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Introduction To Technical Analysis & Trading TraderMade International Ltd Market Leading Trading & Sales Tools. Introduction. TraderMade International DBFS Group LLP Global leader in advanced Trading Charting and Technical Analysis software

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slide1

Introduction To

Technical Analysis & Trading

TraderMade International Ltd

Market Leading Trading & Sales Tools

introduction
Introduction

TraderMade International

  • DBFS Group LLP
  • Global leader in advanced Trading Charting and Technical Analysis software
  • The banks who use TraderMade represent 88% of the FX market liquidity

Brian McNulty

  • Co-Founder and Head of Business Development, DBFS Group
  • Senior Technical Trader, Rand Merchant Bank
  • Technical Analyst, Automated Trading
agenda
Agenda
  • Introducing Technical Analysis
  • Foundations Of Technical Analysis
  • Chart Construction & Terminology
  • Traders Tools – Moving Averages
  • Common Patterns
  • Traders Tools – Oscillators
  • 3 Elements Of Successful Trading
  • Bringing it all together
  • Questions and Answers
introducing technical analysis
Introducing Technical Analysis

“Technical Analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price movement”

John Murphy: TAOTFM

  • Determine future price directions
  • Primarily done through studying charts

Where did it come from?

  • Japanese rice traders – to see how much people were paying / S&D
  • Charles H . Dow in 1884 stock market averages publication
    • Robert Rhea 1932 ‘Dow Theory’
who uses technical analysis
Who uses technical analysis
  • A Trader is someone who takes a position in the market
  • Technical Analysis is used by anyone who requires a view on a market
  • Categories:
  • Traders
  • Hedge Fund Managers
  • Corporate Treasuries
  • E-commerce / Sales teams
  • Retail (HNI , Private Investors)
  • What is the purpose of a Trader:
  • Speculative (Buy low, sell high! – simple?)
  • Hedging (manage risk)
  • Go long, go short or stay out
  • Percentages and probability analysis
  • Money management
different schools of thought
Different schools of thought
  • Fundamental Forecasting:
    • Studies the ‘cause’ of the market / ‘why’
    • Focuses on supply and demand
    • Predicting future moves based on monetary policy, economic conditions weather, political etc
    • Calculate the ‘intrinsic value’
  • Technical Forecasting:
    • Believes the fundamentals are factored in
    • Pattern recognition and analysis
    • Study of past behaviour
    • ‘in times of confusion, charts come out!’
  • These techniques are complimentary!
    • Majy market practitioners use both
    • Technical is indirectly studying fundamentals
    • Listen and understand both
    • Use to confirm signals / build into your model
foundations of technical analysis
Foundations of Technical Analysis

The 3 premises on which technical approach is

based are:

  • Market action discounts everything
  • History repeats itself
  • Prices move in trends
market action discounts everything
Market Action Discounts Everything
  • Unless this if fully understood and accepted, nothing else that follows will make much sense.
  • Anything that can affect prices is reflected in the price so that the study of price action is all that is needed.
  • The charts do not in themselves cause markets to move, they simply reflect the bullish or bearish psychology of the market place.
  • Instead peoples actions cause the market to move and TA is just a picture of peoples actions
  • When news comes out in the market, people react and the price will move until everyone is happy that the price has now factored this in.
foundations history repeats itself
Foundations – History Repeats Itself

Human Psychology:

  • Chart patterns have been identified and categorized for over 100 years. Human psychology does not tend to change, hence patterns that have worked well in the past, are assumed to work well in the future.

Crowd Theory:

  • Group behaviour is more predictable than individual. In the markets, vast majority behave as groups

Self-fulfilment

  • Enough people believe in it and it will become true
foundations introducing trend

Resistance

Resistance

Resistance

Support

Support

Support

Foundations – Introducing Trend

The trend is absolutely essential to the technical approach

  • A trend can be defined as the direction of the market.
  • An uptrend is a succession of higher highs and higher lows and a downtrend is a succession of lower highs and lower lows.
  • The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends.
  • Why? A trend in a motion is more likely to continue than to reverse.
  • The majority of the rest of the tools are simply to help measure the trend in order to participate.
the concept of a trend continued
The Concept Of A Trend (continued)
  • Why not just buy (go long) when the market is going up then?
  • It is all about timing
  • In too early – on the wrong side
  • In too late – market will move against you
  • Corrections
  • Enters a sideways market – get whipped!
  • More bad news….major trends have 3 phases
  • Accumulation – informed buying by most astute investors - ‘bad news assimilated’
  • Public Participation – Most technical trend follows begin to participate, prices begin to advance rapidly and business news improves
  • Distribution – Newspapers begin to print increasingly bullish stores; speculative volume and public participation increases. (note this is when those long at 1 sell!!)
  • Hope to show some ways Traders can identify trend early enough along with some other indicators that can mean we are not always in 3!
chart construction terminology
Chart Construction & Terminology

Types of Charts:

  • Price Bar (daily – yearly) – most common
  • Line Chart (close only)
  • Candlestick
  • Volume – total of trading activity

Terminology:

  • Placing an order (bid /offer)
  • Long / Short
  • Stops
  • Minimal Price Objective
  • Corrections
  • Support and Resistance
  • Trend lines
fundamentals of charting support resistance
Fundamentals of charting – Support & Resistance
  • The basic idea behind this support-resistance theory is that the understanding of the future lies in the past.
  • Price levels that were significant in the past will be of importance for the price action in the future.
  • Usually a support or resistance level is identified by previous lows or previous highs and is a level beyond which prices may have difficulty in moving. They are therefore considered important levels
  • Trend reversal could be identified by watching the support and resistance levels.
  • Role Reversal
fundamentals of charting trendlines
Fundamentals of charting – Trendlines
  • They are diagonal lines that either define and area of support in the market or an area of resistance. It identifies the current trend of a market
  • In an uptrend a line is drawn connecting the lows to form a trendline. This is because the buyers in the market are pushing the market in an uptrend
  • The trendline then helps not only to determine the extremities of the corrective phases but maybe even more importantly tells us when the trend is changing – a reversal
  • Filters - Validity of the trendline breaking
fundamentals of charting channels
Fundamentals of charting – Channels
  • The important line in a channel pattern is still the trendline. The channel line is purely a measuring line and should not be used as a trading signal. It can be used as a take profit indicator but it should not be used to establish a position against the prevailing trend.
  • The channel line can be used for short term profit taking
  • Once the channel line has been drawn on the chart, the width can be measured and projected from the break of the trendline. This is the Minimum Price Objective (MPO).
traders tools moving averages
Traders Tools - Moving Averages
  • Remember, the trend is your friend!
  • Purpose of most tools is to work out which way the trend is going asap
  • MA’s are therefore used to smooth out some of the "noise“

that occurs in the market so that the underlying trend is more easily viewed

  • Moving Averages are the most popular method of doing so but be aware using MA’s in a trendless market is one of the quickest ways to lose money!
  • Cannot simply trade one (too long, too short, non-trending_
common patterns
Common Patterns
  • We know already that markets move in trends with peaks and troughs in their price movements
  • We have also seen how we can use tools such as Moving Averages to identify the start and end of trends
  • The problem is that markets don’t always trend up or down - they also move sideways.
  • Another challenge of a trader is to work out whether this period of transition is just a pause before a continuation or the sign that a reversal of trend will happen.
  • There are specific patterns that can help the trader to decide which it is:
    • Reversal Patterns: These patterns normally indicate an important reversal in trend is happening
    • Continuation Patterns: These patterns usually indicate that the sideways price action is nothing more than a pause in the prevailing trend.
  • This is done by identifying recognisable patterns within the price movements, which can then be used to generate price objectives for potential future moves
  • i.e. Is a reversal or continuation likely and if so, predict where the market will move too
reversal patterns head shoulders
Reversal Patterns – Head & Shoulders
  • Breaking of the neckline – very high probability pattern
continuation patterns flags pennants
Continuation Patterns – Flags & Pennants
  • Continuation patterns are usually shorter
  • Continuation patterns tell us that a sideways movement on a chart may be just a pause in the prevailing (longer-term) trend, after which prices will continue to move in the same direction as before.
  • They must have been preceded by a sharp and almost straight line move.
  • ‘flying at half mast’
continuation patterns triangles
Continuation Patterns – Triangles
  • Triangle Patterns are not traded until the break out occurs.
  • Expected direction is up
  • Trend signal confirmation s given by closing penetration
  • Ascending Triangles – bullish
  • Descending Triangles - bearish
traders tools oscillators
Traders Tools - Oscillators
  • Another useful tool in a non-trending market. Provides the technical trader with a tool that can enable to profit from these periodic sideways and trendless markets.
  • Runs continuously
  • Also used to warn us that a trend reversal is possibly approaching
  • Used to warn of a trend reversal before the prices reach the actual top or bottom (deceleration of the price increase / losing momentum)
  • Overbought or oversold
  • It is studying the rate of ascent or decent
  • M = P – Px (where Px is price x days ago)
  • Types: Stochastics, RSI, Larry Williams, MACD
the 3 elements of successful trading
The 3 Elements Of Successful Trading
  • Price Forecasting - ‘what to do’
  • Which way a market is expected to trend. (buy or sell)
  • It is the crucial first step in trading decision.
  • Timing – ‘when’
  • Trading tactics, or timing, determines specific entry and exit points.
  • Money Management – ‘how much’
  • Covers the allocation of funds.(portfolio make-up,
  • diversification, how much money to invest or risk in one market, the use of stops, reward to risk ratios)
bringing a trading strategy together
Bringing a Trading strategy together
  • Do your homework – not really a part time job!
  • Pick one or two oscillators you are comfortable with
  • Combine with trend indicators and confirmation signals and volume indicators
  • Back test and paper trade
  • Have a plan, NEVER trade impulsively
  • Understand money management / diversify
  • Trade light until proof of concept
  • Automated entry and exit (profit and stop) - even if not generated by algorithmic trading system
  • Always place your protective stop when you place your order
  • Exit a losing trade as early as possible
  • Learn to be happy in the minority!
further reading
Further Reading
  • Technical Analysis of the Financial Markets – John J. Murphy
  • Deciphering The Market
  • J.M.W Tadion
  • Forecasting Financial Markets
  • - Plummer