Securities Analysis and Portfolio Management: Prices Usually Always Move in Trends
Securities Analysis and Portfolio Management: Prices Usually Always Move in Trends
Securities Analysis and Portfolio Management: Prices Usually Always Move in Trends
Technical analysis
SHORT ANSWERS 100-150 WORDS
What is Technical Analysis?
Technical Analysis is concerned with the study of the past price behavior of shares as well as volume
of shares being traded in the past. One can study daily or weekly price and volume data of index
comprising several stocks like SENSEX or NIFTY.
A method of valuing securities by considering data produced by market movement, such as past
prices and volume.
Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and
other tools to identify patterns that can suggest future activity.
2. What are the various assumptions of Technical Analysis?
The various assumptions of Technical Analysis are:
Price discounts everything
A technical analyst focuses only on the prices of security as every information regarding
demand or supply of share is reflected in the prices of the security. Thus there is no need to
focus on various factors like financial results, political situation, trends for a particular
product of a company, seasonal factors etc. Only studying of trends in the movement of
prices will give a good idea about them.
Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open
interest of a security or contract used by traders who follow technical analysis. Technical indicators
are heuristic or mathematical calculations based on the price, volume, or open interest of a security or
contract used by traders who follow technical analysis.
Technical analysts or chartists look for technical indicators in historical asset price data in order to
judge entry and exit points for trades.
There are several technical indicators than fall broadly into two main categories: overlays and
oscillators.
Overlays: Technical indicators that use the same scale as prices are plotted over the top of the prices
on a stock chart. Examples include moving averages and Bollinger Bands®.
Oscillators: Technical indicators that oscillate between a local minimum and maximum are plotted
above or below a price chart. Examples include the stochastic oscillator, MACD or RSI.
Trend Analysis:
The biggest advantage of technical analysis is that is helps investors and traders predict the trend of the
market. Up trend, downtrend, and sideways moves of the market are easy to predict, with the help of chart
analysis.
Entry/Exit Point
Timing plays an important role in trading and investing. With the help of technical analysis, traders and
investors can predict the right time to enter and exit a trade thereby enabling good returns. Chart patterns,
candlesticks, moving averages, Elliot wave analysis, and other indicators are very useful for traders to
make entry and exit points.
Technical analysis gives early signals and also paints a picture about the psychology of investors and
traders regarding what they are doing. Price-volume analysis also indicates the movement of market
makers and their activities related to a particular market. Another main advantage of technical analysis is
that it gives an early signal when it comes to trend reversal.
In currency trading, technical analysis is less expensive as compared to the fundamental analysis and
there are so many companies that provide free charting software. Technical analysis gives a quick result
for traders who use 1 minute, 5 minutes, 30 minutes, and 1 hour charts. For instance, the formation of a
head and shoulder on 1 minute and 5 minutes chart gives fast results, as compared to the daily chart.
Technical analysis has long been treated with a certain degree of scorn — or at least skepticism — by
the stock market cognoscenti. Perhaps it is the suggestion implicit in technical analysis that
something other than rigorous fundamental analysis is behind all the buying and selling. “Chartists,”
as they are known, see asset prices as a function of supply and demand, and while technical analysts
generally agree with the efficient market hypothesis (EMH) insofar as markets quickly reflect all
available information, it is at this point that the disciplines part ways. Technicians believe that price
patterns tend to repeat over time and, as a result, are somewhat predictable. The repetitive behavior of
markets is a result of the irrationality of investors. This irrationality manifests itself in behavioral
biases that are, in the view of technicians, exploitable.
Past studies of the efficacy of technical analysis came to a range of conclusions and no firm
consensus. technical analysis did not beat simple buy-and-hold strategies after transaction costs. More
recent studies suggest some benefit from trading on technical indicators, including moving averages
and trading range breaks.
Rather than testing individual technical trading rules, they simply relied on portfolio managers’
assertions about whether or not, and to what extent, they employed technical analysis in their
investment process. The investor can manage US equity, global equity, US balanced, and global
balanced portfolios. They find that technical analysis was utilized to some degree by about one-third
of the managers surveyed, with US equity fund managers the most avid users and US balanced fund
managers the least frequent users. There were no notable differences in the use of technical analysis
by market capitalization of holdings.
Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices
together or show some data's best fit. The resulting line is then used to give the trader a good idea of
the direction in which an investment's value might move.
A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of
price. Trendlines are a visual representation of support and resistance in any time frame. They show
direction and speed of price, and also describe patterns during periods of price contraction.
Trendlines indicate the best fit of some data using a single line or curve.
A single trendline can be applied to a chart to give a clearer picture of the trend.
Trendlines can be applied to the highs and the lows to create a channel.
The time period being analyzed and the exact points used to create a trendline vary from trader to
trader.
The trendline is among the most important tools used by technical analysts. Instead of looking at past
business performance or other fundamentals, technical analysts look for trends in price action. A
trendline helps technical analysts determine the current direction in market prices. Technical analysts
believe the trend is your friend, and identifying this trend is the first step in the process of making a
good trade.
To create a trendline, an analyst must have at least two points on a price chart. Some analysts like to
use different time frames such as one minute or five minutes. Others look at daily charts or weekly
charts. Some analysts put aside time altogether, choosing to view trends based on tick intervals rather
than intervals of time. What makes trendlines so universal in usage and appeal is they can be used to
help identify trends regardless of the time period, time frame or interval used.
If company A is trading at $35 and moves to $40 in two days and $45 in three days, the analyst has
three points to plot on a chart, starting at $35, then moving to $40, and then moving to $45. If the
analyst draws a line between all three price points, they have an upward trend. The trendline drawn
has a positive slope and is therefore telling the analyst to buy in the direction of the trend. If company
A's price goes from $35 to $25, however, the trendline has a negative slope and the analyst should sell
in the direction of the trend.
Technical indicators are heuristic or pattern-based signals produced by the price, volume, and/or open
interest of a security or contract used by traders who follow technical analysis. By analyzing historical
data, technical analysts use indicators to predict future price movements. Examples of common technical
indicators include the Relative Strength Index, Money Flow Index, Stochastics, MACD and Bollinger
Bands. technical analysis is a trading discipline employed to evaluate investments and identify trading
opportunities by analyzing statistical trends gathered from trading activity, such as price movement and
volume. Unlike fundamental analysts, who attempt to evaluate a security's intrinsic value based on
financial or economic data, technical analysts focus on patterns of price movements, trading signals and
various other analytical charting tools to evaluate a security's strength or weakness. Technical analysis
can be used on any security with historical trading data. This includes stocks, futures, commodities, fixed-
income, currencies, and other securities. In this tutorial, we’ll usually analyze stocks in our examples, but
keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is far
more prevalent in commodities and forex markets where traders focus on short-term price movements.
Technical indicators, also known as "technicals," are focused on historical trading data, such as price,
volume, and open interest, rather than the fundamentals of a business, like earnings, revenue, or profit
margins. Technical indicators are commonly used by active traders, since they're designed to analyze
short-term price movements, but long-term investors may also use technical indicators to identify entry
and exit points. Types of Indicator There are two basic types of technical indicators: 1. Overlays:
Technical indicators that use the same scale as prices are plotted over the top of the prices on a stock
chart. Examples include moving averages and Bollinger Bands. 2. Oscillators: Technical indicators that
oscillate between a local minimum and maximum are plotted above or below a price chart. Examples
include the stochastic oscillator, MACD or RSI. Traders often use many different technical indicators
when analyzing a security. With thousands of different options, traders must choose the indicators that
work best for them and familiarize themselves with how they work. Traders may also combine technical
indicators with more subjective forms of technical analysis, such as looking at chart patterns, to come up
with trade ideas. Technical indicators can also be incorporated into automated trading systems given their
quantitative nature. Example of Technical Indicators The following chart shows some of the most
common technical indicators, including moving averages, the relative strength index (RSI), and the
moving average convergence-divergence (MACD). In this example, the 50- and 200-day moving
averages are plotted over the top of the prices to show where the current price stands relative to its
historical averages. The 50-day moving averages is higher than the 200-day moving average in this case,
which suggests that the overall trend has been positive. The RSI above the chart shows the strength of the
current trend—a neutral 49.07 in this case—and the MACD below the chart shows how the two moving
averages have converged or diverged - slightly bearish in this case.
PRIMARY TREND
Primary trend is the long-term direction in the price movement and lasts for a year or a number of
years.
It can be bullish or bearish.
It also consists of three phases, wherein each phase is interrupted by an intermediate trend reversal
lasting up to two to three weeks.
INTERMEDIATE TREND
This intermediate trend takes away the earlier price movements, upward or downward.
This trend appears within the primary trend and may lasts for a period ranging from few days to
weeks or months.
These trends indicate interruptions in the primary trend and act as a preventive force on the primary
trend.
This trend generally retraces from 33% to 66% of the primary price change since the previous
medium swing or start of the main movement.
SHORT TERM TRENDS
Short term trends are also known as minor trends and can be witnessed intraday or during a few days.
These trends correct the overbought and oversold positions in the scrip caused by reversals made in
the secondary trends.
For the purpose of analysis, it makes sense to ignore short-term trends and analyses the primary and
secondary trends in prices.
The three movements may be simultaneous, for instance, a daily minor movement in a bearish
secondary reaction in a bullish primary movement.