Conquering Technical Analysis Webinar Presenter: Shaun van den Berg : Head of Client Education at PSG Online Wednesday, 13 February 2013
Agenda • What is Technical Analysis? • Simple vs Complex Charts • Chart Setups • Psychology of Trading • The Trading Plan • The Stockbroker Report • Summary • Conclusion Presenter: Shaun van den Berg
What is Technical Analysis? Presenter: Shaun van den Berg
Introduction Two broad categories used to analyse shares to make investment decisions: • Fundamental analysis: • Characteristics of a company • Estimate its value • Technical analysis: • Does not care about the "value" of a company. • Technicians (also called chartists) only interested in price movements.
Shopping Mall Analogy • Fundamental Analyst • Goes into each store • Studies the product • Decides whether to buy • Technical Analyst • Sits on a bench in the mall • Watches people go into the stores. • Disregards intrinsic value of the products in the store • Decision based on the patterns or activity of people going into each store. Presenter: Shaun van den Berg Source: www.investopedia.com
What is Technical Analysis? • Method to evaluate securities • Shares, indices, futures, commodities, exchange rates, etc. • Analyse market activity (historical performance) • Past prices • Volume • Use charts and other tools • Identify patterns • Future activity – Direction/ trend Presenter: Shaun van den Berg
Price Action • Study of supply & demand • Attempts to determine: • What direction or trend - Continue into future • Attempts to understand: • The emotions in the market by studying the market itself, as opposed to its components • Some chartists use technical indicators & oscillators • Others rely on chart patterns. • Most use some combination of the two.
Basic Assumptions • The market discounts everything (Priced in) • Price discounts everything (Reflects all information). • Broader economic factors (GDP, inflation, interest rates) • Company's fundamentals (Financial information relative to price) • Market psychology (Greed, Fear & Expectations) • Price moves in trends (The trend is your friend) • Price movements are not totally random • Once a trend is established, future price movement is more likely to be in the same direction than to be against it. • Most technical trading strategies are based on this assumption. • History tends to repeat itself (Market sentiment) • The "What" is more important than the "Why." • Market players react consistently to similar market stimuli over time. • Emotional aspect of the market (Bullish or Bearish)
Simple versus Complex Charts Presenter: Shaun van den Berg
Chart Analysis • Step #1: What is the Overall Trend? • Identify the overall trend – use trend lines, moving averages or peak/trough analysis. • As long as the price remains above its up trend line, selected moving averages or previous lows, the trend will be considered bullish. • As long as the price remains below its down trend line, selected moving averages or previous highs, the trend will be considered bearish.
Trending & Trading Ranges Trending Trading Range Trending Trading Range Trending Trading Range Trending Trading Range
Trend Analysis Three types of trend: • Uptrends • Downtrends • Sideways/Horizontal or Neutral Trends
Example of a Up Trend (SAB) Higher Highs Higher Lows
Key & Critical Support Levels Key • Early warning • Something is not right • Protect profits • Raise your stops • Critical level – Beginning of new trend Critical
Example of a Down Trend (TKG) Lower Highs Lower Lows
Key & Critical Resistance Levels Critical • Early warning – Move is pausing • Move is coming to an end • Protect profits (if short) • Tighten your stops (if short) • Critical level – Move up is complete Key
Trend Lines (SAB) Resistance Trend line Support Trend line
Chart Analysis • Step # 2: Where is Support? • Congestion (trading range) or previous lows below the current price mark support levels. • A break below support would be considered bearish (Open short positions / Sell). • Step # 3: Where is Resistance? • Areas of congestion and previous highs above the current price mark the resistance levels. • A break above resistance would be considered bullish (Open long positions / Buy).
Example of a Sideways Trend (ANG) Resistance Support 2006 2013
Chart Analysis • Step # 4: Where is Momentum? • Momentum is usually measured with an oscillator such as the MACD indicator. • If MACD is above its 9-day EMA (exponential moving average) or positive, then momentum will be considered bullish, or at least improving. • If MACD is below its 9-day EMA or negative, then momentum will be considered bearish, or at least deteriorating.
Chart Analysis • Step # 5: Where is Buying/Selling Pressure? • For shares and indices with volume figures available, an indicator that uses volume is used to measure buying or selling pressure. • When Chaikin’s Money Flow (CMF) is trading above zero, buying pressure is dominant. • Selling pressure is dominant when the CMF indicator moves below zero.
Chart Analysis • Step # 6: Where is Relative Strength? • The Relative Strength indicator is a line formed by dividing one data stream (share) by another (usually a benchmark). • For shares it is usually the share price divided by the JSE Overall Index. • The plot of this line over a period of time will tell us if the share is: • Market outperforming (rising) • Market under performing (falling), or • Market performing (moving sideways) relative to the JSE Overall Index.
Relative Strength Data 1 = BHP Billiton Data 2 = JSE Over Index
Chart Setups Presenter: Shaun van den Berg
Chart Setups • Chart setups are situations where all or most of the chart conditions are "right" for a long or short entry. • "Right" conditions, depending on the setup, may or may not include other indicators. • Technical indicators support price & volume action • Indicate or support what the action is, but • Do not dictate what to do, or • When to do it
Chart Setups • Many setups are a result of self-fulfilling prophecies • Traders see the same chart patterns & price action. • Early identification & perhaps even an early entry is important • Understand all influences & indicators & interpretation. • Only experience will get you to • Understand how they work, • When to use them, and • Trust chart setups. • Back-test, Paper trade (Simulator) & Start small. • Pick a trade candidate, • Plan your trade • Execute your plan.
Chart Setups: Observations • The stronger the primary trend the more confidence you should have. • Watch for big changes in volume as price approaches targets. • Increased volume should accompany any breakout. • Big volume spikes start & end a rally regardless of time frame. • Play around with various charts but always use more than one time period using the support-resistance levels of one to tell you where your limits are in the other. • Above every resistance level & below every support level lie plenty of orders to buy or sell once price breaks one way or the other. • This is what accounts for major volume increases on a breakout or breakdown.
Chart Setups: Observations • All stop-losses should be set to allow a 2% - 3% loss & no more. • Smart money tends to put on trades when markets are quiet; amateurs tend to jump on the news. • Buy the rumour, sell on the news. • Buyers wait for pullbacks & sellers wait for resistance • Technical indicators show what is going on with price • They DO NOT dictate what you should do. • Technical indicators are either: • Momentum type - showing you strength of the trend, • Overbought and Oversold type - showing you weakness at support/resistance.
Chart Setups Ascending Triangle Descending Triangle Symmetrical Triangle
Ascending Triangle • Bullish chart pattern - easily recognizable - distinct shape created by two trend lines. • One trend line is drawn horizontally - level that has historically prevented the price heading higher (i.e. resistance) • Second trend line connects a series of increasing troughs or higher lows/ supports. • Enter a long position when the price breaks above the top resistance.
Ascending Triangle - Rules • The more mature in time the pattern is the stronger it is. • Trade the primary trend. • Set buy limits just above the highs of horizontal resistance. • Increased volume must accompany the breakout.
Ascending Triangle Open: 28300c High: 28892c Low: 28300c Close: 28892c Resistance @ 28500c Entry Price: 28510c • Mature • Bullish • Broken resistance • Increased volume
Descending Triangle • A bearish chart pattern • One trend line connects a series of lower highs • Second trend line - strong level of support. • Watch for a move below support - suggests downward momentum is building. • Once the breakdown occurs - enter a short position
Descending Triangle – Rule • The more mature in time the pattern is the stronger it is. • Trade the primary trend. • Set sell limit just below the lows of horizontal support. • Increased volume must accompany the breakout.
Descending Triangle Open: 39770c High: 40096c Low: 38851c Close: 39190c Support @ 39320c Entry Price: 39315c • Mature • Bearish • Broken support • Increased volume
Symmetrical Triangle • Easily recognisable chart pattern • Distinct shape created by two converging trend lines. • Draw two trend lines that connect a series of sequentially lower peaks & a series of sequentially higher troughs. • Both trend lines act as barriers that prevent the price from heading higher or lower. • Once the price breaks above or below one of these levels, a sharp movement often follows.
Symmetrical Triangle - Rules • Can break either way – Up or down • Stick with the primary trend. • Set buy limit just above the high of descending trend line resistance. • Increased volume must accompany the breakout.
Symmetrical Triangle Open: 15900c High: 16700c Low: 15701c Close: 16700c Resistance @ 15883c Entry Price @ 15890c • Mature • Bullish • Broken resistance • Increased volume
Psychology of Trading • The definition of a successful trader is someone who feels good about themselves and enjoys playing the game. Presenter: Shaun van den Berg
Psychology of Trading • You must win the battle within yourself first, before you can win in the markets. • Trader’s mental & emotional state • Approach your trading with the right mind-set & attitude. • Train the mind to a level of mental fitness & toughness • Make decisions with a clear & unclouded mind. • Keep emotions under control (Discipline) • Visualise yourself as a successful trader • Become that person - Less likely to allow your emotions to make mistakes / inconsistent
Psychology of Trading Source: Goal Mapping by Brian Mayne
Psychology of Trading • Control your emotions • Spend time every day, working on the discipline of trading (Keep a trading journal) • Do not take losses personally • Negative personal evaluations (What did I do right?) • Self-image as a winning trader • Treat trading like a business • Back-test a system - Confidence • Find system that suits your personally • Back-test/ Paper trade / Start small (Real-time) • Appropriate money to trade system • Go for it!