Technical Analysis – A Beginner's Guide - Corporate Finance ...

Technical analysis is a form of investment valuation that analyses past prices to predict future price action. Technical analysts believe that the ... TechnicalAnalysis–ABeginner’sGuidePredictingtheprobablefuturepricemovementofasecuritybasedonmarketdataHome›Resources›Knowledge›Trading&Investing›TechnicalAnalysis–ABeginner’sGuideWhatisTechnicalAnalysis?Technicalanalysisisatool,ormethodValuationMethodsWhenvaluingacompanyasagoingconcerntherearethreemainvaluationmethodsused:DCFanalysis,comparablecompanies,andprecedenttransactions,usedtopredicttheprobablefuturepricemovementofasecurity–suchasastockStockWhatisastock?Anindividualwhoownsstockinacompanyiscalledashareholderandiseligibletoclaimpartofthecompany’sresidualassetsandearnings(shouldthecompanyeverbedissolved).Theterms"stock","shares",and"equity"areusedinterchangeably.orcurrencypair–basedonmarketdata.Thetheorybehindthevalidityoftechnicalanalysisisthenotionthatthecollectiveactions–buyingandselling–ofalltheparticipantsinthemarketaccuratelyreflectallrelevantinformationpertainingtoatradedsecurity,andtherefore,continuallyassignafairmarketvaluetothesecurityPublicSecuritiesPublicsecurities,ormarketablesecurities,areinvestmentsthatareopenlyoreasilytradedinamarket.Thesecuritiesareeitherequityordebt-based.. PastPriceasanIndicatorofFuturePerformanceTechnicaltradersbelievethatcurrentorpastpriceactioninthemarketisthemostreliableindicatoroffuturepriceaction.Technicalanalysisisnotonlyusedbytechnicaltraders.ManyfundamentaltradersusefundamentalanalysisAnalysisofFinancialStatementsHowtoperformAnalysisofFinancialStatements.Thisguidewillteachyoutoperformfinancialstatementanalysisoftheincomestatement,todeterminewhethertobuyintoamarket,buthavingmadethatdecision,thenusetechnicalanalysistopinpointgood,low-riskbuyentrypricelevels. ChartingonDifferentTimeFramesTechnicaltradersanalyzepricechartstoattempttopredictpricemovement.Thetwoprimaryvariablesfortechnicalanalysisarethetimeframesconsideredandtheparticulartechnicalindicatorsthatatraderchoosestoutilize.Thetechnicalanalysistimeframesshownonchartsrangefromone-minutetomonthly,orevenyearly,timespans.Populartimeframesthattechnicalanalystsmostfrequentlyexamineinclude:5-minutechart15-minutechartHourlychart4-hourchartDailychartThetimeframeatraderselectstostudyistypicallydeterminedbythatindividualtrader’spersonaltradingstyle.Intra-daytraders,traderswhoopenandclosetradingpositionswithinasingletradingday,favoranalyzingpricemovementonshortertimeframecharts,suchasthe5-minuteor15-minutecharts.Long-termtraderswhoholdmarketpositionsovernightandforlongperiodsoftimearemoreinclinedtoanalyzemarketsusinghourly,4-hour,daily,orevenweeklycharts.Pricemovementthatoccurswithina15-minutetimespanmaybeverysignificantforanintra-daytraderwhoislookingforanopportunitytorealizeaprofitfrompricefluctuationsoccurringduringonetradingday.However,thatsamepricemovementviewedonadailyorweeklychartmaynotbeparticularlysignificantorindicativeforlong-termtradingpurposes.It’ssimpletoillustratethisbyviewingthesamepriceactionondifferenttimeframecharts.Thefollowingdailychartforsilvershowspricetradingwithinthesamerange,fromroughly$16to$18.50,thatit’sbeeninforthepastseveralmonths.Along-termsilverinvestormightbeinclinedtolooktobuysilverbasedonthefactthatthepriceisfairlynearthelowofthatrange.  However,thesamepriceactionviewedonanhourlychart(below)showsasteadydowntrendthathasacceleratedsomewhatjustwithinthepastseveralhours.Asilverinvestorinterestedonlyinmakinganintra-daytradewouldlikelyshyawayfrombuyingthepreciousmetalbasedonthehourlychartpriceaction.  CandlesticksCandlestickchartingisthemostcommonlyusedmethodofshowingpricemovementonachart.Acandlestickisformedfromthepriceactionduringasingletimeperiodforanytimeframe.Eachcandlestickonanhourlychartshowsthepriceactionforonehour,whileeachcandlestickona4-hourchartshowsthepriceactionduringeach4-hourtimeperiod.Candlesticksare“drawn”/formedasfollows:Thehighestpointofacandlestickshowsthehighestpriceasecuritytradedatduringthattimeperiod,andthelowestpointofthecandlestickindicatesthelowestpriceduringthattime.The“body”ofacandlestick(therespectiveredorblue“blocks”,orthickerparts,ofeachcandlestickasshowninthechartsabove)indicatestheopeningandclosingpricesforthetimeperiod.Ifabluecandlestickbodyisformed,thisindicatesthattheclosingprice(topofthecandlestickbody)washigherthantheopeningprice(bottomofthecandlestickbody);conversely,ifaredcandlestickbodyisformed,thentheopeningpricewashigherthantheclosingprice.Candlestickcolorsarearbitrarychoices.Sometradersusewhiteandblackcandlestickbodies(thisisthedefaultcolorformat,andthereforetheonemostcommonlyused);othertradersmaychoosetousegreenandred,orblueandyellow.Whatevercolorsarechosen,theyprovideaneasywaytodetermineataglancewhetherpriceclosedhigherorlowerattheendofagiventimeperiod.Technicalanalysisusingacandlestickchartsisofteneasierthanusingastandardbarchart,astheanalystreceivesmorevisualcuesandpatterns. CandlestickPatterns–DojisCandlestickpatterns,whichareformedbyeitherasinglecandlestickorbyasuccessionoftwoorthreecandlesticks,aresomeofthemostwidelyusedtechnicalindicatorsforidentifyingpotentialmarketreversalsortrendchange.Dojicandlesticks,forexample,indicateindecisioninamarketthatmaybeasignalforanimpendingtrendchangeormarketreversal.Thesingularcharacteristicofadojicandlestickisthattheopeningandclosingpricesarethesame,sothatthecandlestickbodyisaflatline.Thelongertheupperand/orlower“shadows”,or“tails”,onadojicandlestick–thepartofthecandlestickthatindicatesthelow-to-highrangeforthetimeperiod–thestrongertheindicationofmarketindecisionandpotentialreversal.Thereareseveralvariationsofdojicandlesticks,eachwithitsowndistinctivename,asshownintheillustrationbelow.  Thetypicaldojiisthelong-leggeddoji,wherepriceextendsaboutequallyineachdirection,openingandclosinginthemiddleofthepricerangeforthetimeperiod.Theappearanceofthecandlestickgivesaclearvisualindicationofindecisioninthemarket.Whenadojilikethisappearsafteranextendeduptrendordowntrendinamarket,itiscommonlyinterpretedassignalingapossiblemarketreversal,atrendchangetotheoppositedirection.Thedragonflydoji,whenappearingafteraprolongeddowntrend,signalsapossibleupcomingreversaltotheupside.Examinationofthepriceactionindicatedbythedragonflydojiexplainsitslogicalinterpretation.Thedragonflyshowssellerspushingpricesubstantiallylower(thelonglowertail),butattheendoftheperiod,pricerecoverstocloseatitshighestpoint.Thecandlestickessentiallyindicatesarejectionoftheextendedpushtothedownside.Thegravestonedoji’snameclearlyhintsthatitrepresentsbadnewsforbuyers.Theoppositeofthedragonflyformation,thegravestonedojiindicatesastrongrejectionofanattempttopushmarketpriceshigher,andtherebysuggestsapotentialdownsidereversalmayfollow.Therare,fourpricedoji,wherethemarketopens,closes,andin-betweenconductsallbuyingandsellingattheexactsamepricethroughoutthetimeperiod,istheepitomeofindecision,amarketthatshowsnoinclinationtogoanywhereinparticular.Therearedozensofdifferentcandlestickformations,alongwithseveralpatternvariations.ProbablythemostcompleteresourceforidentifyingandutilizingcandlestickpatternsisThomasBulkowski’spatternsite,whichthoroughlyexplainseachcandlestickpatternandevenprovidesstatisticsonhowofteneachpatternhashistoricallygivenareliabletradingsignal.It’scertainlyhelpfultoknowwhatacandlestickpatternindicates–butit’sevenmorehelpfultoknowifthatindicationhasproventobeaccurate80%ofthetime. TechnicalIndicators–MovingAveragesInadditiontostudyingcandlestickformations,technicaltraderscandrawfromavirtuallyendlesssupplyoftechnicalindicatorstoassisttheminmakingtradingdecisions.Movingaveragesareprobablythesinglemostwidely-usedtechnicalindicator.Manytradingstrategiesutilizeoneormoremovingaverages.Asimplemovingaveragetradingstrategymightbesomethinglike,“Buyaslongaspriceremainsabovethe50-periodexponentialmovingaverage(EMA);Sellaslongaspriceremainsbelowthe50EMA”.Movingaveragecrossoversareanotherfrequentlyemployedtechnicalindicator.Acrossovertradingstrategymightbetobuywhenthe10-periodmovingaveragecrossesabovethe50-periodmovingaverage.Thehigheramovingaveragenumberis,themoresignificantpricemovementinrelationtoitisconsidered.Forexample,pricecrossingaboveorbelowa100-or200-periodmovingaverageisusuallyconsideredmuchmoresignificantthanpricemovingaboveorbelowa5-periodmovingaverage. TechnicalIndicators–PivotsandFibonacciNumbersDailypivotpointindicators,whichusuallyalsoidentifyseveralsupportandresistancelevelsinadditiontothepivotpoint,areusedbymanytraderstoidentifypricelevelsforenteringorclosingouttrades.Pivotpointlevelsoftenmarksignificantsupportorresistancelevelsorthelevelswheretradingiscontainedwithinarange.Iftradingsoars(orplummets)throughthedailypivotandalltheassociatedsupportorresistancelevels,thisisinterpretedbymanytradersas“breakout”tradingthatwillshiftmarketpricessubstantiallyhigherorlower,inthedirectionofthebreakout.Dailypivotpointsandtheircorrespondingsupportandresistancelevelsarecalculatedusingtheprevioustradingday’shigh,low,openingandclosingprices.I’dshowyouthecalculation,butthere’sreallynoneed,aspivotpointlevelsarewidelypublishedeachtradingdayandtherearepivotpointindicatorsyoucanjustloadonachartthatdothecalculationsforyouandrevealpivotlevels.Mostpivotpointindicatorsshowthedailypivotpointalongwiththreesupportlevelsbelowthepivotpointandthreepriceresistancelevelsaboveit. FibonacciRetracementsFibonaccilevelsareanotherpopulartechnicalanalysistool.Fibonacciwasa12th-centurymathematicianwhodevelopedaseriesofratiosthatisverypopularwithtechnicaltraders.Fibonacciratios,orlevels,arecommonlyusedtopinpointtradingopportunitiesandbothtradeentryandprofittargetsthatariseduringsustainedtrends.TheprimaryFibonacciratiosare0.24,0.38,0.62,and0.76.Theseareoftenexpressedaspercentages–23%,38%,etc.NotethatFibonacciratioscomplementotherFibonacciratios:24%istheopposite,orremainder,of76%,and38%istheopposite,orremainder,of62%.Aswithpivotpointlevels,therearenumerousfreelyavailabletechnicalindicatorsthatwillautomaticallycalculateandloadFibonaccilevelsontoachart.FibonacciretracementsarethemostoftenusedFibonacciindicator.Afterasecurityhasbeeninasustaineduptrendordowntrendforsometime,thereisfrequentlyacorrectiveretracementintheoppositedirectionbeforepriceresumestheoveralllong-termtrend.Fibonacciretracementsareusedtoidentifygood,low-risktradeentrypointsduringsucharetracement.Forexample,assumethatthepriceofstock“A”hasclimbedsteadilyfrom$10to$40.Thenthestockpricebeginstofallbackabit.Manyinvestorswilllookforagoodentryleveltobuysharesduringsuchapriceretracement.Fibonaccinumberssuggestthatlikelypriceretracementswillextendadistanceequalto24%,38%,62%,or76%oftheuptrendmovefrom$10to$40.Investorswatchtheselevelsforindicationsthatthemarketisfindingsupportfromwherepricewillbeginrisingagain.Forexample,ifyouwerehopingforachancetobuythestockafterapproximatelya38%retracementinprice,youmightenteranordertobuyaroundthe$31pricelevel.(Themovefrom$10to$40=$30;38%of$30is$9;$40–$9=$31)FibonacciExtensionsContinuingwiththeaboveexample–Sonowyou’veboughtthestockat$31andyou’retryingtodetermineaprofittargettosellat.Forthat,youcanlooktoFibonacciextensions,whichindicatehowmuchhigherpricemayextendwhentheoveralluptrendresumes.TheFibonacciextensionlevelsarepeggedatpricesthatrepresent126%,138%,162%,and176%oftheoriginaluptrendmove,calculatedfromthelowoftheretracement.So,ifa38%retracementoftheoriginalmovefrom$10to$40turnsouttobetheretracementlow,thenfromthatprice($31),youfindthefirstFibonacciextensionlevelandpotential“takeprofit”targetbyadding126%oftheoriginal$30moveupward.Thecalculationgoesasfollows:Fibonacciextensionlevelof126%=$31+($30x1.26)=$68–givingyouatargetpriceof$68.Onceagain,youneveractuallyhavetodoanyofthesecalculations.YoujustplugaFibonacciindicatorintoyourchartingsoftwareanditdisplaysallthevariousFibonaccilevels.PivotandFibonaccilevelsareworthtrackingevenifyoudon’tpersonallyusethemasindicatorsinyourowntradingstrategy.BecausesomanytradersdobasebuyingandsellingmovesonpivotandFibonaccilevels,ifnothingelsethereislikelytobesignificanttradingactivityaroundthosepricepoints,activitythatmayhelpyoubetterdetermineprobablefuturepricemoves. TechnicalIndicators–MomentumIndicatorsMovingaveragesandmostothertechnicalindicatorsareprimarilyfocusedondetermininglikelymarketdirection,upordown.Thereisanotherclassoftechnicalindicators,however,whosemainpurposeisnotsomuchtodeterminemarketdirectionastodeterminemarketstrength.TheseindicatorsincludesuchpopulartoolsastheStochasticOscillator,theRelativeStrengthIndex(RSI),theMovingAverageConvergence-Divergence(MACD)indicator,andtheAverageDirectionalMovementIndex(ADX).Bymeasuringthestrengthofpricemovement,momentumindicatorshelpinvestorsdeterminewhethercurrentpricemovementmorelikelyrepresentsrelativelyinsignificant,range-boundtradingoranactual,significanttrend.Becausemomentumindicatorsmeasuretrendstrength,theycanserveasearlywarningsignalsthatatrendiscomingtoanend.Forexample,ifasecurityhasbeentradinginastrong,sustaineduptrendforseveralmonths,butthenoneormoremomentumindicatorssignalsthetrendsteadilylosingstrength,itmaybetimetothinkabouttakingprofits.The4-hourchartofUSD/SGDbelowillustratesthevalueofamomentumindicator.TheMACDindicatorappearsinaseparatewindowbelowthemainchartwindow.ThesharpupturnintheMACDbeginningaroundJune14thindicatesthatthecorrespondingupsurgeinpriceisastrong,trendingmoveratherthanjustatemporarycorrection.Whenpricebeginstoretracedownwardsomewhatonthe16th,theMACDshowsweakerpriceaction,indicatingthatthedownwardmovementinpricedoesnothavemuchstrengthbehindit.Soonafterthat,astronguptrendresumes.Inthisinstance,theMACDwouldhavehelpedprovidereassurancetoabuyerofthemarketthat(A)theturntotheupsidewasasignificantpricemoveand(B)thattheuptrendwaslikelytoresumeafterpricedippedslightlyonthe16th.  Becausemomentumindicatorsgenerallyonlysignalstrongorweakpricemovement,butnottrenddirection,theyareoftencombinedwithothertechnicalanalysisindicatorsaspartofanoveralltradingstrategy. TechnicalAnalysis–ConclusionKeepinmindthefactthatnotechnicalindicatorisperfect.Noneofthemgivessignalsthatare100%accurateallthetime.Thesmartesttradersarealwayswatchingforwarningsignsthatsignalsfromtheirchosenindicatorsmaybemisleading.Technicalanalysis,donewell,cancertainlyimproveyourprofitabilityProfitabilityRatiosProfitabilityratiosarefinancialmetricsusedbyanalystsandinvestorstomeasureandevaluatetheabilityofacompanytogenerateincome(profit)relativetorevenue,balancesheetassets,operatingcosts,andshareholders'equityduringaspecificperiodoftime.Theyshowhowwellacompanyutilizesitsassetstoproduceprofitasatrader.However,whatmaydomoretoimproveyourfortunesintradingisspendingmoretimeandeffortthinkingabouthowbesttohandlethingsifthemarketturnsagainstyou,ratherthanjustfantasizingabouthowyou’regoingtospendyourmillions. ReadmoreaboutInvesting:DebtCapitalMarketsDebtCapitalMarkets(DCM)DebtCapitalMarkets(DCM)groupsareresponsibleforprovidingadvicedirectlytocorporateissuersontheraisingofdebtforacquisitions,refinancingofexistingdebt,orrestructuringofexistingdebt.TheseteamsoperateinarapidlymovingenvironmentandworkcloselywithanadvisorypartnerEquitiesTraderEquityTraderAnequitytraderissomeonewhoparticipatesinthebuyingandsellingofcompanysharesontheequitymarket.Similartosomeonewhowouldinvestinthedebtcapitalmarkets,anequitytraderinvestsintheequitycapitalmarketsandexchangestheirmoneyforcompanystocksinsteadofbonds.Bankcareersarehigh-payingInvestmentMethodsInvestmentMethodsThisguideandoverviewofinvestmentmethodsoutlinestheymainwaysinvestorstrytomakemoneyandmanageriskincapitalmarkets.Aninvestmentisanyassetorinstrumentpurchasedwiththeintentionofsellingitforapricehigherthanthepurchasepriceatsomefuturepointintime(capitalgains),orwiththehopethattheassetwilldirectlybringinincome(suchasrentalincomeordividends).BlockchainBlockchainBlockchainnetworkingallowsmaintenanceofagrowinglistofrecords.Blockchainauthenticationiswhatsupportscryptocurrencysecurity.CorporateFinanceTrainingAdvanceyourcareerininvestmentbanking,privateequity,FP&A,treasury,corporatedevelopmentandotherareasofcorporatefinance.EnrollinCFI’sFinanceCoursestotakeyourcareertothenextlevel!Learnstep-by-stepfromprofessionalWallStreetinstructorstoday.CorporateFinanceInstituteBacktoWebsite0searchresultsfor‘’Peoplealsosearchfor:excelFreefreecoursesBalancesheetaccountingwaccIRRExploreOurCertificationsFinancialModeling&ValuationAnalyst(FMVA)®LearnmoreCommercialBanking&CreditAnalyst(CBCA)™LearnmoreCapitalMarkets&SecuritiesAnalyst(CMSA)®LearnmoreCertifiedBusinessIntelligence&DataAnalyst(BIDA)™LearnmoreResourcesExcelShortcutsPCMacListofExcelShortcuts 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