SUPPORT AND RESISTANCE

Think of security prices as the result of a head-to-head battle between a bull(the buyer) and a bear(the seller).The bulls push prices higher and the bears push prices lower.The direction prices actually move reveals who is winning the battle.

Markets cycle between support and resistance. Support is a wall of buyers while resistance is a wall of sellers.

THE BATTLE BETWEEN BUYERS/SELLERS, BULLS/BEARS, SUPPORT/RESISTANCE, DEMAND/SUPPLY

A market goes up until it hits a wall of sellers. This wall is composed of people who bought the market before it went down, so they are losing money and are just waiting until the price comes back upto the price where they bought. When price comes back upto their buying price, they sell so they can break even. There are those buyers who bought at the lower price and wait for price to hit the wall of sellers so they can sell and take profits. The people who sell short at the wall, attempting to profit from price bouncing back down off the wall of sellers. In summery the wall of sellers is composed of three elements of traders those trying to break even, profit takers and short sellers.

A market goes down until it hits a wall of buyers. This wall is composed of people who sold short the market before it went up, so they are losing money and are just waiting until the price comes back down to the price where they sold short. When price comes back down to their selling price, they buy back their position so they can breakeven. There are those sellers who sold at the higher price and wait for price to hit the wall of buyers so they can buy back and take profits. The people who buy at the wall attempting to profit from price bouncing back up off the wall of  buyers. In summery the wall of buyers is composed to three elements of traders those trying to breakeven, profit takers and buyers looking to profit from the upward bounce.       

The foundation of most technical analysis tools is rooted in the concept of supply and demand.

Resistance is equivalent to "supply" line. When the prices increase, the quantity of sellers also increases, as more investors are willing to sell at these higher prices. When too much selling occurs, however, prices retreat. When this happens repeatedly near a specific price level, resistance forms at that price level.

Support is equivalent to "demand" line. When the prices decrease, the quantity of buyers increases, as more investors are willing to buy at lower price. When too much buying occurs, however, prices rise. When this happens repeatedly near a specific price level, support forms at that price level.  

In a free market, support and resistance lines are continuously changing. As investor expectations change, so do the prices buyers and sellers feel are acceptable. A breakout above a resistance level is evidence of an upward shift in the demand line as more buyers become willing to buy at higher prices. Similarly, the failure of support level shows that the supply line has downward. 

CHARTS

The foundation of technical anlysis is the chart.In this case,a picture is truly worth a thousand words.  

LINE CHART:A line chart is the simplest type of chart.As shown in the chart of GBP/JPY in below figure,the single line represents the security's closing price on eachday.Dates are displayed along the bottom of the chart and prices are displayed on the side(s).

A line chart's strength comes from its simplicity.It provides an uncluttered,easy-to-understand view of a security's price.Line charts are typically displayed using a security's closing prices.

BAR CHART: A bar chart display's a security's open?(if available),high,low and closing prices.Bar charts are the most popular type of security chart.the top of each vertical bar represents the highest price that the security tradednduring the period,and the bottom of the bar represents the lowest price that it traded.A closing tick is displayed on the right side of the bar to designate the last price that the security traded.If opening prices are available,they are signified by a tick on the left side of the bar.

CANDLESTICK CHARTS: Candlestick charts displays the open,low,and closing prices in a format similar to a modern-day bar chart,but in a mannar that extenuates the relationship between the opening and the closing prices.Candlestick charts are simply a new way of looking at prices;they don't involve any calculations.Each candlestick represents one period of data.

UPPAR SHADOW     :The highest price

LOWER SHADOW    :The lowest price

THE CENTER SECTION : real body

The opening or closing price,whichever is greater,The opening or closing price,whichever is less,depends on up/down or holow/filled candle body.


OTHER CHART TYPES: Security prices can also be displayed using other types of charts Equivalume,point and fingure,etc

 

PRICE FIELDS

• Technical analysis is based almost entirely on the analysis of price and volume. The fields that define a security's price and volume are explained below.

Open-- This is the price of the first trade for the period(e.g., the first trade of the day). When analysing daily data , the open is especially important as it is the consensus price after all interested parties were able to "sleep on it".

High-- This is the highest price that the security traded during the period. It is the point at which there were more sellers than buyers.(i.e. there are always sellers willing to sell at higher prices, but the high represents the highest price that buyers were willing to pay).

Low-- This is the lowest price that the security traded during the period. It is the point at which there were more buyers than sellers(i.e., there are always buyers willing to buy at lower prices, but the low represents the lowest price sellers were willing to accept).

Close-- This is the last price that the security traded during the period. Due to its availability, the close is the most often used price for analysis. The relationship between the Open(the first price) and the Close(the last price) is considered significant by most technicians. 

Volume-- This is the number of trades/contracts that were traded during the period. The relationship between prices and volume(e.g., increasing prices accompanied by increasing volume) is important.

Open interest--  This is the number of outstanding contracts(i.e., those that have not been exercised, closed, or expired) of a future or option. Open interest is often used as an indicator.

Bid--  This is the price a market maker is willing to pay for a security(i.e., the price you will receive if you sell).

Ask-- This is the price a market maker is willing to accept(i.e., the price you will pay to buy a security).

These simple fields are used to create literally hundreds of technical tools that study price relationships, trends, patterns. etc.

Not all of these price fields are available for all security types.

                   FUTURES  MUTUALFUNDS  STOCKS  OPTIONS
OPEN               Yes                    No                 Often          Yes
HIGH                Yes            Closed end           Yes            Yes
LOW                 Yes             Closed end           Yes            Yes
CLOSE              Yes              Yes(*NAV)          Yes            Yes
VOLUME         Yes            Closed end            Yes             Yes
OPEN INT       Yes                   N/A                N/A            Often
BID             Intraday         Closed end        Intraday      Intraday
ASK            Intraday         Closed end        Intraday      Intraday

 

Automated Trading

If we accept the fact that human emotions and expectations play a role in security pricing,we should also admit that our emotions play a role in our decision making. Many investors try to remove their investing by using computers to make decisions for them. The concept of "HAL" the intelligent computer in the movie 2001, is appealing. 

Mechanical trading systems can help us to remove our emotions from our decisions. Computer testing is also usefull to determine what has happened historically under various conditions and to help us optimize our trading techniques. Yet since we are anlaysing a less than logical subject(human emotions and expectations), we must be carefull that our mechanical systems dont mislead us into thinking that we are anlysing a logical entity. 

That is not to say that computers aren't wonderful technical anlysis tools-- They are indispensable. In my totally biased opinion, technical analysis software as done more to level the playing field for the average investor than any other nonregulatory event. But as a provider of technical analysis tools, I caution you not to let the software lull into believing markets are as logical and predictable as the computer you use to analyze them.      

THE ROULETTE WHEEL

In my experience,only a minority of technicians can determine future prices consistantly and accurately.However,even if you are unable to forecast prices accurately.technical analysis can be used to consistantly reduce your risks and improve your profits.

The best analogy I can find on how technical can improve your investing is a roulette wheel.I use this analogy with reservation as gamblers have very little control when comparing to investors(although considering the actions of many investors,gambling may be very appropriate analogy).

A casino makes money on roulette wheel,not by knowing what number will come up next,but by slightly improving their odds with the addition of a 0 and 00.

Similarly,when an investor purchases a security,he doesn't know that its price will rise.But if he buys a stock when it is in a rising trend,after a minor sell-off,and when intrest rates are falling,he will have improved his odds of making a profit.That's not gambling-- it's intelligaence.Yet many investors buy securities without attempting to control the odds.

Contrary to popular belief,you do not need to know what a security's price's will be in the future to make money.Your goal should simply be to improve the odds of making profitable trades.        Even if your analysis  is as simple as determining the long,intermediate, and short term trends of the security,you will have gained an edge that you would not have without technical analysis.

Consider any of the chart,where the trend is obviously down and there is no sign of a reversal,      While the company may have great earnings prospects and fundamentals,it just doesn't make any sense to buy the security untill there is some technical evidence in the price that this trend is changing.

FUNDAMENTAL ANALYSIS

FUNDAMENTAL ANALYSIS

If we were all logical and could separate our emotions from our investment decisions, then fundamental analysis, the determination of price based on future earnings, would work magnificently. And since we would all have the same completely logical expectations, prices would change only when quarterly reports or relevant news was released. Investors would seek “overlooked” fundamental data in an effort to find undervalued securities.

The hotly debated “efficient market theory” states that the security prices represent everything that is known about the security at a given momentum. This theory concludes that it is impossible to forecast prices, since prices already reflect everything that is correctly known about the security.

THE FUTURE CAN BE FOUND IN THE PAST

If prices are based on investor expectations, then knowing what a security/currency should sell for (i.e. fundamental analysis) becomes less important than knowing what other investors expect to sell for. That’s not to say that knowing what a security/currency sell for isn’t important—it is. But there is usually a fairly strong consensus of a stock’s/currency future earnings that the average investor cannot disprove.

Technical analysis is the process of analyzing a security/currency’s historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e. current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself, while others would suffice to say that we should learn from the past.

THE HUMAN ELEMENT IN TRADING

THE HUMAN ELEMENT AND EXPECTATIONS IN TRADING 

The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security’s price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans are not easily quantifiable or predictable. This fact alone will keep any mechanical trading system from consistently.
Because humans are involved, I am sure that many of the world’s investment decisions are based on irrelevant criteria. Our relationships with our family, our neighbors, our employers, the traffic, our income and our previous success and failures all influence our confidence, expectations and decisions

Security prices are determined by money management and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers and wealthy and the wanting. This breadth of market participants guarantees an element of unpredictability and excitement.

Technical Analysis

Technical Analysis

Should I buy today? What will prices be tomorrow, next week or next year? Wouldn’t investing be easy if we knew the answers to these seemingly simple questions? If you are following this blog in the hope that my experienced technical analysis has the answers to these questions, I’m afraid I have to disappoint you early—it doesn’t. However, If you are following this Blog with the hope that my experienced technical analysis will improve your investing and in increasing your profits, I have good news-it will!

The term “technical analysis” is a complicated-sounding name for a very basic approach to investing. Simply put, technical analysis is the study of prices, with charts being the primary tool.
The roots of modern-day technical analysis stem from the Dow Theory. Stemming either directly or indirectly from the Dow theory, these roots include such principles as the trending nature of prices, prices discounting all known information, confirmation and divergence, volume mirroring changes in price, and support /resistance. And of course, the widely followed Dow Jones Industrial Average is a direct offspring of the Dow theory.

Dow’s contribution to a modern-day technical analysis cannot be understated. His focus on the basics of security price movement gave rise to a completely new method of analyzing the markets.