MNB Introduction to Technical Analysis

M AGYA R N E M Z ET I BA N K
MNB Handbooks
No. 8.
December 2016
Zoltán Végh
Introduction to technical
analysis: charts, opening and
managing positions
MNB Handbooks
Zoltán Végh
Introduction to technical analysis:

charts, opening and managing positions
MAGYAR NEMZETI BANK

MNB Handbooks
Introduction to technical analysis: charts, opening and managing positions
Written by Zoltán Végh
(Directorate Money and Foreign Exchange Markets, Magyar Nemzeti Bank)
This Handbook was approved for publication by István Veres, Director
Published by the Magyar Nemzeti Bank
Publisher in charge: Eszter Hergár
H-1054 Budapest, Szabadság tér 9.
www.mnb.hu
ISSN 2498-8413 (Print)
ISSN 2498-8421 (Online)

Contents
1 Introduction 5
2 Analysis methods 7
2.1 Fundamental analysis 7
2.2 Technical analysis 8
2.3 Differences 9
3 Theories 11
3.1 Dow theory 11
3.2 Fibonacci sequence theory 13
3.3 Elliott wave theory 15
3.4 Random walk theory 17
4 Chart types 19
4.1 Line chart 19
4.2 Bar chart 20
4.3 Japanese candlestick 21
4.4 Histogram 22
5 Introduction to technical analysis 24

5.1 Trend 24
5.2 Support and resistance 27
5.3 Volume 28
5.4 Time horizon 29
6 Indicators 31
6.1 Trend following indicators 31
6.2 Momentum indicators 36
6.3 Volatility indicators 41
6.4 Volume-based indicators 44
7 Chart patterns 47
7.1 Continuation patterns 47
7.2 Reversal patterns 51
8 Technical analysis in practice 55

8.1 USD/TRY daytrade 55
8.2 EUR/USD daytrade + stop loss 56
8.3 EUR / USD double bottom 57
9 References 59
1 Introduction
The principles of technical analysis date back hundreds of years; some aspects
of technical analysis already appeared in Joseph de la Vega’s “Confusion of
Confusions”, which was published in 1688 and is considered to be the oldest
book ever written on the stock exchange.
In Asia, one still highly popular technical analysis method was developed
in the middle of the 18th century: the Japanese candlestick and the chart
composed of it, which is associated with the name Homma Munehisa.
Some believe that the roots of modern-day technical analysis go back to the
end of the 1800s when Charles H. Dow devised the first stock market index,
calculated from the daily closing prices of twelve stocks. Dow’s basic tenets
on stock price movements have become known as the Dow theory. To this
day, the first and perhaps the most recognised stock market index, the Dow
Jones Industrial Average, partly bears his name.1
We owe the practical applicability of the Dow theory to William Peter Hamilton,
who succeeded Charles Dow as editor of The Wall Street Journal after his death
and presented an in-depth analysis of the Dow theory in his book, The Stock
Market Barometer, in 1922.2
In 1948, Robert D. Edwards and John Magee published Technical Analysis of

Stock Trends. Dedicated to trend analysis and chart patterns, their book is still
looked upon as one of the seminal works of technical analysis.
Initially, the application of technical analysis was limited almost exclusively

to the analysis of charts, as technological limitations – the inadequate
performance of computers – did not support the processing of high volumes
of statistical data.
1
Steven B. Achelis (1995): Technical Analysis from A to Z. 2nd edition. DO-C. United States.
2
harles D. Kirkpatrick and J. R. Dahlquist (2007): The Complete Resource for Financial Market Technicians.
C
FT Press. United States.
Introduction | 5
In the 20th century, along with the spread of new technical analysis tools and
theories, rapid technological development increasingly shifted the focus to
computer-assisted techniques and software applications. One of the current
topics of modern days is high-frequency trading and its regulation.3
The purpose of this booklet is to give an insight into the fundamentals of

technical analysis, to describe its main theoretical directions and to provide
an overview of the technical analysis tools available (indicators, charts and
patterns).
It is important to stress that, due to its limited scope, this booklet should be
viewed only as an introduction to this particular branch of analysis.
3
Charles D. Kirkpatrick and J. R. Dahlquist (2007): The Complete Resource for Financial Market Technicians.
FT Press. United States.
6 | MNB Handbooks • Introduction to technical analysis

2 Analysis methods
Although the objectives of fundamental and technical analysis are nearly the
same – to identify and mitigate risks and to predict the direction of future
price changes with a view to maximising profits – their tools and methods are
vastly different. While the former relies on the main assumption that prices
are essentially determined by fundamental factors and investors’ decisions are
based on an analysis of current political and economic events and financial
indicators, in the case of the latter the analysis is fundamentally based on
mathematics and statistics.
It should be emphasised that neither fundamental, nor technical analysis can

guarantee the ultimate success of an investment.
2.1 Fundamental analysis

Fundamental analysis is typically used for stock valuation. Followers of
the method seek an answer to the underlying factors behind stock price
movements, focusing their analysis on the fundamentals of businesses’
financial management, financial results and indicators (“company analysis”),
while also paying attention to the macroeconomic and industrial environment.
Fundamental analysts try to measure the “intrinsic value” of companies. They

use this value to assess whether an investment opportunity (company) is
underpriced or overpriced and to make a recommendation on buying or
selling. Given that there may be a significant difference between the intrinsic
value of a share and its current market price in the short run, the true relevance
of the application of fundamental analysis lies in long-term investments.
In determining the value of a business, fundamental analysts examine the

following indicators:
• Profitability indicators (ROA, ROE, ROS),
– measuring the company’s earning potential;
Analysis methods | 7
• Efficiency indicators (inventory turnover, receivables and accounts payable
turnover ratios),
– measuring how efficiently a company uses its assets;
• Leverage indicators (equity ratio, interest coverage ratio),
– indicating the company’s indebtedness;
• Liquidity indicators (current ratio, cash ratio, interval measure),
– indicating the company’s solvency; and
• Market indicators (market capitalisation, P/E, EPS, P/BV, dividend yield),
– measuring investors’ assessment of the company.
The fundamental analysis of foreign exchange (FX) markets is extremely

complex. This is because the value of a foreign currency may be influenced
by numerous fundamental factors, such as the relative interest rate and
inflation level typical of the given currency or the performance of the economy
concerned (generally as measured by GDP), as well as other macroeconomic
indicators and monetary policy objectives. Due to its complexity, the use
of this approach in the FX market is mainly limited to predicting long-term
trends.
2.2 Technical analysis

In using technical analysis, investors try to predict the direction in market
and price changes in consideration of historical and current market prices
and volume. In order to determine possible outcomes, they identify various
patterns (head and shoulders pattern, flags, triangles, etc.) and apply different
indicators (moving averages, oscillators, etc.). While the identification of
patterns is somewhat subjective, indicators can be calculated on the basis
of mathematical/statistical formulas. Numerous trading strategies are based
on the use of indicators.

The main principles of technical analysis are the following:
1. Market action discounts everything:
In other words, besides the interaction between supply and demand, the
current market price already reflects not only all of the information known
about a stock, but also investors’ future expectations.
Market volume, which is viewed as an internal attribute of the market, also

plays a prominent role in market analysis and in determining the expected
direction of prices.
2. History repeats itself:
One of the basic tenets of technical analysis is the assumption that in similar
situations investors tend to repeat the behaviour of other investors.
Essentially, the system of technical analysis evolved from the study of these
behaviour patterns. This theory is supported by observations on crowd
psychology as described in psychological studies.
2.3 Differences
Perhaps one of the most important differences between technical and
fundamental analysis is the fact that the information they use derives from
entirely different sources. In the case of fundamental analysis, investors gain
information primarily from corporate (flash) reports, while technical analysts
mainly rely on price charts and volume.
Moreover, while the followers of fundamental analysis think long term, often in
spans of years, the horizon of technical analysis disciples is far shorter: weeks,
days (day-trading), or even hours or minutes.
Despite the considerable difference between the two methods, they

complement each other fairly well. While fundamental analysis seeks an
answer to the question “What?”, i.e. which stocks, bonds, foreign currency,
commodity, etc. is worth investing in (or, as the case may be, disposing of ),
technical analysis helps to decide “When?”. The levels identified with the
Analysis methods | 9
assistance of technical analysis and the indicators used help investors to
navigate the issue of overpricing or underpricing and define the stop-loss
and take-profit4 levels. Trading exclusively on the basis of fundamentals suits
investors who are prepared – and able – to endure relatively substantial
unrealised losses even in the long term, as they confident that their assessment
and evaluation of the current situation and the resulting decision are correct
and the price movement of the given instrument will ultimately turn in their
favour. By contrast, investors who depend solely on technical analysis typically
take on short-term positions in the hope of realising quick profits.
4
Stop-loss, take profit – placing an order to close out a current position immediately.

3 Theories
3.1 Dow theory5, 6

The Dow theory was named after its creator, Charles Henry Dow (1851–1902),
an American financial journalist who, besides being one of the founding
editors of The Wall Street Journal, is also thought to be a pioneer of modern
technical analysis. The formulation of one of the oldest and still popular
American market indicator, the Dow Jones Industrial Average (DJIA), is also
associated with his name. Initially, the indicator devised by Dow consisted
of 12 components; today it measures the stock market value of the top 30
companies of the United States.
Time-tested and proved effective even today, the Dow theory was published
in 1902 after Dow’s death by A. C. Nelson in The Wall Street Journal.
The basic tenets of the theory
1. The most revolutionary novelty of the Dow theory was its assertion that
stock prices reflect not only supply and demand, but also any new information
as soon as it becomes available, including future expectations, and as such it
can be used to predict future events.
2. Based on the theory, three market trends prevail simultaneously in

the market, each determined by the time horizon. The trend itself can be
understood as the general direction of the market price.
We distinguish between primary, secondary and minor trends and all of

these movements may be in progress at the same time in the market. Primary
trends – the determinants of bull or bear markets – are the most significant
of all. They are typically longer than a year in duration, but they may even
encompass a decade.
5
FT Press. United States, Chapter 6.
6
Róbert Cselovszki (1993): A Dow-elmélet (The Dow Theory). Bank & Tőzsde, 1993/4, 12 February, p. 9.
Theories | 11
Secondary trends take the exact opposite direction, materialising as a sharp
decline in a primary bull market or a rally in a primary bear market. These
reaction generally last from weeks to several months.
The third, minor trend indicates the daily fluctuation of the prices; its direction
is entirely random, and it can last from a couple of days to several weeks.
Besides the divergence in their time horizon, the three trends are also set
apart by the fact that, while minor – and potentially, secondary – trends
may be manipulated by major institutional investors (e.g. investment banks,
hedge funds, sovereign wealth funds, pension funds), primary trends cannot
be controlled.
3. Of the three trends, primary trends have the longest duration. They
may well last for years, and they themselves consist of three phases: the
“accumulation”, the “public participation” and the “distribution” phase.
The emergence of individual phases within the trend can be attributed
to the information asymmetry among market participants. In the first
phase (during the emergence of a bull market), well-informed investors
start actively buying certain stocks. In the second phase, technical analysts
follow suit. Accordingly, in the second phase the market is on an upswing: it
is characterised by general optimism, rising volumes and rapidly increasing
prices. In the third phase, even risk-averse investors catch on and begin to
participate, while astute investors already start exiting the market.
4. According to the Dow theory, the indicators confirm each other (“concept
of confirmation”). In Hamilton’s words (25 June 1928): “Dow always ignored
a movement of an average which was not confirmed by the other, and
experience since his death has shown the wisdom of that method of
checking the reading of the averages”.
5. Although transaction volume does not signal a trend reversal, increased

volume confirms the trend and hence, it can serve as a reliable secondary
indicator.
6. The trend continues until there is a clear indication of a reversal. Numerous

tools of technical analysis may assist investors in pinpointing trend reversals.

Chart 1
Trends
OTP
Price
HUF Secondary trend
8,000
7,500
7,000
6,500
6,000
5,500
5,000 Minor trends
4,500 Secondary trend
4,000
3,500
3,000 Primary trend
2,500
2,000
Volume
4M
3M
2M
1M
a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n d j f m a m
2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2
Source: THOMSON REUTERS
3.2 Fibonacci sequence theory7

The formulation of the Fibonacci sequence is attributed to Italian
mathematician Leonardo Fibonacci (approx. 1170–1250), who is considered
to be one of the most talented mathematicians of the Middle Ages. He based
his theory on a mathematical problem involving the growth of an imaginary
population of rabbits.
The solution was an (infinitely continuing) sequence of numbers, the Fibonacci

sequence, where each number in the sequence is the sum of the previous
two numbers.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.
The sequence thus received has some remarkable characteristics:
• After the first six numbers, each number is approximately 1.618 times greater
than the preceding number. Known as the golden section (also referred to
7
István Kecskeméti: Tőzsdei befektetések a technikai elemzés segítségével (Stock exchange investments
with technical analysis). Kecskeméti és Tsa Bt. (2006), p. 81.
Theories | 13
as the “golden ratio”, examples of this ratio can be also found in nature (e.g.
pinecones, snail shells).
• After the first six number, any number divided by the number that follows
approximates 0.618.
Market trends exhibit retracement periods, and Fibonacci levels may help
predict the expected level of the retracement. Although the 76.4% and the
50% levels are not really Fibonacci ratios, traders tend to take them into
consideration in defining resistance/support levels during trading.
The Fibonacci retracement levels can be found when, taking full retracement
(100%) as a basis, the appropriate numbers are divided by 1.618.
100% /1.618 = 61.8%
61.8% /1.618 = 38.2%
38.2% / 1.618 = 23.6%
Chart 2
Fibonacci retracement
Price BUX INDEX

HUF
19,800
19,600 100.0%–19 532.15
19,400
19,200
19,000
18,800 76.4%–18 693.46
18,600
18,400
18,200 61.8%–18 174.61
18,000
17,800 50.0%–17 755.27
17,600
17,400 38.2%–17 335.92
17,200
17,000
16,800 23.6%–16 817.07
16,600
16,400
16,200
16,000 0.0%–15 978.38
15,800
15,600
10 17 24 31 07 14 22 2805 12 19 26 02 10 16 23 30 07 14 21 28 04 11 18 25 01 08 15 22 29 06 13 2027 03 10 17 24 01 08
March 2014 April 2014 May 2014 June 2014 July 2014 August 2014 September 2014 October 2014 November 2014 Dec. 14

Based on the chart, the BUX rose by a total of 3,554 points from 15,978 points
to 19,532 points. Taking this increment as 100%, we receive the next Fibonacci
level (61.8% at 18,174 points) when we add 3,554/1.618 = 2,196 to 15,978.
Since the Fibonacci levels are monitored by many market participants who
adjust their trading decisions accordingly, they serve, in a manner of speaking,
as self-fulfilling prophecies.
To chart these levels, draw a horizontal line at a designated minimum and

maximum price to indicate the 0% and 100% levels, and then divide the
distance by the key Fibonacci retracement levels.
With respect to the Fibonacci retracement levels, we can propose the following
rules of thumb:
• The ideal retracement level is at 61.8%.
• When the retracement of a stock price does not break through the 38.2%
level, a trend continuation pattern is likely to take shape.
• When the stock price breaks through the 38.2% level, it is very likely to reach
the 61.8% retracement level as well.
• When the price exits the 0–100% band, it is very likely to reach the 161.8%
retracement level as well.
3.3 Elliott wave theory8, 9

Ralph Nelson Elliott (1871–1948), the creator of one of the most famous
theories of technical analysis that has been proved effective in monitoring
price movements to this day, published his observations in a series of articles
in Financial World magazine in 1939.
8
Róbert Cselovszki (1992): Elliott hullámelmélete I.-II (Elliott Wave Theory I.-II). Tőzsde Kurír, 1992/38,39.
17, 24 September.
9
FT Press. United States, Chapter 20
Theories | 15
In his theory Elliott posits that capital and money markets are not chaotic;
indeed, stock price movements form a discernible pattern of repetitive waves
of different degree and duration.
In Elliott’s wave theory, price movements are essentially determined by three

elements:
• patterns, which take the shape of waves or wave formations;
• ratios, which can be used to measure the relationship between the waves
and to identify pivot points more accurately;
• time, i.e. the length of the cycles, provides assistance in defining the
pattern – and the ratio – more precisely.
The Elliott cycle consists of the following eight phases. The chart shows an
upward and a downward trend, with the upward trend consisting of 5 waves
and its subsequent correction consisting of 3 waves.
B
3
1
4
C
The local peaks of the impulse wave are marked by 1, 3 and 5, and smaller
reversals emerging in the upward trend are marked by the local troughs of
2 and 4.

Following the 5-phase upward wave, a 3-phase corrective wave begins,
represented by points A, B and C.
Similar to Dow’s assertion that 3 trends co-exist in the market simultaneously,

in Elliott’s wave theory waves exist at several different levels. Major impulse
waves determining the dominant trend can be subdivided into a set of lower-
degree waves: they are composed of a set of minor waves.
5 2
4
35 A CB
1
B 3
1 3 5 B
A
A
1
4
C4 C
2
2
3.4 Random walk theory

The Random walk theory was developed by American economist Burton G.
Malkiel. His hypothesis, which calls into question the applicability of both
technical and fundamental analysis in predicting the expected direction of
prices, was first published in 1973 in his book, A Random Walk Down Wall Street.
In Malkiel’s opinion, a random walk occurs when future prices cannot be

predicted by observing past price movements. According to Malkiel and his
followers, stock prices follow a random walk and, since stock price movements
cannot be predicted, there is no practical use for investment advisers,
complicated charts or indicators. Supporters of the theory believe that higher-
than-average returns can only be achieved by taking greater risk.
Theories | 17
Malkiel famously wrote in his bestselling book: “A blindfolded monkey
throwing darts at a newspaper’s financial pages could select a portfolio that
would perform just as well as one carefully selected by experts”.10
The theory was put to the test by The Wall Street Journal; after the first hundred
days, “monkeys” (blindfolded staffers of The Wall Street Journal) won 39% of the
time versus the pros and this ratio continuously improved over time.
10
Burton G. Malkiel (1992): A Random Walk Down Wall Street. International Training Center for Bankers.
Budapest, p. 20.

4 Chart types11
4.1 Line chart

Line charts are the simplest charts used in technical analysis, displaying
information about only two variables, the price of the underlying instrument
and time. As they are less informative than other charts, their applicability is
limited; their advantage, at the same time, is easy interpretation. Line charts
are typically used for determining and analysing long-term trends. Line charts
plot time usually by their x-axis value and display price data by their y-axis
value. In constructing the chart, analysts can choose from numerous intervals,
depending on the purpose of the analysis and the type of trading. Day-traders,
for instance, prefer hourly, half-hourly or shorter intervals. Price is usually
understood as the closing price, but it is also possible to select the opening
price, the lowest price, the highest price or the average price of the given period.
The line chart below visualises the movement of the EUR/HUF cross rate on
19 May 2015; the software constructs the chart by linking closing quotes at
5-minute intervals.
Chart 3
EUR/HUF Line Chart
EURO/HUF
308.6
308.4
308.2
308.0
307.8
307.6
307.4
307.2
307.0
306.8
306.6
306.4
306.2
306.0
305.8
305.6
305.4
305.2
305.0
304.8
304.6
304.4
304.2
01:05 02:05 03:05 04:05 05:05 06:05 07:05 08:05 09:05 10:05 11:05 12:05 13:05 14:05 15:05 16:05 17:05 18:05 19:05 20:05 21:05 22:05
11
Chart types | 19
4.2 Bar chart
Bar charts are composed of a series of bars. Each bar displays four pieces of
information: opening, closing, the highest and the lowest prices of a given
trading period. In addition, the chart contains yet another – a fifth – piece of
information: the direction of the price movement. Opening prices are shown
by the left-hand bar, closing prices are marked by the right-hand bar, while the
lowest and the highest prices are represented by the lowest and the highest
points of the bar, respectively. The higher a bar, the broader the range in which
the underlying instrument was traded in the given period and similarly, the
lower the bar, the narrower the trading range. Similar to the line chart, the
horizontal axis depicts time and the vertical axis depicts price.
UPTREND
High price
Close price
DOWNTREND
High price
Open price
Open price
Low price
Close price
Low price
High information content is considered to be the advantage of bar charts,

while relative complexity is viewed as a disadvantage.
Bar charts are also known as “OHCL charts” in the literature, the acronym
referring to the words “open, high, close and low”.

Chart 4
EUR/HUF Bar Chart
EUR/HUF
308.6
308.4
308.2
308.0
307.8
307.6
307.4
307.2
307.0
306.8
306.6
306.4
306.2
306.0
305.8
305.6
305.4
305.2
305.0
304.8
304.6
304.4
304.2
06:10 07:10 08:10 09:10 10:10 11:10 12:10 13:10 14:10 15:10 16:10 17:10 18:10 19:10 20:10 21:10
4.3 Japanese candlestick

Japanese candlestick is the most popular chart type in technical analysis. It
was used by Asian rice traders as early as the 1600s and 1700s. It gained
popularity in Europe only after the publication of Steve Nison’s book, Japanese
Candlestick Charting Techniques, in 1991 and today it is one of the chart types
available in Microsoft Excel. Similar to the bar diagram, it is constructed from
JAPANESE CANDLESTICK UPTREND

High price
Upper shadow DOWNTREND
Close price
High price
Body
Open price
Open price
Lower shadow
Low price
Close price
Low price
Chart types | 21
four data items: the lowest and the highest traded prices and the opening
and closing prices.
Chart 5
EUR/HUF Japanese Candelstick
Price
HUF
308.8
308.6
308.4
308.2
308.0
307.8
307.6
307.4
307.2
307.0
306.8
306.6
306.4
306.2
306.0
305.8
305.6
305.4
305.2
305.0
304.8
304.6
304.4
06:10 07:10 08:10 09:10 10:10 11:10 12:10 13:10 14:10 15:10 16:10 17:10 18:10 19:10 20:10
Each individual candlestick consists of two parts: the body and the shadow.
Their size and shape are determined by the range of the price excursions
during the time interval represented. While the body illustrates the area
between the opening and the closing price, the shadow reflects price
movements during the entire period. The chart highlights the direction of
the movement by two colours: when the body of the candle is light-coloured
(typically green or white), the closing price is higher than the opening price
and vice versa, when the body is dark-coloured (generally red or black), the
closing price is lower than the opening price. The former signals a bullish
market, while the latter points to a bearish market.
4.4 Histogram
Technical analysts typically employ histograms to visualise volume in order
to glean additional information about trading activity. Currently, the exact
volume of foreign exchange markets and individual OTC products cannot be

measured precisely; this is only possible in the case of stocks (products with
a centralised market).
Chart 6
OTP – Histogram
OTP
Price
HUF
5,800
5,600
5,400
5,200
5,000
4,800
4,600
4,400
4,200
4,000
3,800
3,600
1
Volume
40M
30M
20M
10M
29 06 13 20 27 03 10 17 24 01 08 15 22 05 12 19 25 02 09 16 23 02 09 16 23 30 07 13 20 27 04 11 18
Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015 Mar. 2015 Apr. 2015 May 2015
Price movements have different significance in the context of relatively low

or relatively high volumes. Due to the highly limited information content,
histograms are mainly used as an addition to price charts (e.g. Japanese
candlestick).
Chart types | 23
5 Introduction to technical analysis
5.1 Trend12, 13
A trend is the basis of technical analysis; it points to the prevailing direction of
market movements. In the long run, market expectations play a leading role in its
evolution; in the short run, however, unexpected events may alter the direction.
Trends tend to have similar characteristics irrespective of their duration.
Depending on direction, we distinguish between upward or downward trends;

in the case of the former, local troughs and local peaks take increasingly high
values and in the latter case the opposite is true. If the direction cannot be
determined clearly, the trend develops sideways. The trendline can be drawn
from connecting at least two troughs in the case of an uptrend and at least
two peaks in the case of a downtrend.
Chart 7
Upward trend
EUR/HUF
Price
HUF
314
312
310
308
306
304
302
300
298
296
294
292
290
288
286
284 Upward trendline
282
280
278
276
j a s o n d j f m a m j j a s o n d j f m a m j j a s
2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3
12
István Kecskeméti (2006): Tőzsdei befektetések a technikai elemzés segítségével (Stock exchange
investments with technical analysis). Kecskeméti és Tsa Bt., p. 81.
13
FT Press. United States, Chapter 2, Chapter 12.

Chart 8
Downward trend
EUR/USD
Price
USD
1.4
1.39
1.38
1.37
1.36 Downward trendline
1.35
1.34
1.33
1.32
1.31
1.3
1.29
1.28
1.27
1.26
1.25
1.24
1.23
1.22
1.21
1.2
05 12 19 26 02 09 16 23 30 07 14 21 28 04 11 18 25 01 08 15 22 29 06 13 20 27 03 10 17 24 01 08 15 22 29
May 2014 June 2014 July 2014 Aug. 2014 Sept. 2014 Oct. 2014 Nov. 2014 Dec. 2014
In the case of a sideways market (bracket trading), local troughs and local
peaks are located at nearly the same, relatively clearly defined levels. The lower
edge of the band is called support, the upper edge is called resistance.
Chart 9
Sideways market
Price EUR/CHF
CHF
1.256
1.254
1.252
1.250
1.248
1.246
1.244
1.242
1.240
1.238
1.236
1.234
1.232
1.230
1.228
1.226
1.224
1.222
1.220
1.218
1.216
1.214
1.212
1.210
1.208
03 10 17 24 01 08 15 22 29 05 12 19 26 02 09 16 23 30 07 14 21 28 04 11 18 25 02 09 16 23 30 06 13 20 27
June 2013 July 2013 Aug. 2013 Sept. 2013 Oct. 2013 Nov. 2013 Dec. 2013 Jan. 2014
Introduction to technical analysis | 25

In the case of a significant breakthrough of the trendline, with high volume,
the closing price is 2% above the trendline, when the price takes a persistently
opposite position, a trend reversal occurs. The longer the trendline (the
duration of the trend) and the more often was it crossed by the price
previously, the greater the significance of the price’s eventual breakthrough.
Chart 10
Trend reversal
BUX INDEX
19,400
19,300
19,200
19,100
19,000
18,900
18,800
18,700
18,600
18,500
18,400
18,300
18,200
18,100
18,000 3.19%
17,900
17,800
17,700
17,600
17,500
17,400
17,300
17,200
17,100
17,000
16,900
26 02 10 16 23 30 07 14 21 28 04 11 18 25
May 2014 June 2014 July 2014 August 2014
With a view to maximising profits, the main goal of traders is to pinpoint the
beginning of a trend with the assistance of technical analysis and enter the
market, then to identify the end of the trend and close out their positions.

5.2 Support and resistance14
In technical analysis, a support level is a level that is not breached persistently
by the falling price; at this level, most investors do not anticipate any further
price declines and a buying frenzy is likely to ensue. Typically, price can break
through the support level only in the case of outstanding turnover or high-
volume sales.
Chart 11
Support and resistance
RICHTER GEDEON
5,000
4,800 Resistance
4,600
4,400
4,200
4,000
3,800
3,600
3,400 Support
3,200
3,000
2,800 Resistance
2,600
2,400
2,200 Resistance Support
2,000
1,800
1,600
1,400
1,200 Support
1,000
800
600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
1990 2010
The opposite is true for resistance. At this level, most investors expect a price
fall; at this point, sellers dominate buyers. When several resistance levels
emerge in the vicinity of a price level, it is called a resistance zone.
The chart below indicates the performance of the EUR/GBP cross rate in 2014.
The chart clearly shows that the quote reversed five times from the resistance
zone formed around the 0.8035 level during the period under review.
14

Chart 12
EUR/GBP Support and Resistance
EUR/GBP
0.825
0.822
0.819
0.816
0.813
0.810
0.807 1 2 3 4 5
0.804 Resistance zone
0.825
0.798
0.795
0.792
Support
0.789
0.786
0.783
0.780 Support
0.777
0.774
07 14 21 28 05 12 19 26 02 09 16 23 30 07 14 21 28 04 11 18 25 01 08 15 22 29 06 13 20 27 03 10 17 24 01 08 15 22 29
Apr. 2014 May 2014 June 2014 July 2014 Aug. 2014 Sept. 2014 Oct. 2014 Nov. 2014 Dec. 2014
The longer/more often a support/resistance level is tested by the price
• and the higher the turnover around it,
• the stronger the specific level.
Support and resistance levels often materialise at round numbers; investors

usually place their buy/sell orders at these levels.
Previous support levels often turn to become resistance levels and vice versa,
past resistance levels often become support levels.
5.3 Volume
Volume plays an important role in technical analysis. It indicates the traded
volume of an underlying instrument in a given period (minute, hour, day,
week). From a technical perspective, a breakthrough or a bounce off has
considerable significance – pointing to a trend reversal rather than only
a temporary retracement – only when accompanied by high volumes.

It is therefore important to consider the trade volume level registered parallel
to the price movement. The highest trading volumes are generally observed
at the beginning and at the end of a trend.
Chart 13
OTP – Volume
Price
HUF End of trend
4,800
4,700
4,600
4,500
4,400 Sideways market
4,300
4,200
4,100
4,000
3,900
3,800
3,700
3,600 Start of trend
Val; OV; Trade Price
2015.05.21.; 100.0000
20M
10M
06 13 20 27 03 10 17 24 03 10 17 24 31 07 14 22 2305 12 19 26 02 10 16 23 30 07 14 21 28 04 11 18 25 01
Jan. 2014 Feb. 2014 Mar. 2014 Apr. 2014 May 2014 June 2014 July 2014 Aug. 2014
The first (February) value marked with an orange circle demonstrates fairly
well that in the case of a sideways market the price moves in a narrow range
with low volumes, while significant price movements are accompanied by
high volumes.
5.4 Time horizon

5.4.1 Scalper
Scalpers are market participants whose investment horizon ranges between
a few seconds and a few minutes at most. This trading strategy requires
extremely high concentration and perfect execution. It is characterised by
fast entries and exits and minor, 10–20 pip profit levels.

5.4.2 Daytrade
Day trading is a trading style where the investor trades only within a day and
closes its open positions by the end of the day or, in any event, before the
market closes for the trading day. The upside of day trading in comparison to
other trading methods is that it rules out overnight risk completely. Overnight
risks are understood as the risk of events between trading sessions, such as
the disclosure of the quarterly report after the market has closed for the day,
or an upgrade/downgrade by a rating company on a Friday evening after
market close.
Forex markets are open for trading almost 24 hours a day; from 10 p.m. Sunday
(Sidney opening time) until 10 p.m. Friday (New York closing time); strictly
taking the trading hours, investors can trade at the domestic stock exchange
from 9 a.m. until 5 p.m. on working days.
5.4.3 Swing trade

In the case of swing trade, the duration of the investment may range between
a few days and a few weeks; investors’ objective is not to realise a quick profit,
but to “ride the wave” of a minor or major market trend. Practitioners of this
trading style typically use 30-minute or 1–4 hour charts to analyse market
movements. As opposed to scalping or day trading, swing traders can place
an order to open or close out a position for the next day even outside of
regular trading hours.
5.4.4 Short, medium and long term

In technical analysis, depending on the length of the review/investment
period, we distinguish between short, medium and long terms. The review
period typically covers a period between one week and one month in the
case of short term, one month to six months in the case of medium term, and
a period of over six months in the case of long term. In examining the different
time horizons, traders may examine hourly, daily, weekly or occasionally,
monthly charts.

6 Indicators
Indicators are indispensable tools in technical analysis. They are functions/
charts derived from historical data (price or volume data) or mathematical or
statistical formulas.
Investors rely on indicators to answer a number of important questions: when

to enter or exit a market, which market products are oversold or overbought,
and where the support/resistance levels are.
The classification of indicators can vary. One of the most popular classification
methods of the various alternatives distinguishes between four indicator types:
• trend following indicators,
• momentum indicators,
• volatility indicators,
• volume indicators.
6.1 Trend following indicators

The category of trend following indicators includes moving averages and
other indicators based on moving averages (such as simple, exponential, or
weighted moving average). These indicators are the oldest, simplest, and most
commonly used indicators in technical analysis; their advantage is that they
provide accurate signals; their disadvantage is that their signals always come
with a lag.15 As trend following indicators are calculated from historical data;
they are not suitable to signal trend reversals; however, they indicate the start
and the direction of a trend fairly well.
15
Indicators | 31
6.1.1 Moving Average (MA)
Market prices may fluctuate widely, even within the same day. Analysts use
moving averages to smooth erratic data, making it easier to view the true
underlying trend.16 Besides identifying the direction of a trend, moving
averages are useful indicators in defining support and resistance levels. Some
traders also use moving averages to identify buy or sell signals: when the price
crosses above the moving average, it should be understood as a buy signal.
A sell signal is the opposite: the price crosses below the moving average.
Chart 14
Moving Average – MA
Price EUR/USD
USD
1.116
1.1155
1.115
1.1145 Sell signal
1.114 Sell signal
1.1135
1.113
1.1125
1.112
1.1115
1.111
1.1105
1.11
1.1095
1.109
1.1085
1.108
1.1075
1.107
1.1065 Buy signal
1.106
1.1055
05:35 06:05 06:35 07:05 07:35 08:05 08:35 09:05 08:35 10:05 10:35 11:05 11:35 12:05 12:35 13:05 13:35 14:05 14:35 15:05 15:35 16:05 16:35
20 May 2015
From a statistical perspective, when calculating moving averages, we assign

a value to the t-th element of a time series by calculating an average figure
from the elements around the t-th element. Over time, the oldest elements
drop out continuously and are replaced by values assigned to the new element
of the time series.17
16
FT Press. United States (2007), Chapter 14, p. 272.
17

Although moving averages can be calculated for any time horizon; analysts
and traders tend to prefer the 10, 20, 30, 50, 60, 100 and 200-day moving
averages. Selecting the length of the examined time series is an important
exercise: in the case of shorter time series, moving averages tend to respond to
price movements more quickly and more sensitively; therefore, the probability
of a false signal is higher than in the case of longer time series.
The three most well-known and most commonly used moving averages are
the following:
• Simple Moving Average (SMA)
A simple moving average – also known as an arithmetic moving average –

can be formed by computing a simple arithmetic mean. The simple moving
average is one of the most popular indicators despite being a “lagging
indicator”, which means that it follows market developments with a lag and
assigns equal weight to each individual data item. Exponential and weighted
moving averages are designed to correct this deficiency.18
• Exponential Moving Average (EMA)
The exponential moving average assigns greater significance to fresh data;

therefore, as opposed to the simple moving average, it applies a greater weight
to recent data items. The weighting itself is not subject to clear-cut rules. Since
EMA reacts more sensitively to recent data, it signals trend reversals earlier.
EMA is calculated by multiplying the elements of the time series by the

weights assigned to each element and dividing the product by the sum of
the weights.19
• Weighted Moving Average (WMA)
Similar to the exponential moving average, the weighted moving average

also applies greater weights to more recent data than to older data; the
18
FT Press. United States, Chapter 14, pp. 272–277.
19
Indicators | 33
difference between the two indicators is the fact that the weights do not
increase exponentially in the case of WMA.
Chart 15
Weighted Moving Average – WMA
EUR/USD
Exponential moving average
1.15
1.145
1.14
1.135
1.13
1.125 Simple moving average
1.12
1.115
1.11
1.105
1.1
1.095
1.09
1.085
1.08
1.075
1.07
1.065
1.06 Weighted
1.055 moving
1.05
1.045
09 16 23 02 09 16 23 30 06 13 20 27 04 11 18
February 2015 March 2015 April 2015 May 2015
6.1.2 Moving Average Convergence/Divergence (MACD)20, 21

Developed by Gerald Appel in 1979, MACD is one of the most widely used
trend-following indicators among traders. MACD is computed as the difference
between two exponential moving averages – usually the EMA computed from
the 12-day and 26-day closing prices. The MACD line thus received oscillates
around zero; values above zero point to an uptrend, while negative values
signal a downtrend. In addition to the MACD line, a signal line – typically the
9-day exponential moving average of the MACD line – is also plotted with the
indicator. With 12, 26 and 9 as selected parameters, a positive value means
that the average price of the past 12 days was higher than the average price
of the past 26 days.
20
investments with technical analysis). Kecskeméti és Tsa Bt., (2006), pp. 112–116.
21
FT Press. United States, Chapter 14, pp. 436–437.

Although the values of 12, 26 and 9 are the most typical settings used by
analysts, depending on specific needs or trading style, any other parameters
can be chosen. In selecting the parameters, however, it should be remembered
that the shorter the time horizon, the more sensitive the indicator to market
events, which increases the number of potential false signals.
Similar to other trend following indicators, MACD produces lagged signals;

however, it is an accurate indicator of trend reversals and it is also a valid
indicator of oversold and overbought products. Experiences demonstrate that
it is best used when the market of the traded product shows great volatility.
Signals of the MACD indicator:
• When MACD crosses above the signal line, it should be interpreted as

a buy signal.
• When MACD crosses below the signal line, it should be understood as

a sell signal.
• Divergence of the indicator from the price – when the indicator and the
price move in the opposite direction – points to a reversal.
In the case of a sell signal in an uptrend, i.e. when MACD resides above the
centerline (0), experienced technical analysts recommend only the close-out of
an existing long position; taking on a sell (short) position is not recommended.
In a downtrend, with MACD below the centerline, the opposite action should
be taken: experts only recommend the close-out of the short position, without
taking on a long position.
Indicators | 35
Chart 16
MACD
Price EUR/USD
USD
1.41
1.4
1.39
1.38
1.37
1.36
1.35
1.34
1.33
1.32
1.31
1.3
1.29
1.28
1.27
Value
USD
0
–0.01
–0.02
–0.03
Value
USD
16 23 30 06 13 20 27 04 11 18 25 01 08 15 22 29 06 13 20 27 03 10 17 24 31 07
Aug. 2010 Sep. 2010 Oct. 2010 Nov. 2010 Dec. 2010 Jan. 2010 Feb. 2010
As shown on the chart, the divergence between MACD and the signal is often
shown at the bottom of the chart in the form of a histogram.
6.2 Momentum indicators

In making trading decisions, investors should not only consider the direction
of a trend, but also its quality.
The indicators presented so far signal market events and reversals with
a lag. Momentum indicators are designed to counteract this deficiency by
measuring the velocity at which the price of the underlying instrument
changes and using this information – the change in the momentum of the
market – to draw conclusions about the turn of a market trend well before
the reversal takes place.22
22
Martin J. Pring (1991): Technical Analysis Explained, III. 3rd edition, McGraw-Hill. United States, p. 127.

6.2.1 ROC (RATE OF CHANGE)23, 24
The ROC oscillator measures the percentage change in price over a given period
of time. The indicator is extremely simple to compute: it compares the current
price to an earlier price and presents the sequence of numbers thus received.
ROC moves parallel to the change in price; when the price increases, ROC
increases as well; when the price decreases, so does ROC. The higher the ROC
value, the more overbought the underlying instrument; the lower the ROC
value, the more oversold the underlying instrument. Extreme values mean
a sell signal in the case of an overbought market, and a buy signal in the case
of and oversold market.
Although there are two methods for scaling in charting ROC, it is important to
stress that this is a mere technicality and has no significance whatsoever in the
functioning of the indicator or the signals given by it. The indicator oscillates
around 100 in the first case and around 0 in the second case.
Chart 17
ROC
EUR/HUF
Price
HUF
321
318
315
312
309
306
303
300
297
Value
USD
4
2
0
–2
–4
–6
–8
01 08 15 22 29 05 12 19 26 02 09 16 23 02 09 16 23 30 06 13 20 27 04 11 18 25
Dec. 2014 Jan. 2015 Feb. 2015 March 2015 April 2015 May 2015
23
Steven B. Achelis: Technical Analysis from A to Z. 2nd edition. DO-C. United States, pp. 243–245.
24
Martin J. Pring (1991): Technical Analysis Explained, III. 3rd edition, McGraw-Hill. United States, pp.
129–131.
Indicators | 37
Although this indicator is typically used for short-term analyses (the 12-day
and the 25-day horizons are applied most frequently), it can obviously also
be used to examine longer periods: the 13-week and the 26-week horizons
are the most popular for medium-term analyses, and the 52-week horizon for
long-term analyses.
6.2.2 Relative Strength Index (RSI)25

The Relative Strength Index (RSI) was developed by J. Welles Wilder and
published in his book New Concepts in Technical Trading Systems. Designed
to assist in identifying the overbought or oversold status of a market, at first
glance, the name of the Relative Strength Index might be misleading. Indeed,
instead of measuring the strength of two instruments relative to each other,
this technical tool measures the internal strength of an underlying instrument
– relative to itself – by comparing the average price increases and decreases
of the instrument over a given period of time.
The value of the indicator oscillates between 0% and 100%; in the chart the
horizontal lines at the 30% and 70% levels indicate the boundaries of the
oversold and overbought levels.
Using RSI may be useful for observing any – long-term or short-term – horizon;
the creator of the index recommended the use of a 14-day timeframe.
It is equally true for this indicator that there is a negative correlation between
its volatility and the review period: the longer the period, the smaller the
magnitude of its fluctuations (the fewer the signals) and vice versa, the
magnitude of the fluctuations and the number of signals grow in line with
a decrease in the length of the period.
When the indicator moves upward from the oversold territory (level 30), it
should be understood as a buy signal; when it turns downward from the
overbought territory (level 70), it is a sell signal. Some traders prefer to observe
stricter rules and monitor level 20 and level 80 instead.
25
T he Technical Analyst (2010): Technical Trading Strategies. Global Markets Media Ltd. United Kingdom,
pp. 56–59.

Chart 18
RSI
EUR/HUF
Price
HUF
308.8
308.4
308
307.6
307.2
306.8
306.4
306
305.6
305.2
304.8
304.4
Value
HUF
70
60
50
40
30
20
10
00:00 04:00 08:00 12:00 16:00 20:00 02:00 06:00 10:00 14:00 18:00 22:00 02:00 06:00 10:00 14:00 18:00 22:00 02:00 06:00 10:00 14:00 18:00 22:00 02:00 06:00 10:00 14:00
18 May 2015 19 May 2015 20 May 2015 21 May 2015 22 May 2015
In addition, a buy or sell signal is also implied when the RSI diverges from the
price movement of the underlying instrument; indeed, such divergences point
to a trend reversal. In the case of positive divergence, the RSI increases while
the price of the underlying instrument decreases, and the opposite is true in
the case of negative divergence.
6.2.3 Stochastic26, 27, 28

Although it is not entirely clear who created the Stochastic indicator, it is
generally associated with the name of George C. Lane, who used the indicator
in the 1950s to identify the levels at which stocks are to be considered
overbought/oversold. The indicator compares the current closing price of the
underlying instrument to its price range over a period of time. As is the case
with ROC or RSI, the Stochastic is an oscillator-type momentum indicator, with
26
FT Press. United States (2007), p. 442.
27
28
Steven B. Achelis: Technical Analysis from A to Z. 2nd edition. DO-C. United States, p. 268.
Indicators | 39
a value oscillating between 0% and 100%. 0% indicates that the closing price
of the underlying instrument was the lowest closing price of the past period,
while 100% indicates the peak of the range over the time period covered.
Chart 19
Stochastic
EUR/HUF
Price
HUF
311
310
309
308
307
306
305
304
303
302
301
300
299
298
297
296
%K
70 %D
60
50
40
30
20
10
02 09 16 23 02 09 16 23 30 06 13 20 27 04 11
January 2015 February 2015 March 2015 April 2015 May 2015
The chart of the indicator consists of two stochastic curves – a fast stochastic
(%K) and a slow stochastic (%D) –, where the %D line is the moving average of
%K. Owing to this attribute, %D is less sensitive to price fluctuations than %K.
Similar to RSI, a horizontal line is commonly drawn at the 20–30% and at

the 70–80% levels as an indication of the boundaries of the oversold and
overbought zones.
Signals generated by the indicator:
Buy signals:
• %K and %D fall below a specific (20-30%) level, and then rise above that
level;

• the %K line rises above the %D line;
• t he %K line and the %D line rise within the oversold territory with
a parallel price decline (divergence).
Sell signals:
•%
K and %D rise above a specific (70-80%) level, and then fall below that
level;
• the %K line falls below the %D line;
• t he %K line and the %D line fall within the overbought territory with
a parallel price increase (divergence).
6.3 Volatility indicators

Volatility indicators ignore the direction of price movements and measure the
magnitude of price fluctuation. Below we present two volatility indicators: the
Bollinger bands and the ATR.
6.3.1 Bollinger bands

Developed in the early 1980s, the indicator was named after its creator, John
A. Bollinger. Bollinger bands are channel (‘band’) type indicators. A distinctive
characteristic of Bollinger bands is that the width of the price channel varies
based on the volatility of the prices: during periods of extreme price changes
(i.e. high volatility) the bands widen; during periods of low volatility, the bands
tighten.29
The indicator consists of three bands. The middle band is a simple moving
average (MA), typically calculated over a 20-day period. The lower and upper
bands (the two edges of the channel) are respectively derived by shifting the
medium line (MA) up and down by the number of the standard deviations of
the underlying instrument (e.g. 2 deviations).
29
Indicators | 41
Obviously, both the period of the moving average and the multiplier of the
standard deviation can be modified; however, J. Bollinger noted that the
indicator will not be reliable if the MA is calculated over a period shorter
than 10-days.30
Chart 20
Bollinger
EUR/HUF
328
326
324
322
320
318
316
314
312
310
308
306
304
302
300
298
296
294 Bollinger bands
292 (20 days)
05 12 19 26 02 09 16 23 02 09 16 23 30 06 13 20 27 04 11 18 25
January 2015 February 2015 March 2015 April 2015 May 2015
Signals of the Bollinger bands:
• A price move of the underlying instrument that originates at one band tends
to go all the way to the other band. This observation is especially useful in
when projecting price targets.
• The narrowing of the bands (i.e. a decline in volatility) increases the

probability of a sharp breakout in prices.
• It signals a continuation of the current trend when the price breaks out of
the bands.
30

• Bottoms and tops made outside the bands followed by bottoms and tops
made inside the bands signal a reversal in the trend.31
6.3.2 ATR (Average True Range)

Technical analysts basically use two methods for measuring price volatility:
one is the standard deviation around the moving average as applied in the
Bollinger bands, the other is the ATR.
As the RSI, this indicator was also conceived by J. Welles Wilder. As suggested
by its name, the ATR is the average of TR (the True Range); therefore, in order
to compute ATR, it is indispensable to determine the value of the TR indicator
first.
The True Range value is the greatest of the following:
1. Most recent candle’s high minus the most recent candle’s low.
2. Absolute value of the most recent candle’s high minus the previous close.
3. Absolute value of the most recent candle’s low minus the previous close.
High High
Close
Low Low
Low
1. 2. 3.
31
investments with technical analysis). Kecskeméti és Tsa Bt., (2006), p. 139.
Indicators | 43
The Average True Range is a moving average (typically 14-days) of the above
data series, i.e. the True Ranges.
Since the ATR measures volatility, its value is not an indication of the direction
of the price movements; it generates neither buy nor sell signals. The indicator
helps to spot reversals and identify the top and the bottom of the price range
and in practice, it is generally used in conjunction with other indicators.32
6.4 Volume-based indicators

Volume means the sum of market activity within a specific period; although
its level is independent of price, analysts can glean important information
from this data about market sentiment and mood swings.
An important characteristic of volume-based indicators is the fact that their

value is not derived from volume itself but from shifts in volume.
The use of volume-based indicators is based on the premise that changes

in volume precede price changes in time. Therefore, they serve as an early
warning for investors that a reversal in the trend is imminent.33 These signal
types can only be used in the case of financial products where volume data
are available real time.
6.4.1 OBV (ON BALANCE VOLUME)

Conceived by Joe E. Granville in the 1960s, the On Balance Volume indicator
is a money-flow indicator, which is intended to use the price and volume of
the underlying instrument to predict changes in the market of the underlying
instrument and to assess whether capital is flowing into or out of the specific
market.
32
33
FT Press. United States (2007), pp. 416–417.

Chart 21
OBV
OTP
Price
HUF
5,800
5,600
5,400
5,200
5,000
4,800
4,600
4,400
4,200
4,000
3,800
3,600
3,400
Value
HUF
232M
228M
224M
220M
216M
17 24 01 08 15 22 29 05 22 19 26 02 09 16 23 02 09 16 23 30 07 13 20 27 04 11 18
Nov. 2014 December 2014 January 2014 February 2015 March 2015 April 2015 May 2015
The value of the indicator is determined as follows.
• When the price rises, i.e. today’s close is higher than the previous close, the
OBV will be the sum of yesterday’s OBV plus today’s volume.
• When today’s close is equal to yesterday’s close, the OBV will be identical to
yesterday’s OBV.
• When today’s close is less than yesterday’s close, i.e. when the price
decreased, then the OBV will be yesterday’s OBV minus today’s volume.34
34
Indicators | 45
Signals of the OBV indicator:
• The indicator confirms the trend when it reaches new peaks or troughs in
parallel with the price curve.
• When the price movement precedes OBV movement (divergence), a trend

reversal can be expected.
6.4.2 Accumulation/Distribution (A/D)35, 36

Developed by Marc Chaikin, the Accumulation/Distribution index is a version
of OBV and like OBV, it is a momentum indicator that attempts the assess the
relationship between demand and supply by examining whether the market
of the underlying instrument is characterised by accumulation (the market
is controlled by buyers) or distribution (the market is controlled by sellers).
In addition to volume, the following parameters are required for the

calculation of the A/D index: closing price (C), low price (L) and high price
(H). The calculation can be presented with the following formula:
⎛
A / D = ⎜ volume ×
( C − L) − ( H − C ) ⎞ +1
⎝ H−L ⎟⎠
An upward shift on the indicator points to accumulation, while a downward

shift indicates distribution.
The trading signals of A/D are similar to those of OBV; in the case of divergence,
a reversal can be expected.
35
Steven B. Achelis: Technical Analysis from A to Z. 2nd edition. DO-C. United States, pp. 52–53.
36
FT Press. United States (2007), pp. 420–421.

7 Chart patterns37
Along with indicators, chart patterns – that can be clearly visualised by
connecting the peaks and dips of price movements – play an important role
in the toolkit of technical analysis.
Identifying chart patterns and understanding their characteristics can help

identify entry and exit points and the future direction of a trend. In analysing
chart patterns, technical analysts should always consider the accompanying
volumes.
There are two main group of patterns:
• continuation patterns;
• reversal patterns.
As suggested by the name, continuation patterns signal the continuation

of the current trend; when such a pattern is identified, investors should take
a position that benefits from the continuation of the given price movement.
Reversal patterns point to a reversal in the current market trend. Below we
present an overview of the most important pattern types.
7.1 Continuation patterns38

In the case of continuation patterns, the trend exhibits a temporary diversion
and, after the given pattern has taken shape, the price continues to move in
the direction of the trend. Once a continuation pattern has been identified,
investors should expand their positions consistent with the direction of the
trend or, in the lack of such a position, enter the market.
37
CI DIPLOMA COURSE – Markets International Ltd. November 2014, Chapter 11. Fundamental and
A
Technical Analysis, pp. 32–38.
38
investments with technical analysis). Kecskeméti és Tsa Bt., pp. 33–55.
Chart patterns | 47
7.1.1 Flags and pennants
The formation of flags and pennants and their characteristics are essentially
the same; the most important difference between the two patterns is in the
shape of the pennants. In the consolidation phase, when the flag pattern
begins to take shape, the price moves in a parallel band; when the pennant
is being formed, the prices form a symmetrical triangle where the trendlines
converge towards each other.
FLAG PENNANT
Breakout Breakout
These formations take shape in a short period of time; initially – during the
formation of the flagpole/mast – volume increases; however, the formation
of the pennants is always accompanied by low volume in both cases. Another
important similarity between the two patterns is the fact that the retracement
cannot exceed 38.2% of the flag/mast in either case. While in the case of
flags the slope of the pennants is in the opposite direction compared to the
prevailing trend, this is not necessarily true for the pennant.
After the conclusion of the consolidation, the previous trend is expected to

continue.
7.1.2 Ascending/descending triangle

Ascending and descending triangles are counted among the continuation
patterns and can last anywhere from a few weeks to a few months. As the
chart below illustrates, price peaks and dips converge to a single point, the
apex of the triangle.

The sign of the price breakout and that of the skewness of the triangle’s sloped
side is identical. Volume declines parallel to the formation of the pattern; the
breakout, however, is accompanied by high volumes in the case of this pattern
as well. In the case of an ascending triangle, the upper side of the triangle, and
in the case of a descending triangle, the lower side of the triangle is horizontal.
Market experience has demonstrated that breakouts typically occur at 50%
or 2/3 of the pattern.
ASCENDING TRIANGLE DESCENDING TRIANGLE
Breakout
Breakout
7.1.3 Wedge
The wedge pattern shows several similarities to the triangle pattern, but there
are a number of crucial differences between the two. Although the price
moves in a narrowing band with both patterns, in the case of a wedge pattern
highs and lows tend to tighten to a lesser degree compared to a triangle
pattern. The other difference is that the lines connecting the peaks in the
WEDGE IN AN WEDGE IN A
UPTREND DOWNTREND
Breakout
Breakout
Chart patterns | 49
wedge pattern typically point in the same direction and end in a peak at
a rather great distance from the pattern itself. The direction of the pattern is
always opposite that of the trend: upward trends are always broken by falling
wedges and vice versa, downward trends are interrupted by rising wedges.
The formulation of the pattern may take a period of 2 to 8 weeks.
7.1.4 Cup with handle

Cup with handle is a continuation pattern consisting of two parts. The cup
forms in advance – which may take several weeks or even months – and as
the cup is completed, the handle is formed in the brief consolidation period
before the breakout. Typically, the handle resembles a flag or a pennant that
slopes downward; other times it is just a short pullback.
CUP AND HANDLE
Breakout
Neckline
Handle
Cup
The formation of the pattern is coupled with peculiar volumes. As the price
approaches the bottom of the cup, volume declines continuously. Then, in the
upward phase, parallel to the upturn in buy pressures the volume increases as
well. The formation of the handle is characterised by low volume; at the same
time, at the breakout the volume surges again.
When a breakout occurs, price targets should be defined by measuring,

vertically to the neckline, the distance between the neckline and the bottom
of the cup.

7.2 Reversal patterns39
7.2.1 Head & shoulders
One of the most famous reversal patterns is the Head and shoulders pattern,
which contains three successive price peaks with the middle peak (head) being
the highest and the two outside peaks (shoulders) being lower. The pattern
Head
C Trendline
A E
Left shoulder Right shoulder
G
Neckline
B D
Chart 22
USD/JPY Head & shoulders
USD/JPY
Price/ Head
USD
134
132
130
118
Left shoulder Right shoulder
116
114
122
120
118
116 Neckline
114
112
110
108
106
104
102
a s o n d j f m a m j j a s o n d j f m a m j j a s o n d j f m a m j j a s o n
2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4
39
investments with technical analysis). Kecskeméti és Tsa Bt., pp. 58–68.
Chart patterns | 51
may form both at market peaks in an uptrend or at dips in a downtrend.
An uptrend is broken by a decline, which forms the left shoulder (AB), then
the uptrend continues and the head takes shape (C); this peak is followed
by another decline. Thereafter, the trend resumes but it cannot rise above
the previous peak (head), and the right shoulder is formed. While the left
shoulder still belongs to the bullish market, the right shoulder already marks
the beginning of the bearish market.
The peaks of the two shoulders do not need to be at the same level; however,
both need to be located below the head. The horizontal line connecting
the low points of the shoulders is called the neckline. Any time the price
falls below this level (typically accompanied by an expansion in volume), it
presages a further price decline and the reversal of the previous upward trend,
indicating that sell (short) positions should be taken.
In the case of an inverse Head and shoulders pattern, the opposite is true:
a downtrend turns into an uptrend.
Besides being easy to identify, another advantage of this chart pattern is its
ability to predict trend reversals with relatively high certainty.
7.2.2 Double top and Double bottom

Similar to the Head and shoulders pattern, the Double top and Double bottom
patterns are easy-to-spot reversal formations which, as suggested by their
names, consist of two peaks or two dips.
DOUBLE TOP DOUBLE BUTTOM

Peak 1 Peak 2
Resistance
Support
(neckline) Downtrend
Uptrend Support
(neckline)
Resistance
Buttom 1 Buttom 2

The height of the two peaks formed in an upward trend do not need to be
at the same height. If the price persistently falls below the support level (a
trough between two peaks) following the second peak, it indicates further
market/price falls and the reversal of the upward trend. A support break – as
is the case with the Head and shoulders pattern – is typically accompanied
by outstanding volumes.
The Double bottom is identical to the Double top in all characteristics, except
in the case of the former a downtrend turns into an uptrend.
The chart below illustrates the 2-year performance (2007–2008) of the

EUR/USD cross rate. It is clear from the chart that the uptrend seen in 2007
continued in the first half of 2008 as well. The quote tried to break through the
resistance level at 1.6000 twice (the double top was formed). On the second
occasion, quotes reversed from a level of 1.6038 – a record peak in the EUR/
USD cross rate – but ultimately the EUR was unable to appreciate above the
level of 1.60; consequently, the trend reversed and within a few months, the
EUR depreciated more than 20% against the USD.
Chart 23
EUR/USD Double top
EUR/USD
Price
USD Resistance
1.59
1.58
1.57
1.56
1.55
1.54
1.53 Support
1.52
1.51
1.5
1.49
1.48
1.47
1.46
1.45
1.44
1.43
1.42
1.41
1.4
24 31 07 14 21 28 04 11 18 25 03 10 17 24 31 07 14 21 28 05 12 19 26 02 09 16 23 30 07 14 21 28 04 11
Dec. 2007 January 2008 February 2008 March 2008 April 2008 May 2008 June 2008 July 2008 Aug. 08
Chart patterns | 53
7.2.3 Key Reversal
As opposed to the Head and shoulders and the Double top/bottom patterns,
the Key Reversal is a reversal pattern that can be best used in short-term
trading. As the Key Reversal pattern takes shape in an upward – and generally
accelerating – trend, in the first step the price climbs to a peak higher than
the previous one, opens at yet another high on the next day, but by closing
time it falls below yesterday’s low.
After a downtrend, at first the price falls below the local trough, opens at
yet another low on the next day, but by closing time the price rises above
yesterday’s high. The day of the Key Reversal is characterised by high volatility
and outstanding volumes.
Key Reversal Key Reversal

(uptrend) (downtrend)
Price opens Close price is
at new above
New local peak yesterday’s
peak high
Close price is
below New local
yesterday’s trough Price opens at
low another trough

8 Technical analysis in practice
Below we present a few practical examples based on the analysis methods
and tools described above.
8.1 USD/TRY daytrade

The chart below illustrates the movement of the USD/TRY cross rate on 27
February. Months of an upward trend presented a good opportunity for taking
up a long40 position. The Bollinger bands generated a buy signal, and RSI also
indicated that the market was oversold already (i.e. the continuation of the
previous uptrend was expected). Based on the technical signals, it was worth
entering the market close to the 2.4990 level. The soundness of the decision
was confirmed somewhat later by MACD, which also issued a buy signal.
Subsequently, the strengthening of the exchange rate continued to increase

without interruption to above the 2.515 level. At this level, the RSI shifted over
into overbought territory and the exchange rate also breached the upper
Chart 24
USD/TRY daytrade
USD/TRY
2.525
2.52
2.515 Close-out
2.51
2.505
2.5
2.495
2.49 Bollinger bands
buy signal
0.0030
0.0020
0.0010 MACD buy signal
0.0000
RSI overbought territory
60
40
RSI oversold tartomány
05:30 07:30 09:30 11:30 13:30 15:30 17:30 19:30
27 February 2015
40
Benefiting from the upward shift in the exchange rate; i.e. the appreciation of the US dollar.
Technical analysis in practice | 55

Bollinger band, increasing the probability of a reversal – at this point, the
previously opened position needed to be closed out. Subsequent exchange
rate movements demonstrated that closing out the position at the 2.5120
level was premature, and it was also much later that MACD eventually issued
a sell signal.
8.2 EUR/USD daytrade + stop loss

Before taking up a position, a market analysis should be formed. Although this
does not guarantee success in itself, it still improves the chances of completing
the trade with a positive result. Investors should examine the publication of
any macrodata or, in the case of stocks, any news regarding the company
and the sector on the given day that might have an impact on market events.
They should identify the direction of the general trend and enter the market
consistently with that trend. As the saying goes: “Trend is your friend”. Even
the most experienced traders are reluctant to trade against the general trend.
The example below confirms that success cannot be guaranteed even with
the best due diligence. The year 2014, and especially its second half, saw
Chart 25
EUR/USD daytrade + stop loss
EUR/USD
Bollinger bands Stop loss
1.254 sell signal
1.253
1.252
1.251
1.25
1.249
1.248
1.247
1.246
1.245
1.244
0.0010 Signal line not crossed
0.0005 by MACD
0.0000
–0.0005
–0.0010 RSI – overbought territory
60
40
03:30 05:30 07:30 09:30 11:30 13:30 15:30 17:30 19:30 21:30 23:30 01:30 03:30 05:30
18 November 2014 19 November 2014

a strong appreciation of the USD. By the end of the year, the US currency had
strengthened against the EUR from a level close to 1.4000 to 1.1500.
The Bollinger bands signalled a trend reversal and, hovering in overbought

territory, the RSI also produced a sell signal. It appeared to be a sound decision
to enter the market close to the 1.2530 level; the price target and the stop loss
were defined at the level of 1.2500 and 1.2545, respectively; in terms of the
risk/reward ratio, this translated to 33/12 = 2.75. The decision was expected
to be confirmed by the MACD signal as well; however, it did not happen as
the MACD did not cross the signal line and generated a sell signal only later,
after punching through the stop-loss.
Ultimately, the exchange rate did not reach the 1.2500 level; the trend reversed
just a few points before reaching the price target, and, after reaching the stop-
loss level, the trade was closed out automatically.
8.3 EUR / USD double bottom

The EUR/USD chart clearly shows that after months of an upward trend, in
March the appreciation of the USD came to an abrupt halt, creating the first
Chart 26
EUR/USD double bottom
EUR/USD
1.3
1.29
1.28
1.27
1.26
1.25
1.24
1.23
1.22
1.21
1.2
1.19
1.18
1.17
1.16 Support Price target
1.15
1.14
1.13
1.12
1.11 Neckline
1.1
1.09
1.08
1.07
1.06
1.05
Buttom 1 Buttom 2
22 29 06 13 20 27 03 10 17 24 01 08 15 22 29 05 12 19 26 02 09 16 23 02 09 16 23 30 06 13 20 27 04 11
Sep. 2014 Oct. 2014 Nov. 2014 Dec. 2014 Jan. 2015 Feb. 2015 March 2015 April 2015 May 15
Technical analysis in practice | 57

bottom close to the 1.0460 level. In the following weeks the exchange rate
retraced to the 1.1000 level, and then the USD began to weaken once again,
but failed to reach another minimum, and the second bottom was formed
at the 1.0520 level. At that point, the direction reversed once again with the
USD dynamically breaking through the neckline, which signalled a market
entry. In this case, the price target was defined at the first support line, at the
1.1500 level.

9 References
Malkiel, Burton G.: A Random Walk Down Wall Street. International Training Center
for Bankers, Budapest
Kirkpatrick, C.D. – Dahlquist, J. R. (2007): The Complete Resource for Financial Market
Technicians. FT Press. United States
Cselovszki, R. (1993): A Dow-elmélet (The Dow Theory). Bank & Tőzsde, 1993/4, 12
February
Cselovszki, R. (1992): Elliott hullámelmélete I.-II (Elliott Wave Theory I.-II). Tőzsde Kurír,
1992/38,39. 17, 24 September
Kecskeméti, I. (2006): Tőzsdei befektetések a technikai elemzés segítségével (Stock

exchange investments with technical analysis). Kecskeméti és Tsa Bt.
Pring, M.J. (1991): Technical Analysis Explained. 3rd edition, McGraw-Hill. United States
Achelis, S.B. (1995): Technical Analysis from A to Z. 2nd edition. DO-C. United States
The Technical Analyst (2010): Technical Trading Strategies. Global Markets Media Ltd.
United Kingdom
ACI DIPLOMA COURSE – Markets International Ltd. (November 2014)
References | 59
MNB Handbooks
Introduction to technical analysis:
charts, opening and managing positions
Print: Prospektus–SPL consortium

H-8200 Veszprém, Tartu u. 6.

MNB Introduction to Technical Analysis

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

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

MNB Introduction to Technical Analysis

Загружено:

Авторское право:

Доступные форматы

M AGYA R N E M Z ET I BA N K

Introduction to technical analysis:

MAGYAR NEMZETI BANK

Introduction to technical analysis: charts, opening and managing positions

Written by Zoltán Végh

(Directorate Money and Foreign Exchange Markets, Magyar Nemzeti Bank)

This Handbook was approved for publication by István Veres, Director

Published by the Magyar Nemzeti Bank

Publisher in charge: Eszter Hergár

H-1054 Budapest, Szabadság tér 9.

ISSN 2498-8413 (Print)

ISSN 2498-8421 (Online)

5 Introduction to technical analysis 24

8 Technical analysis in practice 55

In 1948, Robert D. Edwards and John Magee published Technical Analysis of

Initially, the application of technical analysis was limited almost exclusively

The purpose of this booklet is to give an insight into the fundamentals of

6 | MNB Handbooks • Introduction to technical analysis

It should be emphasised that neither fundamental, nor technical analysis can

2.1 Fundamental analysis

Fundamental analysts try to measure the “intrinsic value” of companies. They

In determining the value of a business, fundamental analysts examine the

• Profitability indicators (ROA, ROE, ROS),

– measuring the company’s earning potential;

– measuring how efficiently a company uses its assets;

• Leverage indicators (equity ratio, interest coverage ratio),

– indicating the company’s indebtedness;

• Liquidity indicators (current ratio, cash ratio, interval measure),

– indicating the company’s solvency; and

• Market indicators (market capitalisation, P/E, EPS, P/BV, dividend yield),

– measuring investors’ assessment of the company.

The fundamental analysis of foreign exchange (FX) markets is extremely

2.2 Technical analysis

8 | MNB Handbooks • Introduction to technical analysis

1. Market action discounts everything:

Market volume, which is viewed as an internal attribute of the market, also

2. History repeats itself:

Despite the considerable difference between the two methods, they

10 | MNB Handbooks • Introduction to technical analysis

3.1 Dow theory5, 6

The basic tenets of the theory

2. Based on the theory, three market trends prevail simultaneously in

We distinguish between primary, secondary and minor trends and all of

5. Although transaction volume does not signal a trend reversal, increased

6. The trend continues until there is a clear indication of a reversal. Numerous

12 | MNB Handbooks • Introduction to technical analysis

Source: THOMSON REUTERS

3.2 Fibonacci sequence theory7

The solution was an (infinitely continuing) sequence of numbers, the Fibonacci

The sequence thus received has some remarkable characteristics:

100% /1.618 = 61.8%

61.8% /1.618 = 38.2%

38.2% / 1.618 = 23.6%

Price BUX INDEX

Source: THOMSON REUTERS

14 | MNB Handbooks • Introduction to technical analysis

To chart these levels, draw a horizontal line at a designated minimum and

• The ideal retracement level is at 61.8%.

3.3 Elliott wave theory8, 9

In Elliott’s wave theory, price movements are essentially determined by three

• patterns, which take the shape of waves or wave formations;

16 | MNB Handbooks • Introduction to technical analysis

• Profitability indicators (ROA, ROE, ROS),

• Leverage indicators (equity ratio, interest coverage ratio),

• Liquidity indicators (current ratio, cash ratio, interval measure),

• Market indicators (market capitalisation, P/E, EPS, P/BV, dividend yield),

5. Although transaction volume does not signal a trend reversal, increased

6. The trend continues until there is a clear indication of a reversal. Numerous

• The ideal retracement level is at 61.8%.

• patterns, which take the shape of waves or wave formations;

• and the higher the turnover around it,

• the stronger the specific level.

• trend following indicators,

• Simple Moving Average (SMA)

• Exponential Moving Average (EMA)

• Weighted Moving Average (WMA)

• When MACD crosses above the signal line, it should be interpreted as

• When MACD crosses below the signal line, it should be understood as

• the %K line falls below the %D line;