The Technical Analysis Technical Analysis nThe oldest way of asset analysis. nSome principles and processes of technical analysis were used in the Asia rice market since the 18th century. nModern history of technical analysis is related with Charles H. Dow (1851-1902). qWilliam Hamilton qRobert Rhea nDow theory during 30 years nOthers: qW. D. Gann that earned more than 50 millions dollars using by own principles and methods known as a Gann Theory. According to angles in charts he looked for moments when trend is going to turnover. qR. Elliont nThe Elliont waves qA bull market is divided in three phases §5 bull waves §3 bear waves §A classical pattern that is repeated and can be called a cycle § § Background nTechnical analysis is the method that want to predicted a future development of market by trends and the chart researches. qBasic information sources are nDevelopment of security prices nVolume of trade nDevelopment of market indices Technical Analysis nThe criticism of fundamental analysis qThe intrinsic value is not able to describe the real situation in the capital market because is not able to describe psychological aspects and other non-fundamental and technical aspects. qTechnical analysis does not interest in fundamental factors that influence security price but focus on activity and movement in the market. nBelieve that there exist factors that have an impact on the security price but they are qwith unpredictable character and qthat are not covered by fundamental analysis Technical Analysis nTechnical analysis is summarized in three thesis: n1. Security prices mirror all known information. But reaction of security rate to new information is ngradual and nslow qThis gradual process of adjustment of some new information leads to a market trend. qTechnical analysis ndoes not care about reasons of the security price movement but nabout this movement in itself. Technical Analysis n2. There have been the patterns of security price movements. qIf they are successful and in time recognize kind of the pattern they are able to prognoses future development of security rate. n3. History is repeated qMore than 100 years technical analyzers have been looking for patterns they classified and confronted them. qAs the result they founded out that the most of the patter is repeated because human behavior repeated as well. Technical Analysis nAccording to the main mentioned thesis there are some problems in TA application qHistory is not repeated exactly and investor can not expect exact repeating of patterns. It leads to subjective opinion of analyzer and inaccuracy of analysis results. qIt means that result of analysis is only na framework that nhappened with particular probability. qThe technical analysis answers the question: nWhen and what is going to happen -> it means that it is used for timing nIn contrast to fundamental analysis that TA is not used for stock picking (technical analysis is not able to find over or under estimate securities) Technical Analysis nMain advantages qIt is not data-intensive qThe background of basic methods uses by technical analysis is simple qMethods of technical analysis can by apply in any market nSecurities nCommodities or nExchange currencies n n Dow Theory nOn the basis of security prices study assumed conclusion that qAs market barometry can be used the average closing rate of particular securities. qThis can be used as a benchmark of a whole market performance. qFirst application in 1884 - Railroad Average first index composes of 11 stocks (9 stocks of railroad companies) qIn 1896 Dow created new index because Railroad Average was able to describe only part of the economy because of limited number of sector securities. qDow Jones Industrial Average - average of closing prices of 12 securities nHighly speculative nIndustry companies qIn 1928 basis of DJIA extended to 30 securities. qValue of DJIA first published in Wall Street Journal in May 1896 its value was 40,96 points (that days 12.500 points) qFormer Railroad Average is still used and it is known as a Dow Jones Transportation Average (DJTA). Dow Theory nStudy of historical performance of capital market gave him an evidence that averages of security price are moved in trends. nThe most of the securities in the market have similar development. The market performance can be describe by using of indices. nAll relevant factors that influence supply and demand are absorbed by index. qIndex represents an accurate image of the situation in the market. Main ideas of Dow Theory nIndexes that are created as an average of closing prices of securities includes all relevant information. q main thesis of technical analysis nMovement of stock rates can be divided in three basic trend movements qPrimary – takes one year or more and it is consider to be a main trend or main way of development. qSecondary - takes from 3 weeks to 3 months. It is consider to be reverse to the development of the main trend. qTertiary – the shortest trend less then 3 weeks. It is consider to be insignificant development in primary or secondary trend. q Main ideas of Dow Theory AdC_26 Main ideas of Dow Theory nFuture development of security prices (it means continuing of trend or its turnover) can be derivate from the recent market situation qTrend where peaks are rising it means the trend where every next peak is higher then previous peak and whose every bottom is higher then previous bottom is known as a rising trend or a Bull Trend. qTrend where peaks and bottoms are declining it means trend whose every bottom is lower then previous and every peak is lower then previous is known as a declining trend or a Bear Trend. Bull Trend bull_trend Bear Trend bear_trend Main ideas of Dow Theory nThe turnover of trend occurs if qRising sequence of peaks and bottoms is interrupted in case of Bull Trend qDeclining sequence of peaks and bottoms is interrupted in case of Bear Trend. qIn order to have an evidence of trend turnover is necessary to have interrupted sequence in both n bottoms and peaks. Primary Trend primary_trend Main ideas of Dow Theory n1.The main trend consists of three phases qThese three phases can be identify in a bull as well as in a bear trend. nThe best-informed investors start buying in situation when index reaches its bottom - accumulate phases nPositive information about economy and profit grow is spreading. In Bull Trend is this phase characterized by the massive growth of capital market and is known as a growing phase. In this phase are trading institutional investors especially. nIn third phase there are trading especially retail investors. This phase is known as a distribution phase. At the end of this phase optimistic stock euphoria is over. Security price reaches its peak. Bull Trend is over and starts Bear Trend. Main ideas of Dow Theory n2.Volume of trade must confirm trend qVolume of trade reflects total market activity with a particular instrument in a determine time. qVolume of trade can be used as a supplement information that can confirms market signals. Trend is confirmed in the moment when the volume of trade is rising. The situation when volume of trade is decreasing it is signal of market weakness and investor can expect with high probability trend turnover. Main ideas of Dow Theory n3.The trend exists until in the market are signals of new trend qThis principle contains basic aim of the technical analysis that is the identification of a trend turnover. nTools qCharting qTechnical indicators Main ideas of Dow Theory qMain problems of Dow Theory nSignals that are identify by Dow theory come with a delay it means that investors drop potential profit at the beginning of every trend. qDow Theory is “Trend-Following” that reacts the circumstances then occurred q The aim of Dow theory is to identify kind of primary trend and its turnover on the market as a whole. Dow theory is not able to offer sell or buy signals of a particular security. qDow theory is oriented only on primary market trend qDow theory is not able to define duration and power of primary trend. n Main ideas of Dow Theory nDespite of all problems Dow Theory is theoretical resource of technical analysis qFrom 1897-1991 Dow Theory delivered 40 correct signals of important market actions qWrong signals were only 5 n Methods and tools of technical analysis nCharting qMethod base on using of charts to identify trend or its turnover and derive buy or sell signals. qAnalyzers looking for standardized formation by studying of security price development. nStandardized formation is a pattern in security rate development. qStandardized formation are emerged repeatedly and their correct identification can be used for the capital market prognoses. Methods and tools of technical analysis nTwo main formations qConsolidated formation that confirms trend, or qReverse formation that confirms turnover of trend nThe simplest tool how to find out trend is by Trend Line. qIn Bull Trend Line establishes if you put together local bottoms qIn Bear Trend Line establishes if you put together local peaks Trend Line – Bull market 20060315-chart_a_LG Trend Line – bear market 20060418-chart_b_LG Methods and tools of technical analysis nTrend Line can be qRising in the case of Bull Trend qDeclining in the case of Bear Trend, or qStagnant in the case of market without significant trend nImportance and the precision of the prediction is determined by qDuration of time period without any interruption of line qNumber of bottom or peaks nIf the line is broken it is a signal of trend turnover. qAs a break-out is consider growth or decline of the security price about at least 3 % or for at least 2 trading days. Methods and tools of technical analysis nTrend channel qCompletion of Trend Line by addition of line that puts together peaks in case of Bull Trend or qBottoms in the case of Bear Trend qTrend Channel is a spread in which is security price developing. qSpread of correctly established Trend Channel can be used for prediction of short-time buy or sell signals. n Trend Channel technical-analysis-fig38 Methods and tools of technical analysis nSupport level and Resistance Level qBoth base on psychological characters qSupport level nLevel in which investors stop their security sales because security price is too low. nSecurities their rates correspond with support level are very cheap and their supply is higher than demand. nMarket that is developing near support level is also known as a oversold and in short time is expected rising demand about these cheap securities and growth of their prices. nBear Trend will transfer to Bull Trend Methods and tools of technical analysis qResistance level nRepresents level where the growth of security rates are finished. nInvestors find out that security price is too high and securities are expensive. nDemand is higher then supply. nMarket that is developing near Resistance Level is known as a overbought and in short time is expected decline in demand. nBull Trend is replaced by Bear Trend. n n nČEZ, support: 30%, resistance: 70% Types of Charts nLine Chart qThe simplest tool of Technical analysis qBase on closing security prices during determined period. qThis data are draw as points in chart and join by line. qAxis x represents time qAxis y represents closing security prices. qThis chart can be amended by information about volume of trade that are represented by different high of column in axis x. Line Chart line-chart Line Chart with volume of trade fsspon Methods and tools of technical analysis nBar Chart qThe most common method of analysis. qDevelopment of security price is represented by a different high of columns. qAxis x is represented by time qAxis y is represented by value of security price qBar Chart is created by columns with one or two beaks. qThe high of column represent by spread between the peak and the bottom in a determined period. qOpen price is represented by left oriented beak. qClose price is represented by right oriented beak. qThis chart can be amended by the volume of trade in axis x by the different high of columns. q q Bart Chart charts-6sunw-ohlc Methods and tools of technical analysis nPoint and Figure Chart qDevelopment of security rates is represented by two symbols nX n0 qThese symbols are draw in one column according to nKind of trend nIts power and basic parameters qThis chart does not display value of security price only significant security rate changes or spread between open and close rate. qAll positive changes are represented by symbol “X”, these symbols creates column that growth form bottom to top qAll negative changes are represented by symbol “0” these symbols created column that growth from top to bottom. qX represents rising trend q0 represents declining trend Methods and tools of technical analysis nPoint and Figure Chart qThis chart brings information about supply and demand. nColumn with “X” represents higher demand then supply nColumn with “0” represents higher supply qThis chart can be also used to determination signals to buy or sell nCharts bring signals to buy in situation if current appreciation of security rate described by X is higher then last column also described by X. qCurrent column with X is higher then last column with X nCharts bring signals to sell in situation if current depreciation of security rate described by 0 is higher then last column also described by 0. qCurrent column with 0 is higher then last column with 0 q Methods and tools of technical analysis nAccuracy of Point and Figure Chart is determined by input parameter qBox size: represents size of the change that is reflected by chart. All changes lower than box size are consider to be insignificant and are not reflected by chart. qReversal Amount: minimal length of column with symbols X or 0. nIf reversal amount is 3 in every column has to be at least 3 “X” or 3 “0”. Point and Figure Chart pnfChart Methods and tools of technical analysis nCandlestick Chart qThis kind of chart works with nMinimum and maximum nOpen and close rate qIn determined time horizon, usually one day. qEvery period is represented by one candlestick nCandlestick is composed from one body and two wicks nHigh of candlestick body represents spread between open and close price nWicks represents spread between maximal and minimal price. nIf open price is higher than close– candlestick is black nIf open price is lower than close– candlestick is white qWhite candlestick represents situation when most of market participants is buying qBlack candlestick represent situation when most of participants is selling candlestick-chart2-lrg Candlestick Chart Thank you for your attention