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?
Why analyzing securities
Fundamental Analysis V.S Technical Analysis
Stock’s Supply& Demand
Moving Average Lines Indicator
RSI and William %R
How to find Entry and Exit
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.
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?
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.
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.
Charting terms and indicators
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.
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.
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
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.
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
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