Fundamentals-of-Technical-Analysis

•Philosophy–whytechnicalanalysisworks•ChartingbasicsIncorporatingtechnicalanalysiswithfundamentalanalysisInter-marketanalysis23“Themarketreflectsallthejobberknowsabouttheconditionofthetextiletrade;allthebankerknowsaboutthemoneymarket;allthatthebest-informedpresidentknowsofhisownbusiness,togetherwithhisknowledgeofallotherbusinesses;itseesthegeneralconditionoftransportationinawaythatthepresidentofnosinglerailroadcaneversee;itisbetterinformedoncropsthanthefarmeroreventheDepartmentofAgriculture.Infact,themarketreducestoabloodlessverdictallknowledgebearingonfinance,bothdomesticandforeign.”4Tounderstandhoweconomiesworkandhowwecanmanagethemandprosper,wemustpayattentiontothethoughtpatternsthatanimatepeople'sideasandfeelings,theiranimalspirits.Wewillneverreallyunderstandimportanteconomiceventsunlessweconfrontthefactthattheircausesarelargelymentalinnature.“Fromthenewbook-AnimalSpirits:HowHumanPsychologyDrivestheEconomy,andWhyItMattersforGlobalCapitalism5Firstknownusewasin1700sinJapanfortradingriceUntilafterWWIIinU.S.,technicalanalysiswastheonlywidelyusedformofsecurityanalysis◦NoreliablefundamentaldataavailableuntilSecuritiesActof1933implemented◦Priorto1930sFundamentaldatawasnotreliable–releasingfalsefinancialinformationwascommonInsidertradingwaslegalandcommon–insiderssoldandpassedoninfotoothers.ThisactuallyimprovedaccuracyofTAsinceallinformationcouldbeutilizedintrading.1934–publicationofSecurityAnalysisbyGrahamandDoddlaunchesfundamentalanalysisfield1949–RobertMcGeechargedwithsecuritiesviolationsbySECforTA-basedrecommendationsFederalReservepaperin2000citedefficacyofTABankofJapanusesTAforcurrencytrading2005–SECacceptsCMTexamfortechnicalanalystsinlieuofSeries86Academiahasmovedfromstrongformmarketefficiency/antiTAtothepointwheremanyuniversitiesoffercoursesinTA.“Suretechnicalanalysisworksinpractice,butitwillneverworkintheory.”CFABodyofKnowledgenowincludestechnicalanalysis67Arestockpricesarrivedatusingfundamentalvaluation:ORAretheyarrivedatbytheforcesofsupplyanddemand?8Onarealtimebasis,thepriceofanyfreelytradedsecurityisbasedonthebalancebetweensupplyanddemandFormanymarketparticipants,fundamentalanalysisisthebasisoftheirdecisionsButfundamentalanalysisisonlyoneofmanyinputsanddifferentanalystsproducedifferentvaluationsTechnicalanalysisisthestudyofrealtimemovementsinprice,volumeandtrend◦Interactionbetweensupplyanddemand9TechnicalanalysisprovidesatooltopredictsecuritiespricesusingpriceandvolumedatadisplayedgraphicallyKeepinmindthattechnicalanalysisisoftensubjective,particularlyinrecognizingpatternsAlso,fornearlyeverywidelyacceptedtechnicalrule,thereisacontrarianrule-ifeveryoneisbullish,thereisnoonelefttobuy,sopriceswilldecline.10Allinformationiscontainedincharts◦Newsisgenerallycorrectlyanticipatedbythemarketspriortoitsofficialreleaseorevenitsoccurrence.e.g.,politicalfuturesmarkets’predictionofelectionoutcomesChartpatternsareduetoinvestorpsychologyPatternsoccurrepeatedlyandcanbeusedtoforecastmarketsTechnicalanalysisworksforanyfreelytradedmarketEquitiesFixedIncomeCommoditiesCurrenciesDomesticorInternationalTechnicalanalysisworksforanytimeframeDaytraderLong-terminvestor•Behavioralfinanceusessocialpsychologytoexplainmarketanomalies•Technicalanalysisprovidesasetoftoolstotrackandanalyzemarketaction,whetherdrivenbyrationalorirrationalfactors•Humansusuallyactrationally,butoftenactirrationallyandtechnicalanalysisallowsforanalysisofbothinputs•Thefieldofbehavioralfinanceisrecognizingareasofrepeatedirrationalbehavior•AcademiaandtheCFAcurriculummovingawayfromefficientmarketshypothesisandacceptingbehavioralfinanceandeven(gasp)technicalanalysis•Behavioralfinancerecognizesthathumanirrationalityoftenimpactsinvestments,whiletechnicalanalysisprovidesthetoolstorecognizeandprofitfromthisbehavior•Technicalanalysisworksbecausehumans,eitherindividuallyoringroups,tendtorepeattheirbehavior•Technicalanalysisallowsustoidentifybehavioralpatternsinstocksandprofitfromrepetitionsofsuchinvestorbehavior14Candlestickchart◦Eachcandlehastwoelements:bodyandwick/shadowHIGHCLOSEOPENLOWWhitebodymeansmarketclosedUPCloseOpenHIGHOPENCLOSELOWDarkbodymeansmarketclosedDOWNCloseOpen152001ASOND2002MAMJJASOND2003MAMJJASOND2004MAMJJASOND2005MAMJJASOND2006MAMJJA-2-10123456789101112131415161718192021222324252627282930313233343536TASERINTL(8.69000,8.70000,5.83000,6.17000,-2.48000)161.Anuptrendisdefinedasaseriesofhigherlowsandahigherhighs2.Adowntrendisdefinedasaseriesoflowerlowsandlowerhighs2.OB(overbought)istheupperparameterofatrend3.OS(oversold)isthelowerparameterofatrend17Trendlinesindicatetherelativestrengthofbuyersandsellers•Upwardslopingtrendlinemeansmorebuyingpressurethansellingpressure•Downwardslopingtrendlinemeansmoresellingpressurethanbuyingpressure2003Dec2004FebMarAprMayJunJulAugSepOctNovDec2005FebMarAprMayJunJulAugSepOct10000200003000040000500006000070000x1000333435363738394041424344454647484950515253545556575859606162636465666768EXXONMOBIL(60.5500,61.0500,58.9000,58.9500,-1.60000)MayJuneJulyAugustSeptemberNovemberDecember2005Februar