COL: A Primer Into Technical Analysis Part 3 & 4


Hello guys, as I promised that I will be posting the continuation of my previous post on “A Primer Into Technical Analysis” this weekend. But the GOOD NEWS is that I have finished it earlier than scheduled and that made me decide to post it tonight (Philippine Time). So before the lesson start let me share you this quote:

giant step

PART 3: UNDERSTANDING CORRECTIONS & AREA PATTERNS

MARKET’S SELF-CORRECTING ACTION

Remember that “it takes time to move a price a certain distance”…any exaggeration must be paid for by an adjustment in time or price.

Picture9

DEMONSTRATING CORRECTIONS

Extended prices will be fixed by market forces

  • Price must follow demand/supply rules
  • Extravagant swings eventually have to be fixed through corrections
  • Overbought/Oversold
  • Once prices are well corrected they can move again

Picture10

FIBONACCI RETRACEMENTS

The golden Ratio of 61.8%

  • Leonardo Pisano (1200), more popularly known as Fibonacci
  • Natural relationship of expansion and contraction to maintain balance
  • Fibonacci series of numbers (0,1,1,2,3,5,8,13,21,34,55…)

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AREA PATTERNS

  • Consolidations are depicted by sideways moving markets
  • They enter into a ‘meditative pause’ to fix the price swing exaggeration by winding up between support and resistance
  • These temporary consolidation shifts are called pattern ‘area patterns’
  • Push out of a consolidation/pattern
  • ‘Breakout’ – a condition where prices shove themselves above a pattern’s Resistance commanding a “BUY”
  • ‘Breakdown’ – if prices slip below Support, it commands a “Sell”
  • Shape can unravel clues to its directional bias. Studying the various shapes of consolidations can aid in exposing who is winning the battle between buyers and sellers
  • Size can tell us the eventual target to which a price could go after a breakout (or breakdown) scenario.
  • Height of the pattern can project the minimum size of a push measured from its breakout point
  • Length of a pattern can attest to its durability and forcefulness of its move

TYPES OF AREA PATTERNS

CONTINUATION PATTERNS

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REVERSAL PATTERNS

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USING AREA PATTERNS IN GRAPH

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Symmetrical Triangle (Prior trend is UP so it means an UPWARD bias)

How to compute for the Target Value?

Height: 34 – 31 = 3

Breakout point: 33.7

Minimum Target: 33.7 + 3 = 36.7

PART 4: SYSTEM TRADING TECHNICAL INDICATORS

TECHNICAL INDICATORS

  • A technical indicator is a study of price data derived from various statistical formula plotted onto a graph
  • It serves three (3) basic functions:
    • To Alert
    • To Confirm           Consequential Price Movements
    • To Predict

Three (3) most popular indicators:

  • Moving Averages
  • The MACD (Moving Averages Convergence Divergence)
  • Relative Strength Indicator

MOVING AVERAGES

  • A price-average line plotted onto a chart in direct reference to the market price
  • It can be use to:
    • Identify trends in various time frames
    • Identify support and resistance
    • Quality strength of trends

⇒ We use three (3) period Moving Averages:

  • 65-day =1/4 a year (trending MA)
  • 130-day = 1/2 a year
  • 260-day = 1 year

⇒ You can also use 32 & 16 day MA’s to decipher faster (shorter) trends.

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NOTE:

  • Use MA’s like a trendline
  • Buy into pullback as long as it does not break
  • Sell when your MA’s break
  • Crossover of shorter MA tells you greater trend move is coming

MACD (MOVING AVERAGE CONVERGENCE DIVERGENCE)

  • A lagging but effective momentum tool that uses a crossover system to justify changes in periodic trends
  • It has three (3) component lines:
    • MACD
    • Signal Line
    • Zero Line

Picture19

NOTE:

Use a BUY signal is followed when:

  1. MACD crosses above signal line &
  2. MACD is positive (above zero line showing a positive trend)

A SELL or take profits when MACD crosses below the Signal Line

RELATIVE STRENGTH INDEX

  • A momentum-oscillator that swings from Overbought and Oversold conditions to highlight extreme ends of a price move
  • It can also spot out Bullish or Bearish Divergence

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A Divergence is a lapse in strength shown in RSI compared to its price i.e in an uptrend, a higher-high in price compared with a lower-high shows a lapse in the bullish force

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ESTABLISHING THE TRADING PLAN

WORK ON YOUR TRADE ROUTINE

Creating a Trading Plan

Practice the discipline technically evaluating your prospect – know your upsides and downsides and plan your action ahead of of the trade

  1. Look for a justified entry
  2. Estimate your Targets for Profit Taking
  3. Establish your Selling Stops
  4. Estimating your Technical Risk -Reward

A JUSTIFIED ENTRY: TRADE FILTERING

Have a good line up in your Tech Indicators:

  • Check Moving Averages With You? Yes, above 65, 130, 260
  • Check MACD With You? Yes, Buy Signal above 0
  • Check RSI With You?
    • Overbought?
    • Divergence?

Decision Time:

  • If 3 or ALL SAY YES…THEN GO!
  • If 1 SAYS NO…BEWARE THE UNDERTOW
  • if 2 SAY NO…YOU SAY NO

ESTIMATE YOUR TARGETS

Looking for Price Targets

Evaluate what your upsides can be by following these technical methods:

  1. Trendline Projection
  2. Range in a Price Channel
  3. Height of its current Area Pattern
  4.  Distance to its next major Resistance/Support

ESTABLISH YOUR SELLING STOPS

Triggered Exits using Support Stops

  1. Breakdown conditions
  2. Trendline (or Moving Average) breaks
  3. Trailing Stops
    • Last Reaction Lows
    • For runners – previous day lows or 8-day MA

ESTIMATE YOUR RISK VS REWARD

Evaluate your prospects

A key component in being a succesful trader is to determine your risk versus reward level use that optimum ratio to guide your investment decisions

  1. Estimate your upsides and downsides then pick out Risk-Reward opportunities of 1:3+
  2. Remember selling too soon may inhibit your ratio – keep yourself with the trend
  3. You now have a trade plan – be disciplined enough to follow it!

OK GUYS!…Now that you have already known the basics in stock market technical analysis trading, I hope it did make you more excited to start investing in the Philippine Stock Market. My next posts will be more on how did I start investing and partly trading in the stock market in my little own steps.

I will also be showing my online portfolio for the first time in history using WordPress…hahaha please bear with me I just laughed at my own-self, I am just enjoying the privileged. By the way you can leave your comments on this posts and you may also share your thoughts on my blogs (actually I am very new t this thing). You can also follow this blog or subscribe for free.

HAVE A GREAT AND WONDERFUL DAY EVERYONE!!!

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