technical analysis -advance level research & development department, mex. all rights reserved

Technical Analysis-Advance Level

RESEARCH & DEVELOPMENT DEPARTMENT, MEX. ALL RIGHTS RESERVED

Disclaimer

This presentation is being provided solely for informational purposes. Mercantile Exchange Nepal Limited does not warrant the accuracy or completeness of any information provided in this presentation and such information is provided without any correctness or condition of any kind. Neither Mercantile Exchange Nepal Limited nor any other person associated with the creation of this presentation or its contents shall be liable or responsible to any person for any harm, loss or damage that may arise in connection with the use of this presentation, including without limitation, any indirect, third party, or consequential damages.


Flow of Presentation

• Technical Indicator• Japanese Candlesticks• Technical Indicators• Conclusion


Technical Indicators

• A technical indicator is a series of data points that are derived by applying a formula to the price data of a security

• Price data includes any combination of the open, high, low or close over a period of time



• A technical indicator offers a different perspective from which to analyze the price action.

• Some, such as moving averages, are derived from simple formulas and the mechanics are relatively easy to understand

• Others, such as Stochastics, have complex formulas and require more study to fully understand and appreciate

• Technical indicators can provide unique perspective on the strength and direction of the underlying price action



• Why Use Indicators? An indicator can act as an alert to study

price action a little more closelyIndicators can be used to confirm other

technical analysis tools Some investors and traders use indicators

to predict the direction of future prices



• Tips for Using Indicators Indicators indicate Signals should be taken in context with

other technical analysis tools Learning how to read indicators is more of

an art than a science Hundreds of indicators in use today Choose carefully and moderately


Japanese Candlesticks

• Candlestick charting first appeared sometime after 1850

• Credit goes to legendary rice trader named Homma from the town of Sakata

• Original ideas were modified and refined over many years of trading eventually resulting in the system of candlestick charting that we use today


Japanese Candlesticks


Candlesticks Pattern, WHY??


• Doji

Major Candlesticks Pattern

Bulls and Bears are at an equilibrium A state of indecision Always take notice

•



• Gravestone Doji

Open and the close occur at the low of the day Top of a uptrend


• Dragonfly Doji

Open and the close occur at the top of the day Bottom of a downtrend



• Bullish Engulfing Pattern

End of a downtrend Buying pressure Beginning of an up - trend



Opposite to the bullish pattern End of an up – trending market Selling pressure


• Bearish Engulfing Pattern




• Dark Cloud Cover

Two – day bearish pattern End of an upturn Closes below the 50% level

End of a declining market Price opens lower than the previous day Closes above the 50% level

• Piercing Pattern



• Hammer

Long lower shadows and small real bodies Patter at the bottom of the down-trend is Hammer



• Hanging-man


Long lower shadows and small real bodies Pattern at the top of the up-trend is Hanging Man


• Morning Star

Bottom reversal signal Beginning of an up - trend




• Evening Star

Opposite of the Morning Star Top reversal signal Beginning of a down - trend


• Shooting Star

Warning that the top is near Bottom of a trend is a bullish signal (inverted hammer)



Moving Averages

• Simple Moving Averages• Exponential Moving Averages


Moving Averages

Simple Moving Averages• Average Value of a commodity over a set period• Emphasizes the direction trend • Upward trend is when a shorter duration MA (for e.g.,

15 days) crosses over the longer duration MA (for e.g., 50 days)

• Downward trend is when a longer duration MA (for e.g., 50 days) crosses over the shorter duration MA (for e.g., 15 days)


Moving Averages

Simple Moving Averages


Moving Averages

Exponential Moving Averages• Similar to Simple Moving Averages • Except more weight is given to the latest data• 12- and 26-day EMA’s are the most popular • Example of EMA


Moving Averages

Exponential Moving Averages


Pivot Points

• Predictive indicator of

market movement

• Uses the previous time

frame prices to

calculate the next time

frame’s pivot points

Calculation used for Pivot

Points

Resistance 3 = H + 2*(P-L)

Resistance 2 = P + (Res1-Sup1)

Resistance 1= 2 * P - L

Pivot Point = ( H + C + L ) / 3

Support 1 = 2 * P - H

Support 2 = P - (Res1-Sup1)

Support 3 = L - 2*(H-P)


Example of Pivot Points

• Gold Prices on 31st March 2011

Open High Low Close1435.80 1445.05 1427.80 1431.39

R2 R1 Pivot S1 S2

1452.13 1440.97 1434.77 1424.54 1417.10


Example of Pivot Points


Relative Strength Index

• Developed by J. Welles Wilder • Measures the magnitude of gains against

the magnitude of losses over a period• Range 0-100• Formula=100-100/(1+RS)• where, RS=Average Gain / Average

Loss


Relative Strength Index


Bollinger Bands

• Created by John Bollinger in 1980s• Determines the overbought and oversold

zones• Consists of three curves

Upper Band-Middle Band+2 S.D. Middle Band-20 Days SMALower Band-Middle Band-2 S.D.


Bollinger Bands


Fibonacci

• Discovered by Leonardo Pisano • Series numbers: 0, 1, 1, 2, 3, 5, 8, 13,

21, and so on• Fibonacci Retracement Levels (Golden

Mean)0.236, 0.382, 0.500, 0.618, 0.764

• Fibonacci Extension Levels0, 0.382, 0.618, 1.000, 1.382, 1.618


Fibonacci Retracement

• Works best when the market is trending• Used to determine support and resistance

level• General consensus is the market always

reverses from one of the support/resistance levels


Fibonacci Retracement• Uptrend



• Uptrend



• Downtrend


Fibonacci Retracement• Downtrend


Fibonacci with Trend Lines

• Useful on trending market i.e. Uptrend or Downtrend

• Example of silver• Want to take a long position but don’t

know when• Draw the trend line from 24th August till

22nd October• Draw the Fibonacci levels taking a swing

low price of USD 22.79(coinciding with one of the lowest trend levels of 22nd October) and swing high price of USD 29.34.


Fibonacci with Trend Lines


• Silver Prices found support at 61.8 level i.e. USD 25.31 (coinciding with the trend line as well) on 16th November

• Take a Long position at this level

• Silver Prices broke the swing high level on 4th December

Fibonacci with Japanese Candlesticks

• Tracking the development of exhaustive candlesticks

• Indicates a continuation of a trend• Example of Gold• Draw the Fibonacci levels taking a swing

low price of USD 1156 on 27th July and Swing high price of USD 1387.08 on 14th October


Fibonacci with Japanese Candlesticks


• Gold prices found support at 23.6 Fib Level on 21st October

• Formation of a Dragonfly Doji after a bearish candle the preceding day

• Dragonfly Doji indicates the beginning of a bullish trend

• Take a long position at this level

• Gold Prices break the swing high level on 5th November

MACD• Developed by Gerald Appel in late 1970s• Acronym for Moving Average Convergence

Divergence• Identify a new trend• Calculation• MACD: (12 Day EMA-26 Day EMA)• Signal Line: 9 Day EMA• MACD Histogram: MACD-Signal Line

• Rules for Trading• When MACD>Signal Line=Bullish Market• When MACD<Signal Line=Bearish Market


MACD


Conclusion

• Technical Indicators work in tandem with each other

• Weigh the pros and cons of each indicator before reaping the results

• The best strategy forward is using technical and fundamental factors simultaneously


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