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What is Technical Analysis

"It is the study of market action, primarily through the use of charts, for the purpose of
forecasting future price trends". – John Murphy.

 Three factors considered for Analysis are: Price, Volume and Open Interest

₹ Price Volume % Interest

 Three Rationales which analyst considers while he carries his technical research are.
Market price, or stock price, discounts

Price moves in trend

History repeats itself

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Technical Analysis and Fundamental Analysis

Technical Analysis considers only past price action to forecast future prices
price, while Fundamental Analysis takes into consideration Economic
factors of demand and supply that causes price to move higher or lower.

Fundamental Analysis represents the cause of the current market price of


the stock while Technical Analysis studies the effect of such cause.
Technical Fundamental
Analysis Analysis

Market prices leads to known Fundamentals which means on crucial


market reversal Technical Analysis leads the change as its based on market
prices.

Market prices have already discounted known Fundamentals which means


it moves in anticipation of unknown fundamentals by which Technical take
a call through price patterns.

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Technical Analysis and its Myth

 It is believed that Technical Analysis can only predict equity markets for short term only but
this is just a myth. Following are few points to correct your myth on this school of studies.

Any Asset Class

Any time Frame

Economic Forecasting

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Technical Analysis and its Myth
 Example of Crude, Nifty and IIP as on 26th Feb 2016 on monthly chart.

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Hedge Funds and Technical Analysis

 What is Hedge Fund:


 A hedge fund is basically a fancy name for an investment partnership. It's the marriage of a
professional fund manager, who can often be known as the general partner, and the investors,
sometimes known as the limited partners, who pool their money together into the fund.

 Why TA
 To Know the trend of market
 To Predict Future Of the market
 To Derive Risk is to Reward Ratio
 To Identify patterns to maximise returns

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Hedge Funds and Technical Analysis
• What is Hedge Fund:
• A hedge fund is basically a fancy name for an investment partnership. It's the marriage of a professional fund manager, who
can often be known as the general partner, and the investors, sometimes known as the limited partners, who pool their
money together into the fund.

• Why TA
– To Know the trend of market
– To Predict Future Of the market
– To Derive Risk is to Reward Ratio
– To Identify patterns to maximise returns
DOW THEORY
Father of Technical Analysis

In 1882, Charles Dow and Edward Jones founded Dow Jones and Company. It is believed by most
technical analysts that most theories where founded by DOW and he published his ideas while he
wrote for Wall street Journal. Basic ideas of Dow is considered to be the pillars of technical
analysis.

Dow was the first person to publish first ever stock market average which consisted of 11 stocks
on 3rd July 1884. But after few year in 1897, DOW realized that two separate indices were required
to gauge economy and then he constructed a 12 stock industrial average and 20 stocks average. As
the Economy expanded, more and more stocks were included in the industrial index to gauge
economy better and by 1928 , 30 stocks were included in the index.

Interestingly Dow has never written a book, but he had published his ideas in Wall Street Journal
editorials. After his death in 1903, S.A. Nelson, complied everything in one book and it coined the
word, "Dow Theory", which is considered to be a based for learning technical analysis.

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Dow Theory Tenets
1. The Average Discounts Everything

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Dow Theory Tenets
2. The Market Has three trends

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Dow Theory Tenets

3. Major Trends have Three Phases


• Accumulation: It represents informed buying by the most astute investors
• Public participation: Phase where most technical analyst recognize the rapidly spreading
business news and identify trend
• Distribution: it takes place when news paper starts showing too bullish headlines and
economic news is better than ever. Public participation is most than ever while informed
buyer who accumulated in first phase starts distributing

4. Closing prices are most important

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Dow Theory Tenets
5. Averages must confirm each other

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Dow Theory Tenets
6. Volume must confirm price movement

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Dow Theory Tenets
7. A trend is assumed to be in effect unless clear reversal sign

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Dow Theory Criticism

Misses initial 20-25%.

Generally signs are confirmed in second phase.

Its only used to understand major trends prevailing in markets.

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CHARTS
Type of Charts
 There are basically three types of charts which are most commonly used by traders and
analyst to understand price action and forecast future trend

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Line Charts
 It is the most widely used charts around the world
 Uses only closing prices
 Removes all intraday noises
 Doesn’t not provide any information for visual reading such as High, Low or Open
 This is more close to DOW Theory as it considers only close

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Bar Charts
 Its plotted by adding few more data to line chart: Open, high and Low
 Series of vertical lines
 One vertical line represents the high, low, open and close of a trading
period in study

High High

Close Open

Open Close

Low Low

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Candlestick Charts
 Charts are almost similar to bar charts but this is visually constructed.
 One candlestick represents a trading range of a one particular period in study.
 Candlesticks reading rely on Colors of each candle.

Upper Shadow Upper Shadow


HIGH HIGH

CLOSE OPEN

Real Real
Body Body

OPEN CLOSE

LOW LOW

Lower Shadow Lower Shadow


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SUPPORT AND RESISTANCE
WITH
TREND LINES
Support and Resistance
What is Support and Resistance?
 Support as buying, actual or potential, sufficient in volume to halt a downtrend in prices for an
appreciable period.
 Resistance is the antithesis of Support; it is selling, actual or potential, sufficient in volume to satisfy
all bids and, hence, stop prices from going higher for a time.
 Support level is often termed as Demand Zone while resistance level is often termed as Supply Zone.
 Support and Resistance level could be of any technical term such trend line, different patterns or
even moving average support and resistances or 52 week High/low or even corresponding
fundamental criteria.
 Normally these are the levels where large volumes are traded.
 If the Resistance or Support breaks with significant volume or pattern than only we should consider
its breakout.
 Role reverses after breakout.

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Support and Resistance
 Support line acting as a resistance line now

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Trend Lines

 Prices move in trends


 Stocks do not jump up and down in an altogether random fashion but they show definite organization
and pattern in their charted course which are known as trend
 Trend can be of three types:
 Up Trend
 Down Trend
 Consolidation/Sideways/Range bound
 On basis of duration:
 Primary Trend: Approx. more than a year
 Secondary Trend: Approx. more than a month but less than a year
 Minor Trend: Short term trend
 Trend changes with a definite signal which may be a reversal pattern or any other indication of
Technical Tool

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Trend Lines

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Trend Lines

 Upward Trend:
 Support line: connecting higher lows of minor trends
 Resistance line: Connecting higher highs of minor trends
 Downward Trend:
 Support line: Connecting lower lows of Minor Trend
 Resistance line: Connecting lower highs of Minor trend
 If the Support and resistance line of any trend are parallel to each other than its known as channel
line.
 Trend lines are always broken but as a Technical analyst we have to decide which breakout should be
considered reversal to Trend.
 Breakout should be accompanied with other technical aspects that we shall discuss ahead such as
candlestick patterns, Gaps or even chart patterns.

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Trend Lines

 We need to have two clear tops or bottoms to establish a trend line.


 Accuracy rules of Trend Lines
 Number of Times it has been tested without breaking it
 Angle of Trend line: (more steep trend lines are less reliable
 Duration of Trend line: More time spent on line makes it more valuable trend line
(More rules a trend line satisfy, more validity it gets from a Technical Analyst)
 Penetration Guidelines
 Extend of penetration: Close beyond 3% over trend line or close above
 Volume of Trading: if the breakout is with volumes than it should be considered

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Trend Lines
 Validation of Support line which support all three validation points

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Trend Lines
 Volume Breakout with 3 days and 3% close above trend line

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Trend Lines
Ignoring Few breakouts
Ex: Nifty Weekly Channel

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GAPS
Gaps

“A gap, in the language of the charts, represents a price range at which (at the
time it occurred) no shares changed hands.”

• Gaps on daily charts are produced when the lowest price at which a certain stock is traded
on any one day is higher than the highest price at which it was traded on the preceding day
or vice versa.
• Gaps can occur on any time frame: Weekly or monthly or even yearly.
• Most common myth: “a gap must be closed within specified time”.
• Gaps “closing” or “covering” could even take months and years.
• Minimum Tick size gap should be avoided in consideration.

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Gaps
Gaps unfilled on Nifty Daily charts

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Gaps

 Ex-Dividend Gaps
“gaps that appear on the charts when a stock goes ex-dividend (whether the dividend be in cash,
stock, rights, or warrants) possess no trend implications. They are occasioned not by a change in
the Supply–Demand relation which governs the trend, but by a sudden and irreversible alteration
in the actual book value of the issue”.
 Common or Area Gap or Pattern Gaps
These are the gaps which occur during a consolidation patterns and are generally filled up before
price break’s out of the pattern.
Such gaps help analyst to identify ongoing consolidation patterns.
 Island Reversals
An Island Reversal might be described as a compact trading range separated from the move which
led to it (and which was usually fast) by an Exhaustion Gap, and from the move in the opposite
direction which follows it (and which is also equally fast, as a rule) by a Breakaway Gap.

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Gaps
Common area gap in Britannia Consolidation

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Gaps
Ex-Dividend Gap

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Gaps
Island Reversal on SBIN

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Gaps

 Breakaway Gaps
The Breakaway type of gap also appears in connection with a Price Congestion Formation, but it
develops at the completion of the formation in the move which breaks prices away. The move could
be breakout from reversal or consolidation pattern

 Runaway Gaps
The runaway gaps are the gaps which suggest the continuation of current trend with volumes rising
and trading interesting rising the counter such that each day is trading above previous day.

 Exhaustion Gaps
The Breakout Gap signals the start of a move; the Runaway Gap marks its rapid continuation at or
near its halfway point; the Exhaustion Gap comes at the end.

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Gaps
Breakaway Gap in Adani Port

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Gaps
Runaway Gap in Tata metallic

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Gaps
Exhaustion Gap in Britannia

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Reversal Patterns
Reversal Patterns

• Stock prices move in trends. Some of those trends are straight, some are curved; some are brief and
some are long-continued; some are irregular or poorly defined and others are amazingly regular or
“normal,” produced in a series of action and reaction waves of great uniformity. Sooner or later,
these trends change direction; they may reverse (as from up to down) or they may be interrupted by
some sort of sideways movement and then, after a time, proceed again in their former direction.
These trend reverses with some pattern which are classified as reversal patterns

• Different pattern takes different time to form and complete reversal which means the greater the
Reversal Area — the wider the price fluctuations within it, the longer it takes to build, the more
shares transferred during its construction — the more important its implications.

• A big Reversal Formation suggests a big move to follow and a small pattern, a small move.

• Time prediction is bit difficult.

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Head and Shoulder
 Most common and most reliable pattern
 Guidelines to Head Shoulders
1. Left shoulder has a Strong rally with heavy volumes which is followed my Minor reaction with
lesser volumes
2. Left shoulder is followed by another high volume advance which reaches higher than the Left
shoulder and followed by another reaction with lesser volume which ends somewhere near the
same bottom as Left shoulder did and this forms Head.
3. Third advance but with lesser volume than Left shoulder and head but which fails to achieve high
of Head before another declines sets in which forms Right Shoulder.
4. A line is drawn across the bottoms of reactions between all three formations which is known as
neckline or Breakout line.
5. A approx. close of 3% or equivalent confirms the breakout.
6. Target on downside would be Equal distance from the Head to neckline from the neckline.
7. Volume is necessary to accompany.
8. Variations cannot be ruled out.
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Head and Shoulder
Arvind Chart

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Inverted Head and Shoulder

 Guidelines to Inverted Head Shoulders


1. Left shoulder has a Strong decline with heavy volumes which is followed my Minor short covering
with lesser volumes
2. Left shoulder is followed by another high volume decline which reaches lower than the Left
shoulder and followed by another short covering with lesser volume which ends somewhere near
the same high as Left shoulder did and this forms Head.
3. Third decline but with lesser volume than Left shoulder and head but which fails to achieve low of
Head before another recovery sets in which forms Right Shoulder.
4. A line is drawn across the high of reactions between all three formations which is known as
neckline or Breakout line.
5. A approx. close of 3% or equivalent confirms the breakout
6. Target on upside would be Equal distance from the Head to neckline from the neckline.
7. Volume is necessary to accompany
8. Variations cannot be ruled out

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Inverted Head and Shoulder
Spice Jet

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Multiple Head and Shoulder
Tata Chem

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Symmetric Triangles

• Most common type of triangles.


• It consists of a series of price fluctuations, each of which is smaller than its predecessor, each Minor
Top failing to attain the height of the preceding rally, and each Minor Recession stopping above the
level of the preceding Bottom.
• Connecting tops we get downward slanting resistance line while connecting bottoms we get upward
slanting trend line.
• For suddenly and without warning, as though a coil spring had been wound tighter and tighter and
then snapped free, prices break out of their Triangle with a notable pickup in volume, and leap away
in a strong move which tends to approximate in extent the up or down move that preceded its
formation.
• Could be reversal or continuation in nature.

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Symmetric Triangles
Sun Pharma Top Reversal

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Right Angle Triangles

• Right-Angle Triangles are distinguished by the fact that one of their boundaries is practically
horizontal, while the other slants toward it. If the top line is horizontal and the bottom line slopes up
to meet it somewhere out to the right of the chart (at the apex), the Triangle is of the Ascending
persuasion. If the bottom line is horizontal and the top line slopes down, the Triangle is Descending.

• Ascending Triangle and Descending Triangle: Target would be equal to height of triangle of the
pattern from the horizontal line.

• Volumes are necessary at the breakout.

• Confirmation is achieved upon the close.

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Ascending Triangle
Motherson Sumi Systems

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Descending Triangle
Lupin

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Rectangle Formation

• A Rectangle consists of a series of sideways price fluctuations, a “trading area,” as it is sometimes


called, which can be bounded both top and bottom by horizontal lines.

• Volume diminishes as Rectangle length goes on increasing.

• False breakouts are less common.

• Premature breakouts are much common.

• Targets is equal to distance from top and the Bottom.

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Rectangle Formation
Britannia

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Double Top and Double Bottom

• A Double Top is formed when a stock advances to a certain level with, usually, high volume at and
approaching the Top figure, then retreats with diminishing activity, then comes up again to the same
(or practically the same) top price as before with some pickup in turnover, but not as much as on the
first peak, and then finally turns down a second time for a Major or Consequential Intermediate
Decline.

• Target would be distance equal to from Tops to neckline from the neckline on the downside.

• A Double Bottom is, vice-versa to the Double Top.

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Double Top
Bank Nifty

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Double Bottom
Nifty

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Moving Averages
Moving Averages

 Moving averages smooth the price data to form a trend following indicator.
 They don’t predict prices but only gives an idea of Trend.
 They are lagging indicators as they are calculated on Past prices.
 They filter our noises.
 Acts as a supporting factor for other technical Indicators.
 Averages can be of Two types: Simple Moving average and Exponential Moving averages.

Show practical example

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RSI, MACD and Stochastic
RSI

 Developed J. Welles Wilder.


 A momentum oscillator that measures the speed and change of price movements.
 RSI oscillates between zero and 100.
 Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold
when below 30. Signals can also be generated by looking for divergences, failure swings and center
line crossovers. RSI can also be used to identify the general trend.
 RSI = 100 – 100
 --------
 1 + RS
 RS = Average Gain / Average Loss

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MACD

 Developed by Gerald Appel.


 one of the simplest and most effective momentum indicators available.
 MACD turns two trend-following indicators, moving averages, into a momentum oscillator by
subtracting the longer moving average from the shorter moving average. As a result, the MACD offers
the best of both worlds: trend following and momentum.
 MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge.
 Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals.
 MACD Line: (12-day EMA - 26-day EMA)
 Signal Line: 9-day EMA of MACD Line

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Stochastic

 Developed by George C. Lane.


 Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the
high-low range over a set number of periods.
 %K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
 %D = 3-day SMA of %K

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Candlestick
Candlestick History

 Japanese rice trade


 Patterns derived from studying historical price of rice
 Interesting side note: rice became defacto exchange medium
 Hard currency failed due to debasing of metal coins

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Why Use Candles?

 Easy to understand
 Alert to market turns earlier
 Better entries / exits
 Provide unique market insight
 Enhance western TA
 No TA should be used in isolation
 Increase efficiency of analysis
 Helps Judge Market Psychology

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Bars vs Candles

 Bar charts are 2 dimensional


 Originally did not have open / close sides
 Lack visual clarity of internal bar moves

 Candles bring 3rd dimension


 Much clearer open / close
 Visually depicts price action inside bar

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Candlestick Uses

 Work on all time frames


 Weekly charts (hedgers)
 Daily charts (swing traders)
 Intraday charts (scalpers)

 Should be used to confirm the next higher order chart


 Hourly Charts should support daily charts, etc.

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Cautions

 Patterns are not perfect


 Don’t use them in isolation

 Lack of specificity
 Japanese did not write extensively

 Risk of missing the big picture


 Don’t loose the forest through the trees

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Drawing

 Open, High, Low, Close

High
Close Open

Open Close
Low

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Terms (cont’d)

 Shadow, Body
Upper
Shadow

Real
Body

Lower
Shadow

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Terms (cont’d)

 Shaven Tops
No
Shadow

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Terms (cont’d)

 Shaven Bottoms

No
Shadow

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Terms (cont’d)

 Spinning Tops

Much
Smaller
Real
Body

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Terms (cont’d)

 Dojis

No
Body

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Psychology

 Bodies
 Large bodies are powerful moves
 Smaller bodies are less powerful
 Dojis are indecision or pause
 Shadows
 Short shadows give body credibility
 Long shadows can reveal strong support or
resistance

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Psychology (cont’d)

 Shaven Head
 Bullish close, powerful move up
 Bearish close, strong resistance
 Shaven Bottom
 Bullish close, strong support
 Bearish close, powerful move down

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Warning Signals

 Spinning tops example


 Rising trend line for support

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Warning Signals (cont’d)

 Spinning tops (cont’d)


 Falling trend line for resistance

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Reversal Patterns
Introduction

 Market Timing
 Price clues hint at shifts in market psychology /
changes in trend
 Trend changes are usually gradual
 Markets rarealy reverse abruptly
 Trend Reversal Patterns…
 Implies the former trend is likely to change, but
not necessarily reverse
 Typically results in sideways action

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Introduction (cont’d)

 Reversal Pattern usage


 Important to only use reversal patterns if signal is
with overall trend
 Bearish signal in uptrend doesn’t mean it’s time
to sell
 Bullish signal in downtrend doesn’t mean it’s time
to buy
 Consider for profit taking instead

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Umbrella Lines

 Recall shaven tops


 Long shadows & short bodies

 Two varieties
 Hammer (bullish)
 Comes at the end of a downtrend

 Hanging man (bearish)


 Comes at the end of an uptrend

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Umbrellas (cont’d)

 Hammer & Hanging Man


Small
Body

Long
Shadow

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Umbrellas (cont’d)

 Recognition
 Occurs at extreme trading range
 Shadow at least twice a small body
 Has no (or very short) upper shadow

 Differences
 Hammers valid after short decline
 Hanging man comes after long advance
 Hanging man must be confirmed

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Umbrellas (cont’d)

 Hammers
 Bodies either white or black
 Longer shadow, greater support
 Close very near high is bullish
 Not necessary to confirm, but usually best to wait
for additional pattern
 Example – hammer at bottom, followed by a
doji at support, is better than the hammer by
itself

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Umbrellas (cont’d)

 Hammer occurs at bottoms

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Umbrellas (cont’d)

 Hanging Man
 Come only after long advance
 Require confirmation
 Not a good “stand alone” signal
 Usually followed by sideways move
 Long lower shadow typically a bullish indicator as
well
 Holds market up longer
 Hammer is already at market bottom

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Umbrellas (cont’d)

 Hanging man occurs at tops

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Engulfing Pattern

 Major Reversal Signal


 Must have clearly identified trend
 Two candles in the pattern
 2nd candle must “engulf” the 1st
 Not required to engulf shadow
 2nd candle must be opposite color
 Exception if 1st candle is a doji

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Engulfing Pattern (cont’d)

 Factors Increasing Strength


 1st candle small body, 2nd candle long
 1st candle shows dissipation of strength
 Pattern follows extended market
 Overbought / oversold principle
 Heavy volume on the 2nd candle
 Additional reading is Part 2 of book
 Engulfing patterns give strong hints as to support /
resistance

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Engulfing (cont’d)

 Bearish
Resistance

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Engulfing (cont’d)

 Bullish

Support

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Engulfing (cont’d)

• Breakouts

Resistance
becomes
Support

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Dark Cloud Cover

 Bearish Pattern
 Similar to Bearish Engulfing
 Main difference 2nd candle doesn’t engulf
 1st candle is strong white candle
 2nd candle opens above previous high
 2nd candle closes deeply inside 1st
 Some Japanese technicians require 50% penetration of 1st candle

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Dark Cloud (cont’d)

 Factors
 Greater penetration, greater signal
 If 2nd candle opens above resistance, then closes below during the
pattern, chances of a top increase
 Very high opening volume on 2nd candle indicative of blowoff
 High open interest in futures

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Dark Cloud (cont’d)

 Bearish

Resistance

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Piercing Pattern

 Bullish Pattern
 Similar to Dark Cloud Cover
 Difference is color & occurrence
 1st candle is strong black candle
 2nd candle opens above previous low
 2nd candle closes deeply inside 1st
 Some Japanese technicians require 50% penetration of 1st candle

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Piercing (cont’d)

 Factors
 Greater penetration, greater signal
 If 2nd candle opens below support, then closes above during the
pattern, chances of a bottom increase
 Very high opening volume on 2nd candle indicative of blow off
 High open interest in futures

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Piercing (cont’d)

 Bullish

Support

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Piercing (cont’d)

 Caution
 Piercing patterns have less flexibility than dark cloud covers
 Dark cloud covers that penetrate large percentage of 1st candle
not hard rule
 Piercing patterns need greater penetration to be valid signals
 Harder to turn a market bullish than bearish
 3 other Japanese candle formations
 On neck, in neck & thrusting

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Piercing (cont’d)

 On neck, in neck, thrusting

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Piercing (cont’d)

 On neck, in neck, thrusting

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Stars
Introduction

 Stars
 Small real body
 Black or white
 Gaps away from preceding candle
 Body can be in preceding shadow
 Key point is bodies don’t overlap!
 If it’s a doji, then it’s a “doji star”
 Warning that prior trend is ending

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Morning Star

 Bullish bottom reversal pattern


 3 candle formation
 1st candle has extended black body
 2nd candle has small black body that doesn’t touch 1st candle
body
 3rd candle deeply penetrates 1st candles body
 Can enter 2nd candles body, but if not it’s even more bullish

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Morning Star (cont’d)

 Bullish

Support

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Morning Star (cont’d)

 Morning Doji Star

Support

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Morning Star (cont’d)

 Limitations
 It takes 3 candles to complete
 Waiting misses part of the move
 Lessens reward-to-risk ratios
 Best to enter market following a subsequent correction
 Recall trading tactics of channel breakouts, Fibonacci
retracements, etc

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Morning Star (cont’d)

 Flexibility
 Ideal pattern occurs when 2nd body doesn’t touch 1st or 3rd
bodies
 Not as fast a rule in markets where open is off the previous close
 Forex
 Semi-conductor & Drug indices
 Intraday charts
 15 minute, 30 min, etc

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Evening Star

 Bearish counterpart
 3 candle formation
 1st candle has extended white body
 2nd candle has small white body that doesn’t touch 1st candle
body
 3rd candle deeply penetrates 1st candles body
 Can enter 2nd candles body, but if not it’s even more bearish

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Evening Star (cont’)

 Bearish

Resistance

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Evening Star (cont’)

 Evening Doji Star

Resistance

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Evening Star

 Factors Increasing Reversal Odds


 1st, 2nd & 3rd candle bodies don’t overlap one another
 3rd candle closes deeply inside 1st
 1st candle low volume, 3rd heavy

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Evening Star

 Western Island Top


 Similar to the Evening Star
2

1 3 Gap

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Shooting Stars

 Bearish Single Candle Pattern


 Similar concept to Hanging Man
 Difference is location of body
 Long upper shadow
 Body is white or black
 Occurs at end of extended rally
 Strong resistance “rejects” price

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Shooting Stars (cont’d)

 Bearish

Resistance

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Inverted Hammers

 Bullish Single Candle Pattern


 Similar concept to Hammer
 Difference is location of body
 Long upper shadow
 Body is white or black
 Occurs at end of extended sell off
 Strong support “lifts” price

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Inverted Hammers (cont’d)

 Bullish

Support

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More Reversal
Patterns
Introduction

 Preceding Chapter
 Usually powerful reversal signals
 Occur at defined support / resistance
 This Chapter
 Less powerful signals / less reliable
 Require more confirmation / patience
 More potent signals / more reliable
 Occur less frequently / should be heeded

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Harami

 Bullish or Bearish
 2 Candle Formation
 Long 1st candle
 Bearish is white
 Bullish is black
 Short 2nd candle (or doji)
 Opens / closes inside 1st candle
 Body is white or black
 Similar to “inside day”
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Harami (cont’d)

 Bearish

Resistance

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Harami (cont’d)

 Bullish

Support

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Harami (cont’d)

 Harami Cross

Resistance

Support

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Tweezers

 Bullish or Bearish
 2 Candle Formation
 Compared to prongs of tweezers
 Tops have 2 identical highs
 Combo with Shooting Star, Harami Cross, Hanging Man, Dark
Cloud Cover
 Bottoms have 2 identical lows
 Combo with Hammer, Inverted Hammer, Harami Cross, Piercing
Pattern

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Tweezers (cont’d)

 Tweezers Tops

Resistance

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Tweezers (cont’d)

 Tweezers Bottoms

Support

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Belt Hold Lines

 Bullish or Bearish
 Single Candle Formation
 Looks like a belt
 Bullish opens at / near low with no lower shadow then powerful
move up
 Similar to shaven bottom
 Bearish opens at / near high with no upper shadow then
powerful move down
 Similar to shaven head

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Belt Holds (cont’d)

 Bearish and Bullish

Resistance

Support

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Three Patterns

 Better for Long Term Traders


 Large Bodies
 3 White Soldiers
 Bullish Continuation
 3 consecutive white candles
 3 Black Crows
 Bearish Continuation
 3 consecutive black candles

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Threes (cont’d)

• 3 White Soldiers - Bullish

Long
Bodies

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Threes (cont’d)

• 3 Black Crows - Bearish

Long
Bodies

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Threes (cont’d)

 3 Mountain Tops
 Similar to triple top
 3 River Bottoms
 Similar to triple bottom
 3 Buddha Tops
 Head & shoulders formation
 3 Buddha Bottoms
 Inverted head & shoulders formation

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Counterattack Lines

 Bullish & Bearish


 2 candle formation
 2nd candle opposite color to first
 Bullish has long 1st black candle, then 2nd long white candle
 2nd opens below 1st close, closes at 1st close
 Bearish has long 1st white candle, then 2nd long black candle
 2nd opens above 1st close, closes at 1st close

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Counterattack (cont’d)

 Bullish & Bearish

Resistance

Support

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Tower Tops & Bottoms

 Bearish & Bullish


 Multi candle formation
 Bearish begins with large white candle
 Bullish begins with large black candle
 Several small candles subsequently hold the move in check
(trading range)
 Towering candle follows break in trading range with powerful
reversal

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Towers (cont’d)

 Bearish & Bullish

Resistance
1 2

1
Support

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Continuation Patterns
Introduction

 Reversals
 Most candle formations are reversals
 Continuation
 Reversals can become continuation signals if “defeated”
 Chapter discusses other direct continuation candle patterns

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Windows

 Bullish & Bearish


 Single or multi candle formation
 Similar to gap
 Rising Windows are Bullish
 Falling Windows are Bearish
 Important factor is the Close relative to the gap / window

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Windows (cont’d)

 Bullish & Bearish

Falling
Window

Didn’t close
in the gap!

Rising
Window

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Tasukis

 Bullish & Bearish


 2 candle formation
 Bullish Tasukis
 1st white candle forms window, second black candle opens
below 1st high, but closes above window
 Bearish Tasukis
 1st black candle forms window, second white candle opens
above 1st high, but closes below window

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Tasukis (cont’d)

 Bullish & Bearish

Upward Downward
Gapping Gapping
Tasuki Tasuki
Didn’t close
in the gap!

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Three Methods

 Bullish & Bearish


 Multi candle formation
 Falling Three Methods is Bullish
 Large 1st white candle followed by 3 small candles (black or
white) inside body of 1st , then a powerful black candle
 Rising Three Methods is Bearish
 Large 1st black candle followed by 3 small candles (black or
white) inside body of 1st, then a powerful black candle

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Three Methods (cont’d)

 Bullish & Bearish

Rising Falling
Threes Threes

3 candles can
be black or
white

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Separating Lines

 Bullish & Bearish


 2 candle formation
 Similar to Belt Hold Lines
 Both candles have same open

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Separating (cont’d)

 Bullish & Bearish

Bullish Bearish
Separating Separating
Lines Lines
Candles have
match ing
open & close
value

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Contrarian Indicators
Contrarian Indicators

 Specialist Public Ratio


 Short Selling of Common Public against informed Traders
 Insider trading

 Advisory Services

 Mutual Fund Cash/Asset Ratio

 Margin Debt (F&O)

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Intermarket Analysis

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Why 90% of the People Lose Money?

 Lack of Financial Trade Management

 Not any control over Greed and Fear

 Trusting on unreliable sources

 Lack of Risk Management

 Not following Technical Guidelines

 Lack of Fundamental interpretation

 Falling in Love with stocks

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Derivative Trading
Derivative Trading

STEP 1: Choose Volatile Stocks


STEP 2: Filter Most Liquid stocks
STEP 3: Apply Short term Moving averages and Volume Parameter
STEP 4: Look for Targets not more than 4%
STEP 5: Trade in ITM or Next Strike price Options
STEP 6: Book Profits at appropriate Targets and before one week of expiry

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Swing Trading
Swing Trading

 Swing trading is the near to intermediate-term time frame

 Trading with the intermediate-term trend

 Momentum-based strategies work


 An object in motion tends to stay in motion
 Stocks trading near to 52 week highs have the least amount of Overhead resistance
 Cheap stocks are cheap for a reason
 We Buy high and Sell higher and not buy low and sell high
 Human nature is to underestimate how long a trend can last
 Main structure of every up trending stock is: Base, Breakout and Pull Back

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Swing Trading

Strategy 1: Moving averages : Use short term Moving averages Combination (Ex. 3,5,8,13,)

Strategy 2: RSI and Support Line: Use 70-30 or 80-20

Strategy 3: RSI and Moving Averages

Strategy 4: Stochastic Oscillator

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Swing Trading-Key Takeaway

 Base Building is like the foundation of a house


 Base is crucial to an uptrend, as the stock builds a strong foundation to launch the
next advance
 Before a stock can launch a big price run up, it must first have a solid base pattern
to build upon
 Patterns: Cup and Handle, H&S, Double Bottom or flat base

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Algorithmic Trading
Algorithmic Trading

 A predefined step-by-step method to accomplish a task


 A computer model that takes an order and structures a sequence of Trades
 Computer programs that generate buy and sell orders and make lightning-quick
trades
 It is the automated execution of trading orders decided by quantitative market
models

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Algorithmic Trading : Objectives

 Minimize cost
 Maximizing Fill rate
 Minimizing Execution risk
 More reliable and faster execution platforms
 More accurate predictions

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Areas of Concern While Setting Algorithms

 Lack of visibility

 Algorithms acting on Other Algorithms

 Which Algorithms to use

 Missing Ingredient-Gut feel

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Algorithmic Trading: Process

 Generate Trading Idea

 Quantify idea and Build a model for it

 Back test the strategy

 Collect the performance statistics

 Implement strategy on software


 Trade

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Algorithmic Trading: Conclusion

 Algorithms trading is a very competitive field in which technology is a crucial factor

 With the help of the Algorithms trading system the trade activity becomes faster

 But after all it is totally depends on the technology

 There are lots of example of crashing in the market due to Algorithms trade system

 So one has to not depend fully on the Algorithms system

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