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TA101 Training Program. Why analyzing securities Fundamental Analysis V.S Technical Analysis Stock’s Supply& Demand Moving Average Lines Indicator MACD MACD signals RSI and William % R How to find Entry and Exit. Security analysis- it matters. W hy Analyze Securities?

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ta101 training program
TA101 Training Program

Why analyzing securities

Fundamental Analysis V.S Technical Analysis

Stock’s Supply& Demand

Moving Average Lines Indicator

MACD

MACD signals

RSI and William %R

How to find Entry and Exit

security analysis it matters
Security analysis- it matters

Why Analyze Securities?

Security Analysis - Does it Matter?

Wall Street has scores of analysts, strategists and portfolio managers hired to do one thing: beat the market. Analysts are hired to find undervalued stocks. Strategists are hired to predict the direction of the market and various sectors. Portfolio managers are hired to put it all together and outperform their benchmark, usually measured as the S&P 500. Granted, there are many studies and disputes raging on the performance of equity mutual funds, but it is safe to assume that about 75% of equity mutual funds underperform the S&P 500. With these kinds of stats, individual investors would surely be better off simply investing in an index fund rather than attempting to beat the market wouldn't they?

The added value of analysis is in the eye of the beholder. A fundamental analyst believes that analyzing strategy, management, product, financial statistics and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market. They are also likely to believe that there is little or no value in analyzing past prices and that technical analysts would be better off stargazing. (Humph!) The technical analyst believes that the chart, volume, momentum and an array of mathematical indicators hold the keys to superior performance. Technicians are just as likely to believe that fundamental data is hogwash pure and simple. And then there are the Random Walkers who believe that any attempt to try and outwit the market is futile.

So whom do we believe? Is fundamental analysis worth the time and effort? Are technicians a bunch of quacks? Or is it all a lesson in random futility? Let's start to clarify things by looking at the efficient market hypothesis and see where the fundamentalists, technicians and random walkers stand on the question of market efficiency. After we have explored this area, we will then take a closer look at the random walk theory, fundamental analysis and technical analysis.

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Market efficiency

Are Markets Efficient?

The question concerning the value of analysis begins with the debate on market efficiency. Just what is represented by the current price of a security? Is a security's current price an accurate reflection of its fair value? Or, do anomalies exist that allow traders and investors the opportunity to beat the market by finding undervalued or overvalued securities?

  • AswathDamodaran, of the Stern Business School at New York University, defines an efficient market as one in which the market price is an unbiased estimate of the true value of the investment. Fair enough, but it is not quite that simple. In an efficient market, the current price of a security fully reflects all available information and is the fair value. "All" because the price is the sum value of all views (bullish, bearish or otherwise) held by market participants. It is the fair value because the market agreed on a price to buy and sell the security. As new information becomes available, the market assimilates the information by adjusting the security's price up (buying) and down (selling). In an efficient market, deviations above and below fair value are possible, but these deviations are considered to be random. Over the long run, the price should accurately reflect fair value.
  • The hypothesis further asserts that if markets are efficient, then it should be virtually impossible to outperform the market on a sustained basis. Even though deviations will occur and there will be periods when securities are overvalued or undervalued, these anomalies will disappear as quickly as they appeared, thus making it almost impossible to profit from them.
  • From experience, most of us would agree that the market is not perfectly efficient. Anomalies do exist and there are investors and traders that outperform the market. Therefore, there are varying degrees of market efficiency, which have been broken down into three levels. These three levels also happen to correspond to the beliefs of the fundamentalists, technicians and random walkers.
strong form technicians
Strong-form: Technicians

Strong-form: Technicians

The strong-form of market efficiency theorizes that the current price reflects all information available. It does not matter if this information is available to the public or privy to top management; if it exists at all, it is reflected in the current price. Because all possible information is already reflected in the price, investors and traders will not be able to find or exploit inefficiencies based on fundamental information. Generally, pure technical analysts believe that the markets are strong-form efficient and all information is reflected in the price.

Semi-Strong Form: Random Walkers

The semi-strong form of market efficiency theorizes that the current price reflects all readily available information. This information will likely include annual reports, SEC filings, earnings reports, announcements and other relevant information that can be readily gathered. However, there is other information not readily available to the public that is not fully reflected in the price. This could be information held by insiders, competitors, contractors, suppliers or regulators, among others. Anomalies exist when information is withheld from the public and the only way to profit is by using information not yet known to the public. This is sometimes called insider trading. Once this information becomes public knowledge, prices adjust instantaneously, so it is virtually impossible to profit from such news. The Random Walk theory is an example of the semi-strong form of market efficiency.

Weak-form: Fundamentalists

The weak-form of market efficiency theorizes that the current price does not reflect fair value and is only a reflection of past prices. Furthermore, the future price cannot be determined using past or current prices (sorry technical analysts). Fundamental analysts are champions of weak-form market efficiency and believe that the true value of a security can be ascertained through financial models using information readily available. The current price will not always reflect fair value, and these models will help identify anomalies.

which form exists in the market today
Which Form Exists in the Market Today?
  • Many in academia believe that security prices are semi-strong efficient. Recall that semi-strong efficient implies that all public knowledge is reflected in the price and it is virtually impossible to exploit deviations from the true value based on public information. Only new information will affect the price. Judging from the reaction of many stocks to news events, there seems to be evidence to support this case.
  • The flow of information has become faster with the Internet, and surprises are factored in instantly. Few will argue that a surprise, both positive and negative, can violently move the price of a security. A few examples include:
  • After Pre-announcing that earnings would come in below expectations on 6-Jan-00, Lucent fell from 59 to 43 in one day.
which form exists in the market today1
Which Form Exists in the Market Today?
  • After positive comments from an influential analyst on 23-Feb-00, Time Warner shot up 49 to 59 in 2 days.
  • After reporting earnings that were below expectations on 15-Feb, Abercrombie & Fitch fell from 24 to 15.
  • Even though these are but a few examples, it is obvious that new information can move the price of a security in non-random ways
info board
Info board

Charting terms and indicators

[edit]Concepts

Resistance — a price level that may prompt a net increase of selling activity

Support — a price level that may prompt a net increase of buying activity

Breakout — the concept whereby prices forcefully penetrate an area of prior support or resistance, usually, but not always, accompanied by an increase in volume.

Trending — the phenomenon by which price movement tends to persist in one direction for an extended period of time

Average true range — averaged daily trading range, adjusted for price gaps

Chart pattern — distinctive pattern created by the movement of security prices on a chart

Dead cat bounce — the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement

Elliott wave principle and the golden ratio to calculate successive price movements and retracements

Fibonacci ratios — used as a guide to determine support and resistance

Momentum — the rate of price change

Point and figure analysis — A priced-based analytical approach employing numerical filters which may incorporate time references, though ignores time entirely in its construction.

Cycles — time targets for potential change in price action (price only moves up, down, or sideways)

Market Condition — the state of price movement as being in a state of range expansion or a range contraction.

[edit]Types of charts

Open-high-low-close chart — OHLC charts, also known as bar charts, plot the span between the high and low prices of a trading period as a vertical line segment at the trading time, and the open and close prices with horizontal tick marks on the range line, usually a tick to the left for the open price and a tick to the right for the closing price.

Candlestick chart — Of Japanese origin and similar to OHLC, candlesticks widen and fill the interval between the open and close prices to emphasize the open/close relationship. In the West, often black or red candle bodies represent a close lower than the open, while white, green or blue candles represent a close higher than the open price.

Line chart — Connects the closing price values with line segments.

Point and figure chart — a chart type employing numerical filters with only passing references to time, and which ignores time entirely in its construction.

[edit]Overlays

Overlays are generally superimposed over the main price chart.

Resistance — a price level that may act as a ceiling above price

Support — a price level that may act as a floor below price

Trend line — a sloping line described by at least two peaks or two troughs

Channel — a pair of parallel trend lines

Moving average — the last n-bars of price divided by "n" -- where "n" is the number of bars specified by the length of the average. A moving average can be thought of as a kind of dynamic trend-line.

Bollinger bands — a range of price volatility

Parabolic SAR — Wilder's trailing stop based on prices tending to stay within a parabolic curve during a strong trend

Pivot point — derived by calculating the numerical average of a particular currency's or stock's high, low and closing prices

Ichimokukinkohyo — a moving average-based system that factors in time and the average point between a candle's high and low

[edit]Price-based indicators

These indicators are generally shown below or above the main price chart.

Average Directional Index — a widely used indicator of trend strength

Commodity Channel Index — identifies cyclical trends

MACD — moving average convergence/divergence

Momentum — the rate of price change

Relative Strength Index (RSI) — oscillator showing price strength

Stochastic oscillator — close position within recent trading range

Trix — an oscillator showing the slope of a triple-smoothed exponential moving average

%C — denotes current market environment as range expansion or a range contraction, it also forecast when extremes in trend or choppiness are being reached, so the trader can expect change.

[edit]Breadth Indicators

These indicators are based on statistics derived from the broad market

Advance Decline Line — a popular indicator of market breadth

McClellan Oscillator - a popular closed-form indicator of breadth

McClellan Summation Index - a popular open-form indicator of breadth

[edit]Volume-based indicators

Accumulation/distribution index — based on the close within the day's range

Money Flow — the amount of stock traded on days the price went up

On-balance volume — the momentum of buying and selling stocks