TA101 Training Program (3)

1. TA101 Training Program (3) Why analyzing securities Fundamental Analysis V.S Technical Analysis Stock’s Supply& Demand Momentum indicator- on balance volume Define EZ-Support& Resistance How to find Entry and Exit *Study of Bollinger

2. 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.

3. Technical analysis v.s Fundamental Analysis

4. 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.

5. 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.

6. 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.

7. 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

8. Momentum indicator- on balance volume On Balance Volume On Balance Volume ("OBV") is a momentum indicator that relates volume to price change. On Balance Volume is a running total of volume. It shows if volume is flowing into or out of a security. When the security closes higher than the previous close, all of the day's volume is considered up-volume. When the security closes lower than the previous close, all of the day's volume is considered down-volume. On Balance Volume is calculated by adding the day's volume to a cumulative total when the security's price closes up, and subtracting the day's volume when the security's price closes down. • If today's close is greater than yesterday's close then: OBV = Yesterday's OBV + Today's Volume • If today's close is less than yesterday's close then: OBV = Yesterday's OBV - Today's Volume • If today's close is equal to yesterday's close then: OBV = Yesterday's OBV

9. Finding ez-support and ez-resistance Keltner Channel The Keltner Channel is a volatility based envelope technique based on the range of HIGH to LOW daily. First, a coefficient named "MA_periods" is defined to hold the number of periods to be used in the moving averages required for the Keltner Channel. Then, a "typical" price is computed by summing the HIGH, LOW and CLOSE and dividing by three. "MA_typical", a simple moving average of the typical price, is then computed using the number of periods held in "MA_periods". "Diff" is the range for the day. "MA_Diff" is a moving average of "Diff", also using "MA_periods". The "Upper" channel is calculated by adding the "MA_Typical" and "MA_Diff" together. The "Lower" channel is a subtraction of "MA_Diff from MA_Typical. If the price breaks out of either the upper or lower band this is interpreted as a continuation signal not a reversal signal. Sample Chart: EZ-RESISTANCE EZ-SUPPORT SELL BUY

10. Study of Bollinger Bollinger Bands Indicator Type: Overlay Bollinger Bands are a kind of trading envelope. They are lines plotted at an interval around a moving average. Bollinger Bands consist of a moving average and two standard deviations charted as one line above and one line below the moving average. The line above is two standard deviations added to the moving average. The line below is two standard deviations subtracted from the moving average. Traders generally use them to determine overbought and oversold zones, to confirm divergences between prices and indicators, and to project price targets. The wider the bands are, the greater the volatility is. The narrower the bands are, the lesser the volatility is. The moving average is calculated on the close.

11. Study of Bollinger • Sample Chart: • Parameters: • Period (20) - the number of bars, or period, used to calculate the study. John Bollinger, the creator of this study, states that those periods of less than ten days do not seem to work well for Bollinger Bands. He says that the optimal period for most applications is 20 or 21 days. • Band Width (2) - The half-width of the band in terms multiples of standard deviation. Typically 2 is used. John Bollinger suggests, if you reduce the number of days used to calculate the bands, you should also reduce the number of deviations and vise versa. For example, if you use a period of 50, you may want to use 2.5 as the standard deviation. For a period of 10, you may want to use 1.5 or 1.0. The application uses a default of 2.0

12. Study of Bollinger Traders generally use Bollinger Bands to determine overbought and oversold zones, to confirm divergences between prices and studies, and to project price targets. The wider the bands, the greater the volatility. The narrower the bands, the lesser the volatility. Bollinger Bands can be applied to any type of chart, although this study works best with daily and weekly charts. When applied to a weekly chart, the Bands carry more significance for long-term market changes.

13. How Do Apply It on Real Trade Trend Following vs. Counter Trend Many traders use Bollinger Bands to find turning points in the market, buying when price hits the lower band and selling when price hits the upper band. In range bound markets, this will typically work well as price travels between the bands and may give traders several opportunities to pick tops and bottoms.

14. How Do Apply It on Real Trade Trend Following vs. Counter Trend Always TRUE???? However, as markets start to break out of the trading range and move into a trending environment price will often "walk the band" as momentum picks up and a directional trade ensues. Traders that are caught in that mode of trying to pick tops and bottoms are faced with a difficult series of losing trades or even worse an ever mounting loss as price moves further and further away from the old trading range.

15. How Do Apply It on Real Trade “SMA HELP US!!!! SOS!!!” price to close outside of the upper or lower band, essentially a “breakout” of the current trading range as defined by the Bollinger Band.

16. How Do Apply It on Real Trade “SMA HELP US!!!! SOS!!!” price to close outside of the lower band, essentially will be a “dropdown” of the current trading range as defined by the Bollinger Band.

17. How Do Apply It on Real Trade “SMA HELP US!!!! SOS!!!” WILL BE A “BREAKOUT” STRONG BUY SIGNAL Only trading above the mid band - SMA of the specific period which matches Bollinger Band Period

18. Bollingerrrrrrrrrrrrr ConclusionWhile Bollinger Bands serve several purposes, I’ve found them to perform best when used for low frequency Trend Following. The Bollinger Band strategy will adjust with market volatility, provide specific entry and exit signals, and uses a trailing stop that will move with the market and lock in profits along the way. If applied correctly, this strategy can help disciplined traders capitalize on long term trends in markets around the globe.

19. 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