethasgonefromaperiodofsuccessivelyhigherhighsandlows
tosuccessivelylowerhighsandlows,whicharethecomponentsofadownwardprimarytrend.
Figure3:UpwardTrendReversal
Thereversalofadownwardprimarytrendoccurswhenthemarketnolongerfallstolowerlows
andhighs. Thishappenswhenthemarketestablishesapeakthatishigherthantheprevious
peakfollowedbyatroughthatishigherthantheprevioustrough,whicharethecomponentsof
anupwardtrend.
Figure4:DownwardTrendReversal
18|P a g e
CurrentRelevance
ThereislittledoubtthatDowTheoryisofmajorimportanceinthehistoryoftechnicalanalysis.
Many of its tenets and ideas are the basis of much of what we know today. Aspects of Dow
Theoryarealsoincorporatedintoothertheories,suchasElliottWavetheory.However,sinceits
originaladaptationandsubsequentupdates,itsrelevanceasastandaloneanalyticaltechnique
hasweakened.Thereasonforthishasbeentheadventofmoreadvancedtechniquesandtools,
whichinpartbuildoffofDowTheory,butgreatlyexpanduponit.
Oneofthebiggerproblemswiththetheoryisthatfollowerscanmissoutonlargegainsdueto
the conservative nature of a trendreversal signal. As we mentioned previously, a signal is
confirmedwhenthereisanendtosuccessivehighs(uptrend)orlows(downtrend).However,
what often happens is that by the time the market has shown a clear sign of reversal, the
markethasalreadygeneratedalargegain.AnotherproblemwithDowTheoryisthatovertime,
the economy and the indexes originally used by Dow has changed. Consequently, the link
between them has weakened. For example, the industrial and transportation sectors of the
economy are no longer the dominant parts. Technology, for example, now takes up a
considerableportionofeconomicproductionandgrowth.
This is important because the basis for watching the indexes is that they are the leading
indicatorsofbusinessconditions.Theeconomyhasclearlybecomemoresegmented,requiring
theanalysisofmoreindexes,whichcouldgreatlyreducetheaccuracyandtimelinessofDow
Theoryanalysis.ImaginehavingtolookatsixindexeswhilestilladheringtoTenet#4:Indexes
MustConfirmEachOther.EventhoughthereareweaknessesinDowTheory,itwillalwaysbe
importanttotechnicalanalysis.Theideasoftrendingmarketsandpeakandtroughanalysisare
foundconstantlywithintechnicalwritingsandideas.AlsoofimportanceinDowTheoryisthe
ideaofemotionsinthemarketplace,whichremainsacharacteristicofmarkettrends.
CharlesDowandDowtheoryhelpedinvestorsimprovetheirunderstandingofthemarketsso
thattheycouldmakerbetterinvestmentsandachieveinvestmentsuccess.
19|P a g e
Conclusion
Dow Theory represents the beginning of technical analysis. Understanding this theory should
leadyoutoabetterunderstandingoftechnicalanalysisandofananalyst'sviewofhowmarkets
work.
Let'srecapwhatwe'velearned:
DowtheorywasformulatedfromaseriesofWallStreetJournaleditorialsauthoredby
Charles H. Dow, which reflected Dows beliefs on how the stock market behaved and
howthemarketcouldbeusedtomeasurethehealthofthebusinessenvironment.
Dow believed that the stock market as a whole was a reliable measure of overall
businessconditionswithintheeconomyandthatbyanalyzingtheoverallmarket,one
could accurately gauge those conditions and identify the direction of major market
trendsandthelikelydirectionofindividualstocks.
Themarketdiscountseverything.
Dowtheoryusestrendanalysistodeterminewhichwaythemarketisheaded.
Primarytrendsaremajormarkettrends.
Secondarytrendsarecorrectionsoftheprimarytrend.
Primarytrendsaremadeupofthreephases.Foranupwardtrend,thesephasesare:the
accumulation phase, the public participation phase and the excess phase. For a
downwardtrend,thethreephasesare:thedistributionphase,thepublicparticipation
phaseandthepanicphase.
Marketindexesmustconfirmeachother.Inotherwords,amajorreversalfromabullor
bearmarketcannotbesignaledunlessbothindexes(generallytheDowIndustrialand
RailAverages)areinagreement.
Volume must confirm the trend. The indexes are the main signals that indicate a
security'smovement,butvolumeisusedasasecondaryindicatortohelpconfirmwhat
thepricemovementissuggesting.
Atrendwillremainineffectuntilaclearreversaloccurs.
20|P a g e
Dow relied solely on closing prices for determining trends, not intraday price
movements.
PeakandtroughanalysisisakeytechniqueusedtoidentifytrendsinDowtheory.
SincetheadventofDowtheory,moreadvancedtechniquesandtoolshaveexpandedon
thistheoryandbeguntotakeitsplace.
OneproblemwithDowtheoryisthatfollowerscanmissoutonlargegainsduetothe
conservativenatureofatrendreversalsignal.
Another problem with Dow theory is that over time, the economy and the indexes
originallyusedbyDowhaschanged.
21|P a g e
Elliot Wave Theory
KUNAL JOSHI
Elliot Wave Theory

The Elliot Wave Theory was
developed by Ralph Nelson Elliot.
This theory is based on the
premise that market behavior is
based on waves rather than
random timing.
KUNAL JOSHI
Elliot Wave Theory

Elliot believed that prices fluctuated in a
series of waves based on the Golden Ratio,
also referred to as the Golden mean that
was originally proven by Fibonacci.
KUNAL JOSHI
Elliot Wave Theory

Elliot believed that the market rises in a
series of 5 waves and that a market
declines in a series of 3 waves.
KUNAL JOSHI
Elliot Wave Theory

According to the theory, on the first
wave a market rises, on wave two it
declines, begins to rise again on the
third wave. The third wave is followed
by a period of decline known as the
fourth wave, and finally completes the
rise on the fifth wave.
5
KUNAL JOSHI
Elliot Wave Theory

There is a correction period following
the five wave sequence. This declining
period is referred to as a three-wave
correction. During this time the market
theoretically declines for wave A,
begins to rise for wave B, and falls
again for wave C.
KUNAL JOSHI
Elliot Wave Theory Simplified

Wave one: Normally very short and easy to
miss.
Wave two: A retracement wave, usually
gives back all or most of what the first one
gained.
KUNAL JOSHI

Wave three: Usually very prominent, as it
follows a period of what appears as
consolidation, most people trade this
wave.
KUNAL JOSHI

Wave four: Noted to be very intricate yet
still a consolidation. One of Elliots main
rules is that in a 5-wave advance cycle,
wave 4 cant overlap wave 1.
Wave five: Often very active, yet at some
point declines and leads to the 3 wave
corrective cycle.
9
KUNAL JOSHI

Three Wave Decline:
Wave A: Normally seen as a minor
pullback, of wave 5 of the advance cycle.
Wave B: Follows Wave A of the downtrend,
and is often hard to spot but should result
in a third wave continuing down.
Wave C: Usually quite significant and
many traders see this selling opportunity.
10
KUNAL JOSHI
Elliot Wave Theory - Example
11
KUNAL JOSHI
Elliott Waves
y Elliot wave theory relies on cycles whithin
cycles
y Grand Super cycle
y Super cycle
y Cycle
y Each cycle consists of 5 moves with the
trend (1,3,5 are impulse, 2,4 are corrective)
and 3 that are against the trend. A 5-3
wave
12
KUNAL JOSHI
Super Cycle
Beginning of the next wave
Impulse
Correction
13
KUNAL JOSHI
The Super Cycle comprises the first two

movements of the Grand Super Cycle.
Impulse (1)
Correction (2)
14
KUNAL JOSHI
The Super Cycle has an underlying cycle

of its own!
Note that the grand super cycle has two movements, the super cycle has 8
movements, the cycle has 34Fibonacci numbers!!
15
KUNAL JOSHI
Elliot Wave Theory

Drawbacks to the wave counting strategy:
One mans wave one, is anothers wave
three. In other words the starting point is
somewhat ambiguous.
It is easy to count the waves after they
occur, but difficult to identify them as they
are occurring.
16
KUNAL JOSHI
Thanks
17
KUNAL JOSHI
CHART BASICS
KUNAL JOSHI
Basic Terms
y Volatility
y Fluctuations
y 52-week high / low
y Price / trading range
y Open / closing price
KUNAL JOSHI
Charts
y Maps price performance
y Sheds light on supply and
demand
y investment roadmap
y Price / volume relationship
important
3
KUNAL JOSHI
Charting: Types of Charts

y line charts
y bar charts
y point and figure charts
y candlestick charts
KUNAL JOSHI
Linear Scale Line Chart
Insert Figure 9-1 here.
KUNAL JOSHI
Bar Chart
KUNAL JOSHI
Point and Figure Chart
KUNAL JOSHI
Candlestick Chart
KUNAL JOSHI
Chart Basics Time Scale

Time Scale
y Dates along bottom of chart (varies from seconds to
decades)
y Common Types: intraday, daily, weekly, monthly
y Subtle differences between different time scales
KUNAL JOSHI
Chart Basics Time Scale
Daily Chart
10
KUNAL JOSHI
Weekly Chart
Explanation
Slide
on
next
Time Scale
You can see that there are subtle differences between the
charts. In the daily chart, you tend to see more fluctuations
from day to day. When you graph on a weekly basis, you
smooth out the fluctuations somewhat, and in many cases,
you case more easily identify a trend. Some investors tend
to use weekly graphs more because it gives them a better
overall picture of whats going on in terms of trends.
11
KUNAL JOSHI
Trends are your Friends

y 1 ) Trend: general direction of stock 2 ) Uptrend: higher highs,
higher lows
12
KUNAL JOSHI
Sometimes, trends difficult to

see
13
KUNAL JOSHI
HOW TO IDENTIFY TREND
14
KUNAL JOSHI
Volume
y Amount of shares that trade hands between seller and
buyers
y Price movements more significant when volume is
above average
15
KUNAL JOSHI
Trend Lines
y There are three basic
kinds of trends:
y An Up trend where prices
are generally increasing.

y A Down trend where
prices are generally
decreasing.
y A Trading Range.
16
KUNAL JOSHI
Trend lines
y Simply put, a line drawn on a chart to represent the
overall trend
y Upward trend line, connecting the lows, represents
support
17
KUNAL JOSHI
Trend lines
18
KUNAL JOSHI
Trend lines
19
KUNAL JOSHI
Trend lines
20
KUNAL JOSHI
Support & Resistance

y Support and resistance lines
indicate likely ends of trends.

y Resistance results from the
inability to surpass prior highs.
y Support results from the
inability to break below to prior
lows.
y What was support becomes
resistance, and vice-versa.
21
KUNAL JOSHI
Breakout
Resistance
Support
Simple Moving Averages

y A moving average is simply
22
KUNAL JOSHI
9/23/93 to 9/21/94
60
55
50
Price
the average price (usually

the closing price) over the
last N periods.
y They are used to smooth
out fluctuations of less than
N periods.
y This chart shows MSFT
with a 10-day moving
average. Note how the
moving average shows
much less volatility than the
daily stock price.
MSFT Daily Prices with 10-day MA
45
40
35
30
1
21
41
61
81
101
121
Date
141
161
181
201
221
241
Thanks
23
KUNAL JOSHI
KunalJoshi
Volume
Volume

Volumeissimplythenumberofsharesorcontractsthattradeoveragivenperiodoftime,usuallyaday.
Thehigherthevolume,themoreactivethesecurity.Todeterminethemovementofthevolume(upor
down),chartistslookatthevolumebarsthatcanusuallybefoundatthebottomofanychart.Volume
barsillustratehowmanyshareshavetradedperperiodandshowtrendsinthesamewaythatpricesdo.

WhyVolumeisImportant
Volume is an important aspect of technical analysis because it is used to confirm trends and chart
patterns. Any price movement up or down with relatively high volume is seen as a stronger, more
relevant move thana similar move with weak volume. Therefore, if you are looking at a large price
movement,youshouldalsoexaminethevolumetoseewhetherittellsthesamestory.
Say,forexample,thatastockjumps5%inonetradingdayafterbeinginalongdowntrend.Isthisasign
ofatrendreversal?Thisiswherevolumehelpstraders.Ifvolumeishighduringthedayrelativetothe
averagedailyvolume,itisasignthatthereversalisprobablyforreal.Ontheotherhand,ifthevolume
isbelowaverage,theremaynotbeenoughconvictiontosupportatruetrendreversal.
Volumeshouldmovewiththetrend.Ifpricesaremovinginanupwardtrend,volumeshouldincrease
(and vice versa). If the previous relationship between volume and price movements starts to
deteriorate,itisusuallyasignofweaknessinthetrend.Forexample,ifthestockisinanuptrendbut
1|P a g e
KunalJoshi
Volume
theuptradingdaysaremarkedwithlowervolume,itisasignthatthetrendisstartingtoloseitslegs
andmaysoonend.
Whenvolumetellsadifferentstory,itisacaseofdivergence,whichreferstoacontradictionbetween
two different indicators. The simplest example of divergence is a clear upward trend on declining
volume.
VolumeandChartPatterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles,
flags and other price patterns can be confirmed with volume, a process which we'll describe in more
detaillaterinthistutorial.Inmostchartpatterns,thereareseveralpivotalpointsthatarevitaltowhat
the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal
momentsofachartpattern,thequalityofthesignalformedbythepatternisweakened.
VolumePrecedesPrice
Another important idea in technical analysis is that price is preceded by volume. Volume is closely
monitoredbytechniciansandchartiststoformideasonupcomingtrendreversals.Ifvolumeisstarting
todecreaseinanuptrend,itisusuallyasignthattheupwardrunisabouttoend.
2|P a g e
Support / Resistance
KUNAL JOSHI
Chart Analysis : Support

Price at which BUYERS > SELLERS consistently.
Buyers who missed out on the first dip will be pressured to
buy if price continues to respect the support.
KUNAL JOSHI
AMZN Example of Supports
KUNAL JOSHI
Support Breakdowns
SELL if support breaks down, because it signifies
that BUYERS no longer overpower SELLERS.

Breakdowns are a BEARISH SELL signal.
You should have sold

here, at the BREAK
DOWN.
KUNAL JOSHI
Chart Analysis : Resistance

Price at which SELLERS overwhelm BUYERS
consistently.
When a stock makes a new high and then retraces,
sellers who missed out @ the previous peak will feel
pressured to sell when price climbs back to that level.
KUNAL JOSHI
TM Resistance Psychology
Should I sell?? Na, Ill

take my chances.
Finally! $138. I better
sell this time.
I should have sold

when TM was $138!!
KUNAL JOSHI
Resistance Breakouts
When price breaks out above resistance, it becomes
a new support level. *** IMPORTANT ***

Breakout signifies clear dominance of BUYERS.
(good time to buy)
This is a BULLISH BUY signal.
KUNAL JOSHI
TGT Resistance Breakout

TGT ResistanceBREAKOUT!!
Breakout
RESISTANCE BECOMES
SUPPORT
KUNAL JOSHI
RELIANCE INDUSTRIES LTD
KUNAL JOSHI
Thanks
10
KUNAL JOSHI
Moving Averages
KUNAL JOSHI
Moving Averages (DMA or

WMA)
y Most popular are 50-day and 200-day
y Shows the average price of the last # days and
plots it on a line
y Often acts as areas of support and/or resistance
KUNAL JOSHI
WIRE Support @ 10 WMA
KUNAL JOSHI
WIRE Support @ 10 WMA
KUNAL JOSHI
CPA Support at 20 & 50 DMA
KUNAL JOSHI
CPA Support at 20 & 50 DMA
20 DMA and 50 DMA

becomes points of
support for this stock
6
KUNAL JOSHI
Thanks
KUNAL JOSHI
FIBONACCI
KUNAL JOSHI
Fibonacci Methods
Fibonacci, one of the greatest
mathematicians of all time
discovered a sequence of numbers
which are now used across many
disciplines.
KUNAL JOSHI
The Fibonacci Sequence

Suppose you begin with a pair of rabbits.
y Rabbits take one month to mature (M)
y Only Mature rabbits can have offspring.
Once mature, a pair offspring are born
every month
y The rabbits never die
KUNAL JOSHI
Y = Young, M = Mature
Now
1 Month
2 Months
One Pair
(Y)
One Pair
(M)
Two Pair
(M, Y)
4 Months
Five Pairs
KUNAL JOSHI
4
(M,
M,Y,Y,M)
5 Months
Eight Pairs
(M,M,M,Y,Y,Y,M,M)
3 Months
Three Pairs
(M, M, Y)
6 Months
Thirteen Pairs
(M,M,M,Y,Y,Y,M,M,M,Y,Y,M,M)
Can you find the Pattern?

y 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
Each number in the Fibonacci sequence is the

sum of the previous two
1+ 1 = 2
1+2=3
2 + 3 = 5 .
KUNAL JOSHI
The Golden Number

Suppose that we divide each number into the previous
number
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
1/1 = 1
1/2 = .5
2/3 = .667
3/5 = .6
KUNAL JOSHI
5/8 = .625
8/13= .615
13/21 = .619
21/34 = .617
The Golden Number

Suppose that we divide each number into the following
number
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
1/1 = 1
2/1 = 1
3/2 = 1.5
5/3 = 1.667
8/5 = 1.6
13/8 = 1.625
21/13 = 1.615
34/21 = 1.619
The ratios converge to 1.618 (PHI)
KUNAL JOSHI
The Golden Number (.618, 1.618)

y Note that 1 + phi = PHI
y However, we also have that
1/phi = PHI
y .618 is the basis for Fibonacci methods
y The important numbers are
y .618
y .382 ( = .618*.618)
y .236 (= .618*.618*.618)
KUNAL JOSHI
Fibonacci Arcs
Draw an initial trend line
between two extreme points
Draw arcs that intersect the

trend at 61.8%, 50%, and
38.2% of the high
The arcs anticipate future

support/resistance levels
KUNAL JOSHI
Fibonacci Rays
Draw an initial trend line between two extreme points
Draw rays that intersect at

61.8%, 50%, and 38.2%
At the second extreme point, draw a vertical line

10
KUNAL JOSHI
Fibonacci Retracement
Once a reversal occurs, it tends to find support at Fibonacci levels!
11
KUNAL JOSHI
Fibonacci times
Large price swings tend to occur on Fibonacci times!
(times could be in days, months, years, etc)
12
KUNAL JOSHI
Thanks
13
KUNAL JOSHI
KunalJoshiFibonacciandElliottWaveRelationshipsSource:Esignal.com
OverviewofFibonacciandElliottWaveRelationships
Here is a Fib start...
We start with the price distance of each wave. To be able to apply successfully Fibonacci Extension calculations we
need to review this basic wave labeling relationship with price. The price distance of each wave is measured as a
vertical distance from the beginning of the wave to the end of the wave. The length is measured in price points or
units.
Length of Wave 1 and 2....
We start with the price distance of each wave. To be able to apply successfully Fibonacci Extension calculations we
need to review this basic wave labeling relationship with price . The price distance of each wave is measured as a
vertical distance from the beginning of the wave to the end of the wave. The length is measured in price points or
units.
Length of Wave 1 and 2....
Length of Wave 3...
1|P a g e
Length of Wave 4...
LengthofWave5...
Now before we start on how to calculate a Fibonacci Extension, let's introduce what Fibonacci and 'Extensions'
actually are, how does it relate to Elliott Wave theory.....
Fibonacci ratios are mathematical ratios derived from the Fibonacci sequence. The Fibonacci sequence is
the work of Leonardo Fibonacci, circa 1180 ACE. The Fibonacci sequence is used in many applications,
including engineering, space studies, stock market actions, and many other fields. Fibonacci is a proven
approach for measure price movement relationships. For Elliott Wave theorists, it means Fibonacci numbers
are tools to help guide us in our interpretation where we think price movements will go, based on human
'fear and greed' actions, reactions, or over-reactions factors.
The most common Fibonacci ratios used in the stock markets are: 1 - 1.618 - 2.618 - 4.23 - 6.85 (multiples) 0.14 0.25 - 0.38 - 0.5 & 0.618 (ratios) There are other numbers, but these are the ones we tend to focus on for defining at
least the short-term wave patterns.
Our ultimate goal here is to return to the question, "How do I calculate a Fibonacci extension?" But we need to
continue to work with some basic, yet very important information if we want to finally see how Fibonacci extension
calculations interplay in all this....
Have you ever wondered why wave counts are labeled when and were? Do you wonder the same about Wave (i.e., 5) projections?
2|P a g e
The first wave in an Elliott sequence is Wave 1. Later on when we want to calculate a Fibonacci Extension
calculation, remember, this is the area at which we will start our calculation. We start our Fib Exe at the beginning of
a new Elliott Wave sequence.
Wave 2 is always related to Wave 1....
3|P a g e
ThemostcommonretracementswelookforinatypicalWave2pullbackareeithera50%or62%retracementofWave1....
WhileweareonthesubjectofWave2's,hereareasomestatisticalinformationbehindWave2's.Wetypicallyexpectonly12%
ofWave2'stohold38%retracementsofWave1....
Weanticipate73%ofWave2retracementsbetween50%to60%....
Weanticipate15%ofWave2'storetracebelowthe62%....
OncewehaveseenevidenceofWave2holding,wecanusetheFibonacciExtensiontocalculatesomeWave3targets.Wave3
isrelatedtoWave1.TypicallywemonitorforthefollowingFibonaccirelationships:Wave3=either1.62xlengthofWave1or
2.62xthelengthofWave1or4.25xthelengthofWave1
4|P a g e
ThemostcommonmultiplesofWave1toWave3arethe1.62 and2.62 numbers.(IfWave3isextending,wetypicallymonitor

for4.25orhigherratios.)
Fibonacci Extension calculation-- Click on the 'Fib Ext' icon. Start a Wave 3 extension calculation by clicking the
mouse at the beginning of the sequence, or in this case the bottom of Wave 1. Click the mouse a second time on the
end of Wave 1. Then click a 3rd time at the end of Wave 2. (Wave 3 projections or targets should show up on the
chart after the second click, and will be locked into place with the final 3rd click of the mouse.)
Ifyouwishtotoggle'ON'or'OFF'aFibonacciExtension(FibExt)number,highlighttheeithertheFibExticonandrightclick,or
highlightaFibnumberalreadydrawnandrightclick.Turn'off'or'on'whatyouwanttoseedisplayed.Forthoseunfamiliarwith
thesoftware,ifyouwishtotoggle'ON'or'OFF'aFibonacciExtension(FibExt)number,highlighttheeithertheFibExticonand
rightclick,orhighlightaFibnumberalreadydrawnandrightclick.Turn'off'or'on'whatyouwanttoseedisplayed.
5|P a g e
Before we go to Wave 4 pullbacks, I think it might help our understanding of Wave 3's if we delved into-- at least in a
very general sense-- some Fibonacci statistics behind a typical Wave 3. I usually never ever quote statistics because
I personally believe statistics are deceptive, as trading (and life in general) can be extremely complex. Simple
statistics don't do justice for all the variables that interplay in pattern matching behavior. So I relunctantly offer these
numbers only as a general guideline for anticipating Wave 3 behaviors. For those of you newer to Elliott Wave it
might help you a little bit as you see Wave 3 counts evolve over time and are trying to anticipate Wave 3 completions.
Only approximately 2% of the time will a labeled Wave 3 be less than W1.
Asarule,Wave3isnevertheshortest,usuallylongerthanW1andW2.IpostedawhilebackaPDFfilewhereItalkedabout
thisgeneralrule.Ifyouwouldliketoreviewit,clickhere.Imaybewrong,butIwishtherulesaid,"Wave3shouldneverbethe
shortest," because it can happen in extremely remote or 2% or the time, if that. (I don't believe it is totally, absolutely
impossible, just very very remote.)
6|P a g e
Weanticipate15%ofWave3'stradebetween1and1.60ofWave1....
As an aside comment here, when I see a Wave 3 labeled that is only between 1 and 1.6 of Wave 1 and 2, I will
typically call a wave count "Wave 1 or A, Wave 2 or B, Wave 3 or C." The reason why I do this is the mathematical
relationships of Wave 1-2-3 and Wave A-B-C patterns is the same until Wave 3 finally extends beyond 1.618. When I
think this way I tend to avoid trading surprises when a promising Wave 3 building fails and falls into a A-B-C pattern. I
always have an alternative plan of escape or reversal strategy until Wave 3 becomes more successful.
We can anticipate 45% of the time Wave 3's will push to between 1.6 and 1.75%....
7|P a g e
Again, I am always a little bit defensive and will manage a position with tighter trailing stops or escape stategies until I see
moreconvictionintheWave3.OnceWave3isabove1.75,Ibegintobreathlessdeeply,relaxalittlebitmore,andwilladopt
someconservativestrategiestohelpmebetterstaywiththetrendasitbecomesevenmoreevident.Tome,the1.60to1.75is
thecriticaljunctionbetweena'lastchance'WaveCfailureorastrongerWave3trendcontinuingtobuild.
Wecananticipateathirdor30%ofthetimeaWave3pushestoapproximatelythe1.75to2.62range....
When I see a Wave 3 push this far, I personally am elated. I am more confident a higher quality, "possible Type 1
Buy/Sell opportunity" could be created with this type of Wave 3 strength. I am more confident in the possiblity Wave 3
could continue to extend higher in a more complex Wave 3 trend. In general, the odds begin to work 60% or greater
in my favor I can manage to find some better quality trades still because everyone else who has yet to trade into this
strength is now finally growing convinced with more evidence of strength behind the Wave 3.
We can anticipate 8% of Wave 3's will extend beyond 2.62 or higher Fibonacci numbers....
HereiswhereIwishIhadtimetoaddmoreadvancedknowledge.Whenwesee2.62orgreaterWave3'sinprogress,theseare
the types of markets even nonElliott Wave traders notice. This is what I think most institutional traders will recognize as
"momentum"trading.Momentumtradingiswhereoneattemptstobuyshallowpullbacksinordertotryandcatchapieceof
whatnowisrecognizedasclearlyastrongtrendinprogress.ItislikegoingtoHawaiiandsurfingthebiggerwaves.Itcanbea
lotoffuncatchingoneofthesebiggerwavesifevenclosetoshorebutboycanitbedangerousifanentryorexitstrategyis
notwellexecuted!
8|P a g e
Ratios for Wave 4 At some point during a Wave 3, it begins to lose energy. During this period, trader's start to
wonder, and become willing to lock in some profits. We call this time period a Wave 4 "profit-taking" pullback, or a
correction. Once profit-taking is finished, the previous trend returns. Wave 4 is related to Wave 3.
Wave 4 is related to Wave 3 by the following standard ratios: Wave 4 = either
24%ofWave3,or38%ofWave3,or50%ofWave3,or62%ofWave3
BackgroundstatisticsofWave4RatiosWecananticipateonly15%ofthetimeWave4toretracebetween24%to38%....
IfyouhavefollowedmychartsfromtheformerAdvancedGET"Trader'sOutlook"andnowhereateSignalCentral,youwillseeI
reallyliketofind25to38%retracementsetupsforType1Buy/Sellideas.If2538%holds,itrepresentsthequickestoddsfora
returntothestrongWave3trend.HereisaveryrecentrealexampleofachartIposted.GLWdailywaspostedatanAGET
Forumthreadasitbegantobreakout.ClickheretoreviewtherealGLWdailyexampleandlaterresults.Oneconsiderationat
thetimeofposting,itwasholdingataminimal25%retracement,startingfromW2andendingatWave3top.
9|P a g e
Wecananticipate60%ofthetimeWave4toretracebetween30%and50%....
10|P a g e
Hereisasampleofwhata30%to50%Wave4pullbackmightlooklike....
Wecananticipate15%ofthetimeWave4toretracebetween50%and62%....
11|P a g e
Hereisasampleofwhata50%to62%Wave4pullbackmightlooklike....
12|P a g e
We can anticipate 10% of the time Wave 4 retracing 62% or greater....
Here is a real-time example where HGH2 daily retraced in a Wave 4 more than 62%. This example I posted at the
former AGET Trader's Outlook as it retraced below 62% but stopping at 75%. It was shown before it rallied again
(see next post)....
13|P a g e
Hereiswhatcamelaterasitralliedoff75%totrendupagaintoanewercontracthigh....
Ratios for Wave 5 Wave 5 has two primary relationships. Wave 5 behavior has a direct correlation to the Fibonacci
relationship of Wave 3.
Relationship #1- If Wave 3 is greater than 1.62, or extended, Wave 5 ratios are as follows: Wave 5 either = Wave
1, or = 1.62 x Wave 1, or = 2.62 x Wave 1
14|P a g e
Relationship#2If Wave 3 is less than 1.62, Wave 5 ratios are as follows:
WhenWave3islessthan1.62,Wave5willoftenoverextend.
TheratioofWave5willbebasedontheentirelengthfromthebeginningofWave1tothetopofWave3.
ExtendedWave5=either0.62xlength(beginningofWave1totopofWave3)or=lengthof(beginningofWave1totopof
Wave3)or=1.62xlengthof(beginningofWave1totopofWave3)
OddsareverygoodWave5becomesextendedifWave3islessthan1.62XWaveOne.Herearesomeparameterstolookfor
underthiscondition
W5=.62XLengthof0to3W5=1XLengthof0to3W5=1.62XLengthof0to3
15|P a g e
HereisanexamplewhereWave5=.0618.TheWave5FibonacciExtensioncalculationstartsatthebeginningofWave1,toend
ofWave3toendofWave4.Thecalculationisthesamenomatterwhatdirectionthetrendis.Theexamplebelowisgenerated
fromadowntrendWave5....
16|P a g e
Even when Wave 5 is extended, we have found many instances where the Wave 5 will often end up inside the ratio values
calculatedfrom0to3,where0isthestartofWave1.Thelengthof0to3isextendedfromtheendofWave4.Wave5typically
endsinsidethe62%window.
Hereisaquicksummaryillustration....
17|P a g e
ANDREW'S PITCHFORK
KUNAL JOSHI
Andrews Pitchfork
Dr. Alan Andrews developed a
channel technique to identify areas
of support and resistance from a
common baseline. The premise of
the theory is to trade the channel
depicted by the tines of the
pitchfork.
2
KUNAL JOSHI
Andrews Pitchfork
The center tine begins at the most
recent contract high or low. The top
tine is determined by looking at the
highest move from the contract high
or low. The next point is located
based on the retracement of that
move.
3
KUNAL JOSHI
Resistance tine based on

most recent move from
baseline.
Support tine identified by

retracement of the original
move
KUNAL JOSHI
Thanks
KUNAL JOSHI
GANN FAN
KUNAL JOSHI
Gann Fan
W.D. Gann designed several techniques for
studying price charts. He believed that
specific geometric patterns and angles
contained reoccurrences that could be used to
predict price action.
KUNAL JOSHI
Gann Fan
Gann believed that the ideal balance between
price and time exists within a 45 degree angle of
the axis. The Gann fan is made up of 9 angles
and is based on this concept.
KUNAL JOSHI
Gann Fan
The corresponding lines represent support and
resistance, once one line is broken by the entire
days price range the next line becomes new
support or resistance. The drawing of these lines
should begin at a relative top or bottom of a
market.
KUNAL JOSHI
Gann Fan
It is also imperative that when drawing the
Gann Fan, the 45 degree angles are kept
in tact. In other words the center line
should keep a 1 to 1 slope.
KUNAL JOSHI
Gann Fan
During an uptrend, the penetration of one line
suggests that the market will rally to the next, in
a downtrend a broken support line anticipates a
drop to the next line.
KUNAL JOSHI
KUNAL JOSHI
KUNAL JOSHI
Thanks
KUNAL JOSHI
KunalJoshi
Andrews&Gann
Andrew's Pitchfork
Andrew's Pitchfork, otherwise known as median line studies utilizes the concepts of support, resistance,
and retracements. As is visually depicted below, Andrew's Pitchfork consists of:
Handle
Resistance Trendline "tine"
Median Line
Support Trendline "tine"
Steps to creating a Pitchfork
1.
Find a significant pivot or retracement (in the chart above, the lower left corner)
2.
Find the next significant pivot or retracement (the dotted blue line connects the first pivot
to this second pivot)

3.
Find the next retracement (in the chart above, the solid blue line starting from the left and
going down to the right)

Charting software finishes the pitchfork by creating the upper resistance "tine", the lower support "tine",
and the median line. Note: "tine" is the terminology used by the creator of Andrew's Pitchfork, Dr. Alan
Andrews.
1|P a g e
KunalJoshi
Andrews&Gann
Interpreting Andrew's Pitchfork

The same rules for support and resistance apply to Andrew's Pitchfork. Look to buy at support and look
to sell at resistance (see: Support & Resistance). Also, prices are thought to gravitate towards the median
line as depicted in the chart above of the S&P 500 exchange traded fund. The chart above shows the longterm view (1 year 6 months) of the stock market; however, Andrew's Pitchfork can be used for shorter
time frames.
Gann Fans
Gann Fans, created by W. D. Gann, are based on prices moving in predictable patterns. Gann's theory is
based on time/price movements with the 1 time unit by 1 price unit (i.e. 1 x 1) being the main angle (45degrees). However, there are other angles such as the 1 x 2, 2 x 1, 1 x 4, 4 x 1, etc. Gann Fans are drawn
from major price peaks and bottoms and are used to show trendlines of support and resistance.
The following Gann Fan (1 x 8) is shown on the price chart of Corn futures
In the chart of wheat futures above, wheat prices were held up by the 1 x 8 support line. When wheat
prices peaked and subsequently began to fall, wheat was held down by the 1 x 8 resistance line.
Gann Fanns are an art and involve intense study by potential users. The fact that the creator W. D. Gann
wrote most of his studies on Gann Fans and angles in a cryptic language doesn't help the potential student
of Gann Fans either.
2|P a g e
KunalJoshiTheBollingerBandsSource:onlinetradingconcepts.com
The Bollinger Bands

Bollinger Bands is a versatile tool combining moving averages and standard deviations and is one of the
most popular technical analysis tools available for traders. There are three components to the Bollinger
Band indicator:
1.
Moving Average: By default, a 20-period simple moving average is used.
2.
Upper Band: The upper band is usually 2 standard deviations (calculated from 20-
periods of closing data) above the moving average.

3.
Lower Band: The lower band is usually 2 standard deviations below the moving average.
Bollinger Bands (in blue) are shown below in the chart of the E-mini S&P 500 Futures contract:
There are three main methodologies for using Bollinger Bands, discussed in the following sections:
1.
Playing the Bands
2.
Bollinger Band Breakouts
3.
Option Volatility Strategies
1|P a g e
1.
Playing the Bollinger Bands
Playing the bands is based on the premise that the vast majority of all closing prices should be between
the Bollinger Bands. That stated, then a stock's price going outside the Bollinger Bands, which occurs
very rarely, should not last and should "revert back to the mean", which generally means the 20-period
simple moving average.
BuySignal
In the example shown in the chart below of the E-mini S&P 500 Future, a trader buys or buys to cover
when the price has fallen below the lower Bollinger Band.
SellSignal
The sell or buy to cover exit is initiated when the stock, future, or currency price pierces outside the upper
Bollinger Band.
These buy and sell signals are graphically represented in the chart of the E-mini S&P 500 Futures contract
shown below:
Rather than buying or selling exactly when the price hits the Bollinger Band, the more aggressive
approach, a trader could wait and see if the price moves above or below the Bollinger Band and when the
price closes back inside the Bollinger Band, then the trigger to buy or sell short occurs. This helps to
reduce losses when prices breakout of the Bollinger Bands for a while. However, many profitable
opportunities would be lost. To illustrate, the chart of the E-mini S&P 500 Future above shows many
missed opportunities. However, in the chart on the next page, the more conservative approach would have
prevented many painful losses. Also, some traders exit their long or short entries when price touches the
20-day moving average
2|P a g e
2. Bollinger Band Breakouts
Basically the opposite of "Playing the Bands" and betting on reversion to the mean is playing Bollinger
Band breakouts. Breakouts occur after a period of consolidation, when price closes outside of the
Bollinger Bands. Other indicators such as support and resistance lines can prove beneficial when deciding
whether or not to buy or sell in the direction of the breakout.
The chart of Wal-Mart (WMT) below shows two such Bollinger Band breakouts:
Bollinger Band Breakout through Resistance Buy Signal

Price breaks above the upper Bollinger Band after a period of price consolidation. Other confirming
indicators are suggested, such as resistance being broken in the chart above of Wal-Mart stock.
Bollinger Band Breakout through Support Sell Signal

Price breaks below the lower Bollinger Band. It is suggested that other confirming indicators be used,
such as a support line being broken, such as in the example above of Wal-Mart stock breaking below
support.
This strategy is discussed by the man who created Bollinger Bands, John Bollinger.
Bollinger Bands can also be used to determine the direction and the strength of the trend. The chart below
of the E-mini S&P 500 Futures contract shows a strong upward trend
3|P a g e
Bollinger Band Showing a Strong Trend

The chart above of the E-mini S&P 500 shows that during a strong uptrend, prices tend to stay in the
upper half of the Bollinger Band, where the 20-period moving average (Bollinger Band centerline) acts as
support for the price trend.
The reverse would be true during a downtrend, where prices would be in the lower half of the Bollinger
Band and the 20-period moving average would act as downward resistance.
Bollinger Bands adapt to volatility and thus are useful to options traders, specifically volatility traders.
3. Option Volatility Strategies

There are two basic ways to trade volatility:
1.
Buy options with low volatility in hopes that volatility will increase and then sell back
those options at a higher price.

2.
Sell options with high volatility in hopes that volatility will decrease and then buy back
those same options at a cheaper price.
Since Bollinger Bands adapt to volatility, Bollinger Bands give options traders a good idea of when
options are relatively expensive (high volatility) or when options are relatively cheap (low volatility).
The chart below of Wal-Mart stock illustrates how Bollinger Bands can be used to trade volatility:
4|P a g e
Buy Options when Volatility is Low

When options are relatively cheap, such as in the center of the chart above of Wal-Mart when the
Bollinger Bands significantly contracted, buying options, such as a straddle or strangle, might be a good
options strategy.
The reasoning is that after sharp moves, prices tend to stay in a trading range to rest. After prices have
rested, such as periods when the Bollinger Bands are extremely close together, then prices usually will
begin to move once again. Therefore, buying options when Bollinger Bands are tight together, might be a
smart options strategy.
Sell Options when Volatility is High
At times when options are relatively expensive, such as in the far right and far left of the chart above of
Wal-Mart when the Bollinger Bands were significantly expanded, selling options in the form of a
straddle, strangle, or iron condor, might be a good options strategy to use.
The logic is that after prices have risen or fallen significantly, such as periods when the Bollinger Bands
are extremely far apart, then prices usually will begin to consolidate and become less volatile. Hence,
selling options when Bollinger Bands are far apart, potentially could be a smart options volatility strategy
5|P a g e
PRICE PATTERNS
KUNAL JOSHI
Types Of Patterns
y REVERSAL
(Indicate that an important reversal in trend is
taking place)
y CONTINUATION
(Market is only pausing for a while , possibly to
correct a near term overbought or oversold
condition, after which the existing trend will be
resumed )
2
KUNAL JOSHI
Reversal Patterns
y The head and Shoulders
y Triple tops and bottoms
y Double tops and bottoms
y Spike(or V) tops and bottoms
y The rounding (or saucer )
KUNAL JOSHI
Continuation Pattern
y Triangles
y Flags
y Pennants
y Wedges
y Rectangles
KUNAL JOSHI
Common Points to All Reversal

Patterns
1. A prerequisite for any reversal pattern is the
2.
3.
4.
5.
6.
5
existence of a prior trend.

The first signal of an impending trend reversal is
often the breaking of an important trend line.
The larger the pattern, the greater the
subsequent move.
Topping patterns are Usually shorter in duration
and more volatile than bottoms.
Bottoms usually have smaller price ranges and
take longer to build.
Volume is usually more important on the upside.
KUNAL JOSHI
Reversal Patterns
KUNAL JOSHI
The Head and Shoulders
KUNAL JOSHI
The Head and Shoulders
TATA MOTORS LTD
KUNAL JOSHI
The Inverse Head and

Shoulders
KUNAL JOSHI
The Inverse Head and

Shoulders
10
KUNAL JOSHI
Complex Head and

Shoulders
11
KUNAL JOSHI
Triple Tops
12
KUNAL JOSHI
Triple Bottoms
13
KUNAL JOSHI
Triple Bottoms
14
KUNAL JOSHI
Double Tops
15
KUNAL JOSHI
Double Tops
16
KUNAL JOSHI
Double Bottoms
17
KUNAL JOSHI
Double Bottoms
18
KUNAL JOSHI
FALSE BREAK OUT
19
KUNAL JOSHI
Rounding or Saucers Bottom
20
KUNAL JOSHI
Spike or V Reversal Pattern
21
KUNAL JOSHI
Continuation Pattern
22
KUNAL JOSHI
Triangles - Symmetrical
23
KUNAL JOSHI
Triangles - Ascending
24
KUNAL JOSHI
Triangles - Descending
25
KUNAL JOSHI
Triangles Expanding
26
KUNAL JOSHI
Flags
27
KUNAL JOSHI
Pennants
28
KUNAL JOSHI
WEDGE
29
KUNAL JOSHI
Rectangle
30
KUNAL JOSHI
Continuation Head and

Shoulders
31
KUNAL JOSHI
Thanks
32
KUNAL JOSHI
KunalJoshi
IndicatorsandOscillators
TechnicalAnalysis:IndicatorsandOscillators
Indicatorsarecalculationsbasedonthepriceandthevolumeofasecuritythatmeasuresuchthingsas
moneyflow,trends,volatilityandmomentum.Indicatorsareusedasasecondarymeasuretotheactual
pricemovementsandaddadditionalinformationtotheanalysisofsecurities.Indicatorsareusedintwo
main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell
signals.
There are two main types of indicators: leading and lagging. A leading indicator precedes price
movements,givingthemapredictivequality,whilealaggingindicatorisaconfirmationtoolbecauseit
followspricemovement.Aleadingindicatoristhoughttobethestrongestduringperiodsofsidewaysor
nontrending trading ranges, while the lagging indicators are still useful during trending periods.
Therearealsotwotypesofindicatorconstructions:thosethatfallinaboundedrangeandthosethatdo
not.Theonesthatareboundwithinarangearecalledoscillatorsthesearethemostcommontypeof
indicators. Oscillator indicators have a range, for example between zero and 100, and signal periods
wherethesecurityisoverbought(near100)oroversold(nearzero).Nonboundedindicatorsstillform
buyandsellsignalsalongwithdisplayingstrengthorweakness,buttheyvaryinthewaytheydothis.
Thetwomainwaysthatindicatorsareusedtoformbuyandsellsignalsintechnicalanalysisisthrough
crossovers and divergence. Crossovers are the most popular and are reflected when either the price
movesthroughthemovingaverage,orwhentwodifferentmovingaveragescrossovereachother.The
secondwayindicatorsareusedisthroughdivergence,whichhappenswhenthedirectionoftheprice
trend and the direction of the indicator trend are moving in the opposite direction. This signals to
indicatorusersthatthedirectionofthepricetrendisweakening.
Indicators that are used in technical analysis provide an extremely useful source of additional
information.Theseindicatorshelpidentifymomentum,trends,volatilityandvariousotheraspectsina
securitytoaidinthetechnicalanalysisoftrends.Itisimportanttonotethatwhilesometradersusea
singleindicatorsolelyforbuyandsellsignals,theyarebestusedinconjunctionwithpricemovement,
chartpatternsandotherindicators.
Page|1
KunalJoshi
Accumulation/DistributionLine
Theaccumulation/distributionlineisoneofthemorepopularvolumeindicatorsthatmeasuresmoney
flowsinasecurity.Thisindicatorattemptstomeasuretheratioofbuyingtosellingbycomparingthe
pricemovementofaperiodtothevolumeofthatperiod.
Calculated:
Acc/Dist = ((Close Low) (High Close)) / (High Low) *

Period'sVolume
Thisisanonboundedindicatorthatsimplykeepsarunningsumovertheperiodofthesecurity.Traders
look for trends in this indicator to gain insight on the amount of purchasing compared to selling of a
security.Ifasecurityhasanaccumulation/distributionlinethatistrendingupward,itisasignthatthere
ismorebuyingthanselling.
AverageDirectionalIndex
Theaveragedirectionalindex(ADX)isatrendindicatorthatisusedtomeasurethestrengthofacurrent
trend.Theindicatorisseldomused toidentifythe directionofthecurrenttrend,but can identifythe
momentumbehindtrends.
TheADXisacombinationoftwopricemovementmeasures:thepositivedirectionalindicator(+DI)and
thenegativedirectionalindicator(DI).TheADXmeasuresthestrengthofatrendbutnotthedirection.
The +DI measures the strength of the upward trend while the DI measures the strength of the
downward trend. These two measures are also plotted along with the ADX line. Measured on a scale
betweenzeroand100,readingsbelow20signalaweaktrendwhilereadingsabove40signalastrong
trend.
Page|2
KunalJoshi
Aroon
The Aroon indicator is a relatively new technical indicator that was created in 1995. The Aroon is a
trendingindicatorusedtomeasurewhetherasecurityisinanuptrendordowntrendandthemagnitude
ofthattrend.Theindicatorisalsousedtopredictwhenanewtrendisbeginning.
The indicator is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon down" line (red
dottedline).TheAroonuplinemeasurestheamountoftimeithasbeensincethehighestpriceduring
thetimeperiod.TheAroondownline,ontheotherhand,measurestheamountoftimesincethelowest
priceduringthetimeperiod.Thenumberofperiodsthatareusedinthecalculationisdependentonthe
timeframethattheuserwantstoanalyze.
AroonOscillator
AnexpansionoftheAroonistheAroonoscillator,whichsimplyplotsthedifferencebetweentheAroon
upanddownlinesbysubtractingthetwolines.Thislineisthenplottedbetweenarangeof100and
100.Thecenterlineatzerointheoscillatorisconsideredtobeamajorsignallinedeterminingthetrend.
Thehigherthevalueoftheoscillatorfromthecenterlinepoint,themoreupwardstrengththereisinthe
security;thelowertheoscillator'svalueisfromthecenterline,themoredownwardpressure.Atrend
reversalissignaledwhentheoscillatorcrossesthroughthecenterline.Forexample,whentheoscillator
goesfrompositivetonegative,adownwardtrendisconfirmed.Divergenceisalsousedintheoscillator
to predict trend reversals. A reversal warning is formed when the oscillator and the price trend are
movinginanoppositedirection.
The Aroon lines and Aroon oscillators are fairly simple concepts to understand but yield powerful
informationabouttrends.Thisisanothergreatindicatortoaddtoanytechnicaltrader'sarsenal.
Page|3
KunalJoshi
MovingAverageConvergence
Themovingaverageconvergencedivergence(MACD)isoneofthemostwellknownandusedindicators
in technical analysis. This indicator is comprised of two exponential moving averages, which help to
measure momentum in the security. The MACD is simply the difference between these two moving
averagesplottedagainstacenterline.Thecenterlineisthepointatwhichthetwomovingaveragesare
equal. Along with the MACD and the centerline, an exponential moving average of the MACD itself is
plotted on the chart. The idea behind this momentum indicator is to measure shortterm momentum
comparedtolongertermmomentumtohelpsignalthecurrentdirectionofmomentum.
MACD= shorter term moving average - longer term

moving average
When the MACD is positive, it signals that the shorter term moving average is above the longer term
movingaverageandsuggestsupwardmomentum.TheoppositeholdstruewhentheMACDisnegative
this signals that the shorter term is below the longer and suggest downward momentum. When the
MACDlinecrossesoverthecenterline,itsignalsacrossinginthemovingaverages.Themostcommon
movingaveragevaluesusedinthecalculationarethe26dayand12dayexponentialmovingaverages.
The signal line is commonly created by using a nineday exponential moving average of the MACD
values. These values can be adjusted to meet the needs of the technician and the security. For more
volatile securities, shorter term averages are used while less volatile securities should have longer
averages.
Another aspect to the MACD indicator that is often found on charts is the MACD histogram. The
histogramisplottedonthecenterlineandrepresentedbybars.Eachbaristhedifferencebetweenthe
MACD and the signal line or, in most cases, the nineday exponential moving average. The higher the
bars are in either direction, the more momentum behind the direction in which the bars point.
As you can see in Figure below, one of the most common buy signals is generated when the MACD
crosses above the signal line (blue dotted line), while sell signals often occur when the MACD crosses
belowthesignal.
Page|4
KunalJoshi
Page|5
KunalJoshi
RelativeStrengthIndexRSI
Atechnical momentum indicator that compares the magnitude of recent gains to recent losses in an
attempt to determine overbought and oversold conditions of an asset. It is calculated using the
followingformula:
100
RSI=100
______
1+RS
RS=Averageofxdays'upcloses/Averageofxdays'downcloses
Asyoucanseefromthechartbelow,theRSIrangesfrom0to100.Anassetisdeemedtobeoverbought
oncetheRSIapproachesthe70level,meaningthatitmaybegettingovervaluedandisagoodcandidate
for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting
oversoldandthereforelikelytobecomeundervalued.
ThestandardcalculationforRSIuses14tradingdaysasthebasis,whichcan beadjusted tomeetthe

needsoftheuser.Ifthetradingperiodisadjustedtousefewerdays,theRSIwillbemorevolatileand
willbeusedforshortertermtrades.
Page|6
KunalJoshi
OnBalanceVolume(OBV)
Introduction
JoeGranvilleintroducedtheOnBalanceVolume(OBV)indicatorinhis1963book,Granville'sNewKeyto
Stock Market Profits. This was one of the first and most popular indicators to measure positive and
negative volume flow. The concept behind the indicator: volume precedes price. OBV is a simple
indicatorthataddsaperiod'svolumewhenthecloseisupandsubtractstheperiod'svolumewhenthe
closeisdown.AcumulativetotalofthevolumeadditionsandsubtractionsformstheOBVline.Thisline
can then be compared with the price chart of the underlying security to look for divergences or
confirmation.
Calculation
Asstatedabove,OBViscalculatedbyaddingtheday'svolumetoarunningcumulativetotalwhenthe
security'spriceclosesup,andsubtractsthevolumewhenitclosesdown.
Forexample,iftodaytheclosingpriceisgreaterthanyesterday'sclosingprice,thenthenew
OBV=Yesterday'sOBV+Today'sVolume
Iftodaytheclosingpriceislessthanyesterday'sclosingprice,thenthenew
OBV=Yesterday'sOBVToday'sVolume
Iftodaytheclosingpriceisequaltoyesterday'sclosingprice,thenthenew
OBV=Yesterday'sOBV
Use
TheideabehindtheOBVindicatoristhatchangesintheOBVwillprecedepricechanges.Arisingvolume
canindicatethepresenceofsmartmoneyflowingintoasecurity.Thenoncethepublicfollowssuit,the
security'spricewilllikewiserise.
Likeotherindicators,theOBVindicatorwilltakeadirection.Arising(bullish)OBVlineindicatesthatthe
volumeisheavieronupdays.Ifthepriceislikewiserising,thentheOBVcanserveasaconfirmationof
thepriceuptrend.Insuchacase,therisingpriceistheresultofanincreaseddemandforthesecurity,
whichisarequirementofahealthyuptrend.
However,ifpricesaremovinghigherwhilethevolumelineisdropping,anegativedivergenceispresent.
Thisdivergencesuggeststhattheuptrendisnothealthyandshouldbetakenasawarningsignalthat
thetrendwillnotpersist.
Page|7
KunalJoshi
The numerical value of OBV is not important, but rather the direction of the line. A user should
concentrateontheOBVtrendanditsrelationshipwiththesecurity'sprice.
Example
ThischartshowshowtheOBVlinecanbeusedasconfirmationofapricetrend.ThepeakinSeptember
wasfollowedbylowerpricemovementsthatcorrespondedwithvolumespikes,thusimplyingthatthe
downtrendwasgoingtocontinue.
Page|8
KunalJoshi
StochasticOscillator
Thestochasticoscillatorisoneofthemostrecognizedmomentumindicatorsusedintechnicalanalysis.
The idea behind this indicator is that in an uptrend, the price should be closing near the highs of the
tradingrange,signalingupwardmomentuminthesecurity.Indowntrends,thepriceshouldbeclosing
nearthelowsofthetradingrange,signalingdownwardmomentum.
The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions
above80andoversoldconditionsbelow20.Thestochasticoscillatorcontainstwolines.Thefirstlineis
the %K, which is essentially the raw measure used to formulate the idea of momentum behind the
oscillator. The second line is the %D, which is simply a moving average of the %K. The %D line is
considered to be the more important of the two lines as it is seen to produce better signals. The
stochasticoscillatorgenerallyusesthepast14tradingperiodsinitscalculationbutcanbeadjustedto
meettheneedsoftheuser.
Page|9
KunalJoshi
AccumulationDistribution
Accumulation Distribution
Accumulation Distribution uses volume to confirm price trends or warn of weak movements that could
result in a price reversal.
Accumulation: Volume is considered to be accumulated when the day's close is higher than the previous
day's closing price. Thus the term "accumulation day"
Distribution: Volume is distributed when the day's close is lower than the previous day's closing price.
Many traders use the term "distribution day"
Therefore, when a day is an accumulation day, the day's volume is added to the previous day's
Accumulation Distribution Line. Similarly, when a day is a distribution day, the day's volume is
subtracted from the previous day's Accumulation Distribution Line.
The main use of the Accumulation Distribution Line is to detect divergences between the price
movement and volume movement
1|P a g e
KunalJoshi
Aroon
Aroon Indicator
The Aroon indicator is used to help traders know when a market is up trending, down trending, or is in a
range-bound, trendless market.
Knowing when a market is trending is very useful, mainly because trend following technical analysis
indicators are profitable during trending markets but cause losses during non-directional markets.
Similarly, oscillators are extremely profitable indicators during range-bound markets, but perform very
poorly during strong trending markets. The Aroon indicator can show which mode the market is in.
The chart of the Nasdaq 100 shows the different modes of the market and how the Aroon indicator reacts
to these different market modes:
Interpreting the Aroon Indicator

When the Aroon Down indicator (in red above) is above the 70 line and the Aroon Up indicator (in greed
above) is below 30, then the market is trending downwards.
In contrast, when the Aroon Up indicator is above the 70 line and the Aroon Down indicator is below 30,
then the market is trending strongly upwards.
When the Aroon Up and Aroon Down indicator move towards the centerline (50), then the market is
entering into a consolidation period.
By varying the period length, the Aroon indicator can give long term indications of trend or short-term
indications of trend. By default, the Aroon indicator is 25-periods (shown in the chart above), but a
shorter time frame could be 10-periods.
Another version of the Aroon indicator that combines both the Aroon Up and Aroon Down is presented
on the next page
1|P a g e
KunalJoshi
Aroon
Aroon Oscillator
The Aroon Oscillator is calculated by subtracting Aroon Down from the Aroon Up indicator. It is
interpreted as follows:
Above 50 is considered a strong uptrending market
Below -50 means that the market is trending lower;
Near 0 means that the market is in transition and not trending.
The chart below of the mini-Dow Futures contract shows both the Aroon indicator and the Aroon
Oscillator:
The chart below of the Gold futures contract shows how the Aroon Oscillator is interpreted:
2|P a g e
KunalJoshi
Aroon
A decrease of the Aroon Oscillator from above the 50 line shows that the uptrend is consolidating and is
reversing direction downward. When the Aroon Oscillator hovers around the zero line over time, then the
market is in a directionless period.
When the oscillator moves toward -50 from the zero line, the market is beginning to trend downward.
And when the Aroon Oscillator is below -50, then the market is in a strong downtrend.
When the oscillator begins to move upward towards the zero line, the downward trend is slowing down
and beginning to reverse direction.
In addition, when the Aroon Oscillator moves higher from the zero line, then the market is moving from a
period of non-trending to a period of uptrending.
The Aroon indicator and Aroon Oscillator are extremely helpful tools for a trader to have and use; the
Aroon indicator helps traders to determine when best to apply trending following indicators like Moving
Averages when best to use oscillator type technical indicators like Stochastics.
3|P a g e
KunalJoshi
ADXcellence.com.
ADX Average Directional Index

The Average Directional Movement Index (ADX) technical analysis indicator describes when a market is
trending or not trending. When combined with the DMI+ plus and DMI- minus. The ADX can generate
buy and sell signals.
However, the main purpose of the ADX is to determine whether a stock, future, or currency pair is
trending or is in a trading range. Determining which mode a market is in is helpful because it can guide
a trader to which other technical analysis indicators to use.
The chart of the E-mini Russell 2000 Index Futures contract below shows an excellent example of the
ADX in action:
ADX Shows Trend Strength

The first concept to remember is that the direction that the ADX moves doesn't depend upon the
direction of the underlying stock. All the ADX shows is the trend strength.
1.
Strong upward trend of stock = Increasing ADX
2.
Strong downward trend = Increasing ADX
As can be referenced from the chart of the E-mini Russell 2000 Index Futures contract above, when the emini future was rising in a strong upward trend, the ADX indicator was rising.
When the e-mini futures contract moved into a non-directional consolidation phase, the ADX decreased.
KunalJoshi
ADXcellence.com.
ADX is a Great Complement to Other Technical Indicators

The ADX is so popular because determining whether a stock, commodity, or currency market is trending
or not trending can help a trader avoid the pitfalls of some indicators.
Moving Averages
Moving averages and their variants are effective during trending markets; however, during
consolidation periods when prices go up and down, but in no direction, moving average indicators have a
tendency to give numerous false buy and sell signals that add up to trading losses. During trending
markets, use moving averages, trendlines, and other trend following technical indicators.
Oscillators
Oscillators are extremely effective in non-trending markets. Buying low and selling high is
accomplished quite readily with oscillators. Unfortunately, during trending markets, oscillators perform
quite poorly, often selling short during a bull market run or buying during a bear market downtrend,
adding up to large losses. For periods of non-trending, use oscillators like Stochastic Fast & Slow, RSI, or
Williams %R and other range-bound indicators like Bollinger Bands or Moving Average Envelopes.
The importance of the 20-level and 40-level, along with more examples of the ADX in action, is covered
on the next page
Interpreting the ADX

It is important to re-emphasize that the direction of price doesn't affect the ADX; it is the strength of the
stock, futures, or currency's trend that matters.
Below, we see the E-mini Russell 2000 Futures contract, but here the e-mini future is in a downtrend, a
strong downtrend. Note that the ADX is rising even though the price of the e-mini future is falling
KunalJoshi
ADXcellence.com.
Interpreting the ADX
Below 20: Non-trending market.

Crosses above 20: Signal that a trend might be emerging; consider initiating buy or sell short in
direction of prevailing stock, future, or currency price movement.
Between 20 & 40: If ADX is increasing between 20 and 40, then it is further confirmation of
emerging trend. Buy or shortsell in the direction of the current market direction. Avoid using
oscillator technical indicators and use trend following indicators like moving averages.
Above 40: Very strong trend.
Crosses above 50: Extremely strong trend.
Crosses above 70: "Power Trend"; very rare occurence
In his book, New Concepts in Technical Trading Concepts, Welles Wilder, Jr., the creator of the ADX
also created the DMI+ and DMI- indicators to generate buy and sell signals specifically for the ADX
technical analysis indicator. In fact the ADX is derived from the DMI+ and DMI- calculations (see:
DMI).
The most recent information on the ADX indicator is chronicled in the book ADXcellence by Dr. Charles
B. Schaap. More information can be found at ADXcellence.com.
KunalJoshi
MACD
MACD
The MACD indicator is one of the most popular technical analysis tools. There are three main
components of the MACD shown in the picture below:
1.
MACD: The 12-period exponential moving average (EMA) minus the 26-period EMA.
2.
MACD Signal Line: A 9-period EMA of the MACD.
3.
MACD Histogram: The MACD minus the MACD Signal Line.
The MACD indicator is an effective and versatile tool. There are three main ways to interpret the MACD
technical analysis indicator, discussed on the following three pages:
1.
Moving Average Crossovers
2.
MACD Histogram
3.
MACD Divergences
1|P a g e
KunalJoshi
MACD
1. MACD Moving Average Crossovers
The primary method of interpreting the MACD is with moving average crossovers. When the shorterterm 12-period exponential moving average (EMA) crosses over the longer-term 26-period EMA a buy
signal is generated; this is seen on the Nasdaq 100 exchange traded fund (QQQQ) chart below with the
two purple lines
Remember that the MACD line (the blue line) is created from the 12-period and 26-period EMA.
Consequently:
1.
When the shorter-term 12-period EMA crosses above the longer-term 26-period EMA,
the MACD line crosses above the Zero line.

2.
When the 12-period EMA crosses below the 26-period EMA, the MACD line crosses
below the Zero line.

Moving Average Crossover Buy Signal
A buy signal is generated when the MACD (blue line) crosses above the zero line.
Moving Average Crossover Sell Signal

When the MACD crosses below the zero line, then a sell signal is generated.
2|P a g e
KunalJoshi
MACD
The prior buy and sell signals get a person into a trade later in the move of a stock or future. A more
common buy and sell signal is shown in the graph below of the Nasdaq 100 exchange traded fund
QQQQ:
Most Common MACD Buy and Sell Signals

MACD Buy Signal
A buy signal is generated when the MACD (blue line) crosses above the MACD Signal Line (red line).
MACD Sell Signal
Similarly, when the MACD crosses below the MACD Signal Line a sell signal is generated.
The MACD moving average crossover is one of many ways to interpret the MACD technical indicator.
Using the MACD histogram and MACD divergence warnings are two other important methods of using
the MACD
3|P a g e
KunalJoshi
MACD
2. MACD Histogram
The MACD Histogram is simply the difference between the MACD line (blue line) and the MACD signal
line (red line). The MACD histogram is illustrated in the chart below of the Nasdaq 100 QQQQ's
Two important terms are derived from the MACD histogram and are illustrated above in the chart of the
QQQQ's:
Convergence: The MACD histogram is shrinking in height. This occurs because there is
a change in direction or a slowdown in the stock, future, bond, or currency trend. When that
occurs, the MACD line is getting closer to the MACD signal line.
Divergence: The MACD histogram is increasing in height (either in the positive or
negative direction). This occurs because the MACD is accelerating faster in the direction of the
prevailing market trend.
When a stock, future, or currency pair is moving strongly in a direction, the MACD histogram will
increase in height. When the MACD histogram does not increase in height or begins to shrink, the market
is slowing down and is a warning of a possible reversal. The graph below of the E-mini Nasdaq 100 Index
Future shows this phenomenon:
4|P a g e
KunalJoshi
MACD
The letter "T" represents when the top or peak of the MACD histogram occurs. In contrast, the letter "B"
shows when the bottom of the MACD histogram occurs. Notice how closely the tops and bottoms of the
MACD histogram are to the tops of the Nasdaq 100 e-mini future.
MACD Histogram Buy Signal

When the MACD histogram is below the zero line and begins to converge towards the zero line.
MACD Histogram Sell Signal

When the MACD histogram is above the zero line and begins to converge towards the zero line.
Note: In the example above, three consecutive days of shrinking MACD histogram from top or bottom
served as the buy or sell signals shown with arrows. This is an agressive example. One could wait until
the MACD histogram went to zero, but that would be the same signal as the MACD moving average
crossover.
The MACD is not only good for buy and sell signals, the MACD can be used for warnings of potential
change in the direction of stocks, futures, and currency pairs
5|P a g e
KunalJoshi
MACD
3. MACD Divergences
Bearish divergence occurs when a technical analysis indicator is suggesting that a price should be going
down but the price of the stock, future, or currency pair is continuing to maintain its current uptrend.
Bullish divergence occurs when the indicator is indicating that price should be bottoming and heading
higher, yet the actual price action is continuing downward.
These valuable divergences can signal to get out of a long or short position before profits erode. The
following chart of the E-mini S&P 500 Index Future shows some of these divergences:
High #1 to High #2
Looking at the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs,
which is usually viewed as bullish. However, the MACD moving average failed to make a new high. This
bearish divergence was an early warning sign of things to come with the E-mini S&P 500 futures
contract.
Low #1 to Low#2
In yet another bearish sign for the E-mini S&P 500 futures contract, the future made higher lows from
Low #1 to Low #2, which again is usually considered positive. Nevertheless, the MACD technical
indicator made a clear lower low from Low #1 to Low #2. This bearish divergence warned of the
impending downturn of the S&P 500 future and the market as a whole.
Low #2 to Low #3
In addition to bearish and bullish divergences, the MACD can confirm price movement as well. The Emini S&P 500 futures contract made a substantial lower low which was confirmed by the MACD when it
made a lower low as well.
6|P a g e
KunalJoshi
MACD
As seen throughout the MACD sections, the MACD is a versatile tool giving clear buy and sell signals
and giving warnings of impending price changes
7|P a g e
KunalJoshi
RSI
Relative Strength Index (RSI)

One of the most popular technical analysis indicators, the Relative Strength Index (RSI) is an oscillator
that measures current price strength in relation to previous prices. The RSI is a versatile tool, it can be
used to:
Generate buy and sell signals
Show overbought and oversold conditions
Confirm price movement
Warn of potential price reversals through divergences
The chart below of eBay (EBAY) shows how the RSI can generate easy to follow buy and sell signals:
RSI Buy Signal

Buy when the RSI crosses above the oversold line (30).
RSI Sell Signal
Sell when the RSI crosses below the overbought line (70).
Varying the time period of the Relative Strength Index can increase or decrease the number of buy and
sell signals. In the chart below of Gold, two RSI time periods are shown, 14-day (default) and 5-day.
Notice how decreasing the time period made the RSI more volatile, increasing the number of buy and sell
signals substantially
1|P a g e
KunalJoshi
RSI
There is another way the Relative Strength Index gives buy and sell signals. This, and how to interpret RSI
divergences, all contained on the next page
2|P a g e
KunalJoshi
RSI
RSI alternative buy and sell Signal

An alternative way that the Relative Strength Index (RSI) gives buy and sell signals is given below:
Buy when price and the Relative Strength Index are both rising and the RSI crosses
above the 50 Line.
Sell when the price and the RSI are both falling and the RSI crosses below the 50 Line.
An example of this methodology for buying and selling based on 50 Line crosses is given below in the
chart of Wal-Mart (WMT
For another interesting and under-utilized method for using the RSI indicator for buy and sell signals, see:
Stochastic RSI, which combines both the popular Stochastics indicator and the Relative Strength Index.
3|P a g e
KunalJoshi
RSI
Relative Strength Index Confirmations & Divergences

A powerful method for using the Relative Strength Index is to confirm price moves and forewarn of
potential price reversals through RSI Divergences.
The chart below of the E-mini Nasdaq 100 Futures contract shows the RSI confirming price action and
warning of future price reversals
Low #1 to Low #2
The E-mini Nasdaq 100 Futures contract's price made a substantial move from Low #1 to Low #2. The
RSI confirmed this move, helping a trader have confidence jumping on board the price move higher.
The break of trendline of the e-mini future was also confirmed by the trendline break of the Relative
Strength Index, confirming that the price move was likely over.
Low #3 to Low #4
A bullish divergence was registered between Low #3 and Low #4. The e-mini Nasdaq 100 future made
lower lows, but the RSI failed to confirm this price move, only making equal lows. An astute trader
would see this RSI divergence and begin taking profits from their shortsells.
High #1 to High #2
A bearish divergence occured when the e-mini futures contract made a higher high and the RSI made a
lower high. This bearish divergence warned that prices could be reversing trend shortly. A trader should
consider reducing their long position, or even completely selling out of their long position.
The Relative Strength Index is a popular tool for generating buy and sell signals, confirming trends, and
warning of impending price reversals
4|P a g e
KunalJoshi
OBV
On Balance Volume (OBV)

On Balance Volume (OBV) combines price and volume to determine whether price movements are
strong or are weak and lacking conviction. On Balance Volume is a simple calculation, which is given
below:
1.
On an up day, the volume is added to the previous day's OBV
2.
On a down day, the volume is subtracted from the previous day's OBV.
Volume is usually interpreted as follows:
Increasing or decreasing price accompanied by increasing volume, confirms the price trend.
Increasing or decreasing price accompanied by decreasing volume, indicates that the price
movement is weak and lacking conviction.
The On Balance Volume indicator is used mainly to confirm price trends or warn of potential price
reversals because of divergences between the price and the OBV indicator. An example of an On Balance
Volume divergence is given below on the price chart of Merck (MRK) stock:
1|P a g e
KunalJoshi
OBV
High #1 to High #2
Merck stock made higher highs, but the On Balance Volume indicator made lower lows. This bearish
divergence warned that price could potentially fall.
Since the On Balance Volume indicator adds volume when price closes higher than the previous day's
close, the OBV indicator could be interpreted as meaning that less volume flowed into High #2 than
flowed into making High #1. Less interest by buyers at High #2 signaled that the price move higher was
unlikely to continue.
High #2 to High #3
Again, the price of Merck stock increased, yet the OBV indicator warned that more volume was occuring
on down days than up days. This bearish divergence warned stock traders that the recent price increases
were lacking strong commitment by buyers.
Low #1 to Low #2
The stock price made higher highs, generally considered a bullish signal; however, the On Balance
Volume technical analysis indicator made lower lows. Volume on down days was on average larger than
volume on up days.
On Balance Volume is a valuable technical analysis tool that combines both price and volume to confirm
price action or warn of potential weakness or lack of conviction by buyers and sellers. An arguably better
measure than the OBV that combines volume and price movement is the Chaikin Oscillator (see: Chaikin
Oscillator). Also, the Money Flow Index (see: Money Flow Index) uses price and volume in a more
precise and realistic manner
2|P a g e
KunalJoshi
Stochastics
Stochastics
1. Stochastics Fast & Slow
2. Stochastic Buy & Sell Signals
3. Stochastic Price Divergences
1. Stochastic Fast & Slow

Stochastic Fast
Stochastic Fast plots the location of the current price in relation to the range of a certain number of prior
bars (dependent upon user-input, usually 14-periods). In general, stochastics are used to measure
overbought and oversold conditions. Above 80 is generally considered overbought and below 20 is
considered oversold. The inputs to Stochastic Fast are as follows:
Fast %K: [(Close - Low) / (High - Low)] x 100

Fast %D: Simple moving average of Fast K (usually 3-period moving average)
Stochastic Slow
Stochastic Slow is similar in calculation and interpretation to Stochastic Fast. The difference is listed
below:
Slow %K: Equal to Fast %D (i.e. 3-period moving average of Fast %K)
Slow %D: A moving average (again, usually 3-period) of Slow %K
The Stochastic Slow is generally viewed as superior due to the smoothing effects of the moving
averages which equates to less false buy and sell signals. A comparison of the two stochastics, fast and
slow, is shown below in the chart of the Nasdaq 100 ETF (QQQQ):
1|P a g e
KunalJoshi
Stochastics
2. Stochastics Buy & Sell Signals

Stochastics Buy Signal
When the Stochastic is below the 20 oversold line and the %K line crosses over the %D line, buy.
Stochastics Sell Signal
When the Stochastic is above the 80 overbought line and the %K line crosses below the %D line, sell.
Stochastic Fast buy and sell signals are illustrated below in the chart of the E-mini S&P 500 Future:
Stochastic Slow is presented below in the chart of the E-mini Russell 2000 Futures contract. Notice how
much smoother the %K and %D lines are and how many fewer false signals were given by the Stochastic
Slow than were given by the Stochastic Fast indicator
In addition to giving clear buy and sell signals, the Stochastic technical analysis indicator is also helpful
in detecting price divergences and confirming trend
2|P a g e
KunalJoshi
Stochastics
3 Stochastic Price Divergences

Stochastics can be used to confirm price trend. In the example below of the Nasdaq 100 ETF (QQQQ),
the Stochastic indicator spent most of its time in the overbought area. When Stochastics get stuck in the
overbought area, like at the very right of the chart, this is a sign of a strong bullish run. Signals to
sellshort would be ignored; however, before the signal not to short was given, many losses unfortunately
would have accrued from failed shorting attempts on the left half of the chart
A powerful and more common occurence is Stochastic divergences. The chart below of Gold futures illustrates
Stochastic divergences and confirmations
3|P a g e
KunalJoshi
Stochastics
Low #1 to Low #2
The Stochastic Slow confirmed the upward movement of gold futures prices by making a higher low.
High #1 to High #2
Gold futures rallied to make a higher high; however, the Stochastic Slow indicator failed to make a higher
high, instead it made a lower high. This divergence coupled with a trendline break in the price of gold
would be a strong warning to futures traders that the recent rally had probably ended and any long futures
positions should be exited or at least scaled back.
Low #3 to Low #4
Gold prices continued its downward tumble, making a lower low at Low #4. On the other hand, the
Stochastic Slow indicator was signaling a higher low. This bullish divergence would have warned traders
to exit their shortsells, the price of gold had a strong potential of bottoming
4|P a g e
Kunal Joshi
Stocks for Speculators

Introduction
Characteristics of desirable speculative stocks
leverage
Swing habit
volatility
Conclusion
Stocks for Long term investor
Introduction
Index Shares and similar instruments
Importance of Modern Trading Instruments
Conclusion
Money Management and Trading Tactics
Introduction
Elements of Successful trading
Money Management
Reward to risk Ratios
Trading Multiple Position
Trading tactics
Types of trading orders
Asset Class Allocation
Conclusion
Which stock to Trade and Why?
Kunal Joshi
The Trading System
The Trading System

The purpose of this chapter is to help in developing your own trading system which will not only help you
making money but save you from Advertisement of Software promising profits with every trade all with
minimal time and effort.
19.1 Introduction
Trading system development is a part art, part science and part common sense, trading
system is simply a group of specific rules or parameters that determines entry and exit points
for a given equity. Our goal is not to develop a system that achieves the highest return using
historical data, but to formulate approach that has performed reasonably well in the past and
can be expected to continue to perform reasonable well in the future.
Ideally one should opt for mechanical approach instead of subjective, mechanical means:
objective if 10 people or 100 follow the same rules and achieve the same results, those rules
are said to be objective. The mechanical approach offers three main benefits:
1. We can back test our idea before actual trade execution A computer or paper
trade allows us to test ideas on historical data rather than on hard earn cash. By
helping us see how a system would have performed in the past, it allows us to make
better decision in the present.
2. We can be more objective and less emotional. Most people have trouble applying
their objective analysis to actual trading system. Analysis is easy, trading is stressful.
most of us would agree to the fact that they had seen more loss in their portfolio then
profit, which result in less return or negative return. But by becoming system trader
one will do what the system will instruct and decision making will be less emotional.
3. We can do more work increasing our opportunities. A mechanical approach takes
less time to apply than a subjective one, which allows us to cover more market, trade
more systems and analyze more times frames each day.
19.2
Types of Trading System
1. Trend following. These systems trade in the direction of the major trend, buying after
the bottom and selling after the top. In its most fundamental form, this system simply
waits for a significant price movement, then buys or sells in that direction. This type
of system is based on the principle that the price movement will maintain the trend.
1
Kunal Joshi
The Trading System
Moving Average Systems

A moving average is an indicator that simply shows the average price of a stock over a period
of time. The essence of trend is derived from this measurement. The most common way of
determining entry and exit is a crossover. (See Chapter 11 for detail explanation) the logic
behind this is simple: A new trend is established when price falls above or below its historic
price average.
Here is a chart that plots both the price (Bar) and the 20 DMA (line) of SUZLON.
Breakout Systems
The concept behind this type of system is similar to that of a moving average system. The
idea is that when a new high or low is established the price movement is likely to continue in
the direction of the breakout. One indicator that can be used in determining breakouts is a
simple Bollinger band overlay. Bollinger bands show averages of high and lower prices, and
breakouts occur when price meets the edges of the bands.
Here is a chart that plots price (candlestick) and Bollinger bands (red and green line) of
RNRL
Kunal Joshi
The Trading System
2. Countertrend. Basically the goal with the countertrend system is to buy at the lowest
and sell at the highest high. The main difference between this and the trend following
system is that the countertrend system is not self correcting. In other words, there is
no set time to exit positions, and this result in an unlimited downside potential.
Support /Resistance
Buy a decline into support; sell a rally into resistance. Here is a chart that plots support and
resistance of RELIANCE.
Retracement
Here we buy pullbacks in a bull market and sell rallies in a bear market. For example, buy a
50% pullback of the last advance, but only if the major trend remains up. The danger of such
systems is that you never know how far a retracement will go and it becomes difficult to
implement and acceptable exit technique.
Here is a chart of HOTEL LEELA where the stock moved up after 50 % pullback
Kunal Joshi
The Trading System
Oscillators
The idea is to buy when the oscillator is over sold and to sell when it is overbought. If
diversions between the price series and the oscillator are also present, a much stronger signal
is given. However, it is usually best to wait for some sign of a price reversal before buying or
selling. (Detail Explanation Ref. Chapter 12)
Here is a chart of the Relative Strength Index (RSI) Technical Indicator on HMT and one can
clearly see the divergence.
3. Pattern reorganization. (Visual and statistical). Examples include the highly reliable
head and shoulders formation (visual), and seasonal price patterns, (statistical). ( For
detail Ref. Chapter 6 )
Hear is a chart of Head and Shoulder Formation in TATA MOTORS
Kunal Joshi
The Trading System
The main markets for which trading systems are suitable are the equity, forex and futures
markets. Each of these markets has its advantages and disadvantages. The two main genres of
trading systems are the trend following and the countertrend systems. Despite their
differences, both types of systems, in their development stages require empirical decision
making on the part of developer. Also these systems are subject to extreme volatility and this
may demand some stamina it is essential that the system trader stick with his or her system
during these times.
19.3 Steps in Developing a Trading System

Only about 5% of the worlds traders and 20 % of the worlds investors, consistently make
big money. What these winners do is not complex. In fact, simplicity is one of the key to
making money. Designing your own trading system is a 5 step process, which can help you in
develop your own trading system that fits your own style of trading.
1. Start with a concept

2. Turn into a set of objective rules
3. Visually check it out on the charts
4. Formally test it with a computer
5. Evaluate the result
STEP 1: START WITH A CONCEPT

Develop your own concept of how market works. You can begin by looking at as many
charts as you can, try to identify moving average crossovers, oscillator configuration, price
patterns or other pieces of objective evidence which preceded major market moves. Also
attempt to recognize clues that provide advance warning on moves that are likely to fail, This
visual approach has worked for me, and I highly recommended.
In addition to studying price chart and reading books, I suggest you read about trading
system and study what others have done. Although no one is going to reveal the Holy Grail
to you, there is a great deal of useful information out there. Most importantly, think for
yourself. I have found that most profitable ideas are rarely original, but frequently our own.
Most of the successful trading systems are trend following. Counter trend system should
not be overlooked, however, because they bring a degree of negative correlation to the table.
This means that when one system is making money, the other is loosing money, resulting in a
smoother equity curve for the two system combined, than for either one alone.
5
Kunal Joshi
The Trading System
STEP 2: TURN YOUR IDEA INTO A SET OF OBJECTIVE RULES

This is the most difficult step in our five step plan, much more difficult than many of us
would at first expect! To complete this step successfully, we must express our ideas in such
objective terms that 100 people following our rules will all arrive at exactly the same
conclusions.
Determine what our system is supposed to do and how it will do. It is with this step that we
produce the details needed to accomplish the programming task. We need to take the overall
problem and break it down into more and more detail until we finalize all the details.
STEP 3: VISUALLY CHECK IT OUT ON THE CHARTS

Following the explicit rules we just determined in Step 2, let us visually check the trading
signals that are produced on a price chart. This is an informal process, meant to achieve two
results: First, we want to see whether our ideas have been stated properly, and the second,
before writing complicated computer code, we want some proof that the idea is potentially
profitable one.
STEP 4: FORMALLY TEST WITH A COMPUTER

Now its time to convert your logic into a computer code. There are software available in the
market which help you in formulating and tasting trading systems. It brings together
everything from the visualization of your idea, to assistance in trading your system in real
time.
Once our program has been written, we can then move into the testing phase. To begin with,
we must choose one or more data series to test. I use the entire data series, many experts
would disagree with this approach, but I believe it to be the best with my methodology that
relies on good solid concept, virtually no optimization, and a testing procedure that covers a
wide range of parameters, sets and markets. I start with a methodology that I believe to be
sound and then test it to either prove or disprove my theory. I have found that most
individuals do the reverse; they test a data series to arrive at a trading system.
I do not account for transaction cost when testing systems, but instead factor them in
at the end. I believe that this keeps the evaluation process more pure and allows my results to
remain useful should certain assumptions change in the future.
Kunal Joshi
The Trading System
Once our testing is complete, let us visually inspect the computer generated trading
signals on a price chart to ensure that the system does what we intended it to do. System
testing software facilitates this process by placing buy and sells arrows directly on the chart
for us. If the system does not do what is it supposed to do, we need to make the necessary
corrections to the code and test it again. Keep in mind that very few ideas will test out
profitably, usually less than 5%. And, for one reason or another, most of these successful
ideas will not even be tradable.
STEP 5: EVALUATE RESULTS
Let us try to understand the concept behind our trading system. Does it make sense or it is
just a con incidence? Analyze the equity curve. Can we live through the drawdown? Evaluate
the system on a trade- by- trade basis. What happens if a signal is a bad one? How quickly
does a system exit from losers? How long does it stay with the winners? Make sure we are
completely comfortable with the test results; otherwise we will not be able to trade this
system in real time.
MONEY MANAGEMENT
Money management is an extremely important topic. It is the key to profitable trading, every
bit as important as a good trading system. Money management techniques should be well
thought out. Accept the fact that losses are the part of the game. Control your down side and
profits will take care of themselves.
In this area, practice diversification as much as possible. Diversification will enable
you to increase your returns while holding your risk constant, or decrease your risk while
holding your returns constant. Diversify among markets, systems, parameters and time
frames. (Detail Ref Chapter 18)
CONCLUSION
We have discussed the basic philosophy of trading system and why objective is better than
subjective. Trading systems can improve your performance and help to make you a
successful trader. The reasons for that are clear:
They force you to do your home work before making a trade.
Kunal Joshi
The Trading System
They provide a discipline framework, making it easier for you to follow the rules
They enable you to increase your level of diversification.
With lots of hard work and dedication, any one can build a successful trading system. It is not
easy, but it is certainly is within reach. As with most things in the life, what you get out of
these efforts will be directly related to what you put into it.

01 Technical Analysis - Level 1 - Kunal Joshi

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

01 Technical Analysis - Level 1 - Kunal Joshi

Загружено:

Авторское право:

Доступные форматы

STOCK MARKET - BASICS

Definition: Stocks are A type of security that signifies

ownership in a corporation and represents a claim on part

Reading Stock Quotes

(One must hone the skill needed for the above)

growth phase, maturity or decline stage

among existent firms, substitute products ,

analyst must forecast earnings, dividend and

From Business Activities to Financial Statements

4 Step Process of analysis

management is not how it runs its business

given the growth prospects, risk

Denoting the earnings for the shareholder

PAT / number of Equity shares

y Dividend per share

where retention ratio = ( PAT Dividend) / PAT

Stock Price Model 1

ROE and .6 is the retention ratio, estimate

Price = Div per share / ROE Growth

y Useful for sensitivity analysis

Intrinsic value using PE

future based on growth assumptions etc)

PE or based on some expected earnings also look

Strategy for identifying

y Intrinsic Value > Market Value

y Intrinsic Value < Market Value

y Intrinsic Value = Market Value

Some keys to investing

The Father of Fundamental Analysis:

Sources: Security Analysis (Graham and Dodd);

Ben Graham and Mr. Market

Grahams 14 Investment Points

Be an investor, not a speculator.

profits over the years at rates greater

showed promise of above-average growth. The two

Organization: Fisher also examined a

Thinking that this year will be any different

A good company usually increases its dividends every year.

You can lose money in a very short time, but it takes a

The stock market isnt a gamble as long as you pick good

You should invest in several stocks (5).

Never fall in love with a stock, always have an open mind.

Just because a stock goes down doesnt mean it cant go lower.

10. Over the long-term it is generally better to buy stocks in small

Sir John Marks Templeton

Templeton is one of a handful of true investment

Sir John Mark Templeton

Technical Analysis Of the

while others use both fundamental and

y Technicians study patterns in security prices

assumptions of technical analysis

y Technical analysts estimate prices

y Technicians tend to ignore issues such

as a firms riskiness and earnings

based on an examination of past price

The Principles behind

Trading Floor, CBOT

y Larry Williams, regarded as one of the great technicians,

entered a trading competition and returned over 20,000%

y Kenneth Griffin, CEO, Citadel Financial uses a computerized

form of TA he programmed to assist in his implementation of

Remember that 1% every day leads to about 290%

The Dow Theory

The Dow Theory

a new support level. * IMPORTANT *