 TECHNICAL ANALYSIS
Technical analysis is the study of chart patterns and statistical figures to understand
market trends and pick stocks accordingly. Sounds complicated? Here is a simpler
definition.
One day the share price is up; another day it may be down. But over time, if you look at
the stock price’s movement, you may see trends and patterns emerge. The study of these
chart patterns and trends in stock prices is called technical analysis of stocks. When you
learn technical analysis of stocks, you will understand the big role that technical
indicators play.
Importance of Technical Analysis

Mathematical Approach:
Technical analysts use probability to pick stocks. By using probability, they are able to
predict the outcome of an action without necessarily needing to scrutinize it in great
detail.
So, technical analysis tells you how prices are going to move without requiring you to
bother about the nitty-gritties that will cause the price to move. It is much quicker and
less laborious than fundamental analysis.

Signs Of Upcoming Danger:
Sometimes, a major fall in stock prices is just around the corner but nobody can see it
coming. Fundamental analysis tools are unable to predict it. However, by using historical
chart patterns and other technical tools, one can predict the fall.
Now naturally, technical analysis cannot tell you the reason for the fall, but it can tell you
that it is about to come. You can prepare yourself for it accordingly.
For example, before the 2009 financial crisis, everything was going well in the US stock
markets. Nobody could say that stocks will fall so soon and so sharply. However, technical
analysts predicted beforehand that markets are about to enter one of the biggest falls
ever.

Identification Of Short-Term Trends :
Fundamental analysis is more relevant for investors who want to invest for a long
period of say three to five years or more. This is because any profitable business model
takes time to be successful.
So, investors too have to remain patient. This is not so with technical analysis.
Eventually, the success of a stock depends on the company’s profitability. This cannot be
predicted by technical analysis. It can only tell you whether the stock is going to move
up or down in the near future.
For example, if a company acquires a new plant and starts producing more output from
it, its revenues will go up. This should lead to an increase in its stock price. But how can
you predict such a change by simply studying past charts and trends? In the short run,
however, fundamental factors can only have a small effect on prices. For example, the
plant we just talked about cannot start producing overnight. It will take time. In such
cases, technical analysis presents a clearer picture. Thus, technical analysis is more
relevant if you want to make a quick buck in say three to six months, or even three.
Fundamental vs Technical Analysis

Basic Description:
As mentioned earlier, fundamental analysis seeks to explore a company’s ‘fundamentals’
to comment about its value, i.e. it evaluates crucial performance related criteria such as
management quality, corporate governance, sales, profit, future plans, condition of assets
and policies related to liabilities managements to predict the future performance of the
company.
Technical analysis does not bother at all with the accounts of a company.
It looks at patterns in the price chart of the company for bullish (optimistic) and bearish
(pessimistic) trends. It combines this with a statistical analysis of historical price data,
such as 52-week average, moving average and price momentum, to determine the future
price of a stock. These tools are together referred to as relative strength indicators.

Intangible Long-Lived Assets :
In case of fundamental analysis, the analyst has faith in his ability to predict how the
company’s financial statements will look in future periods.
For this, he may rely on his assessment of present factors or even past trends related to
the company’s operations.
Technical analysis is based on the assumption that historical patterns repeat themselves
over time. Thus, if these patterns can be studied closely, comments can be made
regarding future prices. This analysis is supported by a study of market volumes data
and relative strength indicators.

Horizon Of Analysis :
When performing fundamental analysis, you may choose to project performance as far in
the future you like—months or even years. Thus, fundamental analysis is predominantly
used
for
long
term
investments.
However, sometimes, an event, such as a favorable court ruling or getting a large sales
order takes place. This changes the company’s earnings potential in the short run,
without impacting it much in the long run. You may invest in a stock for a short period of
days or weeks, in anticipation of such an event. This is called trading. Fundamental
analysis
allows
you
to
both
trade
and
invest.
Technical analysis, on the other hand is predominantly used for trading. In the long
term, fundamental factors change drastically. For this reason, historical data become
completely irrelevant.
For example, if a company sets up new production facilities, its future earnings potential
may increase drastically over time. In such a case, the price range for its stock would
change completely as well. Investment decisions based on past data will therefore, not
bear fruits

Accounts Payable :
Fundamental analysis is an extensive approach to equity analysis. It involves the study
of a lot of material. The starting point of fundamental analysis is always the annual
report and quarterly reports of the company. An annual report is a document that
contains extensive information about the company’s performance during a given year.
It includes the three main financial statements, along with detailed notes; a report on
corporate governance, management discussion and analysis (MD&A) and other
information about the company’s activities during the year. A description of its future
objectives is also included. Quarterly reports are produced more frequently.
They only contain the financial statements of the company. Also, annual reports are
audited externally to ensure that the information in them is accurate. This is not true of
quarterly reports. Once done with these reports, you must also consider other sources,
such as reports published by brokerages and industry bodies, news pieces about the
company and its
industry etc.
Naturally, no such content is required for technical analysis. Technical analysts only
require data related to the stock’s historical price and market volumes. Sometimes, they
also use complex computer software for statistical analysis of prices.
What Are the Limitations Of Fundamental Analysis?
Historical evidence proves that investors make more money by investing in good
companies for the long run compared to making opportunistic, short-term punts. Thus,
fundamental analysis promises greater rewards than technical analysis. Even so, it is
not free of shortcomings. Let’s look at some of them before we move ahead.

No Sweeping Approach:
Fundamental analysis is more an art than a science. Although analysts follow a uniform
series of steps, the analysis at each step is different, based on the specifics of the
company under analysis and the analyst’s philosophy.

Assumption-Based Analysis:
When conducting fundamental analysis, analysts try to picture the future. This naturally
involves the use of many assumptions. They range from the growth rate of sales, to the
future capital structure (proportion of debt and equity) of the company. This places the
analysis on a weak footing. Miscalculation or omission of a single factor can drastically
affect the intrinsic value calculated.

Future Uncertainty:
In addition to errors and omissions, the pure uncertainty regarding future events also
plagues fundamental analysis. One can never provide for events like strikes, thefts and
acts of god in the analysis. However, their occurrence can lay to waste the entire
analysis.

Laborious:
The number of steps involved and the scrutiny required at each stage makes
fundamental analysis a very long and tiresome job.
It requires a lot of patience and time.

No Clear Time Frame:
Fundamental analysis-based investing banks on the faith that a stock is undervalued
and will appreciate to its true value in due course of time. However, it provides no way
of determining how long this course will be. This leads to a blockage of funds for an
uncertain length of time.
Advantages of Technical Analysis
1.Entry point and exit point
Technical analysis actually shows a more specific way of when we can go into the
game, and purchase some stock. If we are educated enough, we will have the ability
to interpret the entry and exit point of the stock. It will allow us to maximize our
gain on the stock.
2. Volume trend
It tell us about the traders sentimental, and what is going through the mind of most
of the traders, because the market is govern by supply and demand, we will be able
to know roughly what other investors are thinking. High demand will push up the
prices, and high supply will inverse push down the prices, therefore from there, we
can judge how the overall market is working. Together with price, we will be able
to identify correction, in which its a more advance way of looking at the prices and
volume. It can also help us see a sudden increase of volume, in the intraday chart, to
enable us to know if there is a community of buyers having the same sentimental, or
institutional ownership, or just simply a damn rich guy.
3. Short term market indication
It provides a short term market indication, for example we want to earn a 10% profit
of the stock, we can time our entry, and minimize the time usage, (because by buying
one security, we are locking in our asset, and not being able to buy others) and
getting the goal we want. its more specific.
4. Visual indication and Pattern Analysis
There are some chart patterns which are proven that if it happen, a very high chance
of a certain pattern will follow after that. As human, we are more visual centered,
we like to see more than hear, therefore by looking at diagram, we can actually track
down pattern, and aid in our decision making faster. Price pattern also repeat
overtime, so if we are going by technical analysis, most likely, we will not be lured
to make other decision by the noise made by other investors and expert (noise refer
to the senseless and meaningless talk about stocks.)
5. 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.
6. 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.
7. Provides Early Signal
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.
8. Quick and Less Expensive
– 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.
9. Provides Lots of Information
– Technical analysis is helpful for short term trading, swing trading, and long term
investing. Technical charts provide a lot of information that helps the traders and
investors build their positions and take trades. Information like support, resistance,
chart pattern, momentum of the market, volatility, and trader’s psychology are just
some examples of types of information provided by technical analysis and used by
traders in the Forex market.
Open – When the markets open for trading, the first price at which a trade executes is
called the opening Price.
High – This represents the highest price at which the market participants were willing
to transact for the given day.
Low – This represents the lowest level at which the market participants were willing to
transact for the given day.
Close – The Close price is the most important price because it is the final price at which
the market closed for a particular period of time.
Volume- Volume is the number of shares or contracts traded in a security or an
entire market during a given period of time.
Types of charts: Overview
Having recognized that the Open (O), high (H), low (L), and close (C) serves as the best
way to summarize the trading action for the given time period, we need a charting
technique that displays this information in the most comprehensible way. If not for a
good charting technique, charts can get quite complex. Each trading day has four data
points’ i.e the OHLC. If we are looking at a 10 day chart, we need to visualize 40 data
points (1 day x 4 data points per day). So you can imagine how complex it would be to
visualize 6 months or a year’s data.
As you may have guessed, the regular charts that we are generally used to – like the
column chart, pie chart, area chart etc does not work for technical analysis. The only
exception to this is the line chart.
The regular charts don’t work mainly because they display one data point at a given
point in time. However Technical Analysis requires four data points to be displayed at
the same time.
Below are some of the chart types:
1. Line chart
2. Bar Chart
3. Japanese Candlestick
The focus of this module will be on the Japanese Candlesticks however before we get to
candlesticks, we will understand why we don’t use the line and bar chart.
– The Line and Bar chart
The line chart is the most basic chart type and it uses only one data point to form the
chart. When it comes to technical analysis, a line chart is formed by plotting the closing
prices of a stock or an index. A dot is placed for each closing price and the various dots
are then connected by a line.
If we are looking 60 day data then the line chart is formed by connecting the dots of the
closing prices for 60 days.
The line charts can be plotted for various time frames namely monthly, weekly, hourly
etc. So ,if you wish to draw a weekly line chart, you can use weekly closing prices of
securities and likewise for the other time frames as well.
The advantage of the line chart is its simplicity. With one glance, the trader can identify
the generic trend of the security. However the disadvantage of the line chart is also its
simplicity. Besides giving the analysts a view on the trend, the line chart does not
provide any additional detail. Plus the line chart takes into consideration only the
closing prices ignoring the open, high and low. For this reason traders prefer not to use
the line charts.
-The bar chart on the other hand is a bit more versatile. A bar chart displays all the four
price variables namely open, high, low, and close. A bar has three components.
1. The central line – The top of the bar indicates the highest price the security has reached.
The bottom end of the bar indicates the lowest price for the same period.
2. The left mark/tick – indicates the open
3. The right mark/tick – indicates the close
For example, assume the OHLC data for a stock as follows:
Open – 65
High – 70
Low – 60
Close – 68
For the above data, the bar chart would look like this:
As you can see, in a single bar, we can plot four different price points. If you wish to
view 5 days chart, as you would imagine we will have 5 vertical bars. So on and so forth.
Note the position of the left and right mark on the bar chart varies based on how the
market has moved for the given day.
If the left mark, which represents the opening price is placed lower than the right mark,
it indicates that the close is higher than the open (close > open), hence a positive day for
the markets. For example consider this: O = 46, H = 51, L = 45, C = 49. To indicate it is a
bullish day, the bar is represented in blue color.
Likewise if the left mark is placed higher than the right mark it indicates that the close is
lower than the open (close <open), hence a negative day for markets. For example
consider this: O = 74, H=76, L=70, C=71. To indicate it is a bearish day, the bar is
represented in red color.
The length of the central line indicates the range for the day. A range can be defined as
the difference between the high and low. Longer the line, bigger the range, shorter the
line, smaller is the range.
While the bar chart displays all the four data points it still lacks a visual appeal. This is
probably the biggest disadvantage of a bar chart. It becomes really hard to spot
potential patterns brewing when one is looking at a bar chart. The complexity increases
when a trader has to analyze multiple charts during the day.
Hence for this reason the traders do not use bar charts. However, it is worth mentioning
that there are traders who prefer to use bar charts. But if you are starting fresh, I would
strongly recommend the use of Japanese Candlesticks. Candlesticks are the default
option for the majority in the trading community.
– History of the Japanese Candlestick
Before we jump in, it is worth spending time to understand in brief the history of the
Japanese Candlesticks. As the name suggests, the candlesticks originated from Japan.
The earliest use of candlesticks dates back to the 18th century by a Japanese rice
merchant named Homma Munehisa.
Though the candlesticks have been in existence for a long time in Japan, and are
probably the oldest form of price analysis, the western world traders were clueless
about it. It is believed that sometime around 1980’s a trader named Steve Nison
accidentally discovered candlesticks, and he actually introduced the methodology to the
rest of the world. He authored the first ever book on candlesticks titled “Japanese
Candlestick Charting Techniques” which is still a favorite amongst many traders.
Most of the pattern in candlesticks still retains the Japanese names; thus giving an
oriental feel to technical analysis.
– Candlestick Anatomy
While in a bar chart the open and the close prices are shown by a tick on the left and the
right sides of the bar respectively, however in a candlestick the open and close prices
are displayed by a rectangular body.
In a candle stick chart, candles can be classified as a bullish or bearish candle usually
represented by blue/green/white and red/black candles respectively. Needless to say,
the colors can be customized to any color of your choice; the technical analysis software
allows you to do this. In this module we have opted for the blue and red combination to
represent bullish and bearish candles respectively.
Let us look at the bullish candle. The candlestick, like a bar chart is made of 3
components.
1. The Central real body – The real body, rectangular in shape connects the opening and
closing price
2. Upper shadow – Connects the high point to the close
3. Lower Shadow – Connects the low point to the open
Have a look at the image below to understand how a bullish candlestick is formed:
This is best understood with an example. Let us assume the prices as follows..
Open = 62
High = 70
Low = 58
Close = 67
Likewise, the bearish candle also has 3 components:
1. The Central real body – The real body, rectangular in shape which connects the opening
and closing price. However the opening is at the top end and the closing is at the bottom
end of the rectangle
2. Upper shadow – Connects the high point to the open
3. Lower Shadow – Connects the Low point to the close
This is how a bearish candle would look like:
This is best understood with an example. Let us assume the prices as follows..
Open = 456
High = 470
Low = 420
Close = 435
Here is a little exercise to help you understand the candlestick pattern better. Try and
plot the candlesticks for the given data.
Day
Open
High
Low
Close
Day 1
430
444
425
438
Day 2
445
455
438
450
Day 3
445
455
430
437
If you find any difficulty in doing this exercise, feel free to ask your query in the
comments at the end of this chapter.
Once you internalize the way candlesticks are plotted, reading the candlesticks to
identify patterns becomes a lot easier.
This is how the candlestick chart looks like if you were to plot them on a time series.
The blue candle indicates bullishness and red indicates bearishness.
Also note, a long bodied candle depicts strong buying or selling activity. A short bodied
candle depicts less trading activity and hence less price movement.
To sum up, candlesticks are easier to interpret in comparison to the bar chart.
Candlesticks help you to quickly visualize the relationship between the open and close
as well as the high and low price points.
– A note on time frames
A time frame is defined as the time duration during which one chooses to study a
particular chart. Some of the popular time frames that technical analysts use are:
o
o
o
o
Monthly Charts
Weekly charts
Daily or End of day charts
Intraday charts – 30 Mins, 15 mins and 5 minutes
One can customize the time frame as per their requirement. For example, a high
frequency trader may want to use a 1-minute chart as opposed to any other time frame.
Here is a quick note on different types of time frames.
Time
Frame
Open
High
Low
Close
No of Candles
Monthly
The opening
price on the
first day of
the month
Highest price at
which the stock
traded during the
entire month
Lowest price
at which the
stock traded
during the
entire month
The
closing
price on
the last
day of the
month
12 candles for
the entire year
Weekly
Monday’s
Opening
Price
Highest price at
which the stock
traded during the
entire week
Lowest price
at which the
stock traded
during the
entire week
The
closing
price on
Friday
52 candles for
the entire year
Daily or
EOD
Opening
price of the
day
Highest price at
which the stock
traded during the
day
Lowest price
at which the
stock traded
during the
entire day
The
closing
price of
the day
One candle per
day, 252
candles for the
entire year
Intraday
30
minutes
The opening
price at the
beginning of
the 1st
minute
Highest price at
which the stock
traded during the
30 minute
duration
Lowest price
at which the
stock traded
during the 30
minute
duration
The
closing
price as
on the
30th
minute
Approximately
12 candles per
day
Intraday
15
minutes
The opening
price at the
beginning of
the 1st
minute
Highest price at
which the stock
traded during the
15 minute
duration
Lowest price
at which the
stock traded
during the 15
minute
duration
The
closing
price as
on the
15th
minute
25 candles per
day
Intraday
5
minutes
The opening
price at the
beginning of
the 1st
minute
Highest price at
which the stock
traded during the
5 minute
duration
Lowest price
at which the
stock traded
during the 5
minute
duration
The
closing
price as
on the 5th
minute
75 candles per
day
As you can see from the table above as and when the time frame reduces, the number of
candles (data points) increase. Based on the type of trader you are, you need to take a
stand on the time frame you need.
The data can either be information or noise. As a trader, you need to filter information
from noise. For instance, a long term investor is better off looking at weekly or monthly
charts as this would provide information. While on the other hand an intraday trader
executing 1 or 2 trades per day is better off looking at end of day (EOD) or at best 15
mins charts. Likewise, for a high frequency trader, a 1 minute charts can convey a lot of
information.
So based on your stance as a trader you need to choose a time frame. This is extremely
crucial for your trading success, because a successful trader looks for information and
discards the noise.
 GAPS: Gaps in stock market trading appear when there is sharp rise or fall in the price of the
stock and when there is no occurrence of the trading activity. The reasons for gap creation
can be a positive news release by the company, change in the trade analyst’s view, buying
or selling pressure among traders, public announcements of the company’s profit, among
others.
Typically, there are two types of gaps in stock trading:
 Gap-up
 Gap-down
Gap-up: When the price of a financial instrument opens higher than the previous day’s
price, it is gap-up.
Gap-down: When the price of a financial instrument opens lower than the previous
trading day it is gap-down. Gap-downs occur when there is a change in investor
sentiments.
Gap strategies in the Indian stock market
In India, the trading market opens after the pre-opening session on all weekdays, except
on public holidays. The first couple of minutes remain highly volatile, where buyers and
sellers try to match prices as per their perceptions of the trend. If the trader is risk-averse,
then they should begin their trading after carefully analyzing the course of the stock
market. If they fail, they can incur substantial losses. Seasoned investors and traders can
make a quick profit depending upon their perception of the market.
Things to note when gap-trading




Once a stock starts to fill a gap, it will not stop as there will be little or no support or
resistance in the market.
The continuation gap and exhaustion gap are very different, so the trader has to make
sure of the gap he is going to follow.
Take note of the volume of stocks as high volume occurs in a breakaway gap, and low
volume occurs in exhaustion gap.
Individual traders are often the ones to decide with the flow of the market, whereas
institutional investors will ride the tide to see how it benefits their portfolio.
When trading in gap, it is prudent to study and analyze the trend before trading. Once a
trader understands the workings of the gap, it is easier to get high returns.
 CANDLESTICK PATTERN: -
Bullish Engulfing Pattern
Conditions to Qualify:
 Market should be in down trend.
 Last candle must be red.
 Previous red candle real body must be covered by next green candle.
 Then we can take buy position.
 Stop Loss:- Stop loss must be your last or current candles lowest low.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Bearish Engulfing Pattern
Conditions to Qualify:
 Market should be in up trend.
 Last candle must be Green.
 Previous green candle real body must be covered by next red candle.
 Then we can take Shortsell position.
 Stop Loss:- Stop loss must be your last or current candles highest high.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Piercing Pattern
Conditions to Qualify:
 Market should be in Down trend.
 Last candle must be red.
 Green candle must be opened with gap down
 Green candle should cover at-least 50% of previous red candle body.
 Then we can take buy position.
 Stop Loss:- Stop loss must be your last or current candles lowest low.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your
position.
Dark Cloud Cover
Conditions to Qualify:
 Market should be in up trend.
 Last candle must be Green.
 Red candle must be opened with gap up.
 Red candle should cover at-least 50% of previous Green candle body.
 Then we can take Shortsell position.
 Stop Loss:- Stop loss must be your last or current candles highest high.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Hammer Pattern
Conditions to Qualify:
 Market should be in Down trend.
 Last candle must be red.
 The candle which looks like hammer with long tail and formed at the bottom
side.
 Then we can take buy position.
 Stop Loss:- Stop loss must be your last or current candles lowest low.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Hanging Man Pattern
Conditions to Qualify :
 Market should be in up trend.
 Last candle must be Green.
 The candle which looks like hammer with long tail and formed at the upside.
 Then we can take Shortsell position.
 Stop Loss:- Stop loss must be your last or current candles highest high.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Inverted Hammer
Conditions to Qualify:
 Market should be in Down trend.
 Last candle must be red.
 The candle which looks like inverted hammer with long tail and formed at the
bottom side.
 Then we can take buy position.
 Stop Loss:- Stop loss must be your last or current candles lowest low.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Shooting Star
Conditions to Qualify :
 Market should be in up trend.
 Last candle must be Green.
 The candle which looks like inverted hammer with long tail and formed at the
upside.
 Then we can take Shortsell position.
 Stop Loss:- Stop loss must be your last or current candles highest high.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Bullish Harmi
Conditions to Qualify:
 Market should be in Down trend.
 Last candle must be red.
 The next green candle all sensitive prices (open, high, low, close) must be
covered by previous red candle.
 Then we can take buy position from next candle.
 Stop Loss:- Stop loss must be your last or current candles lowest low.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Bearish Harmi
Conditions to Qualify:
 Market should be in up trend.
 Last candle must be green.
 The next red candle all sensitive prices (open, high, low, close) must be covered
by previous green candle.
 Then we can take Shortsell position.
 Stop Loss:- Stop loss must be your last or current candles highest high.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Morning Star
Conditions to Qualify:
 Market should be in Down trend.
 Last candle must be red.
 The next green candle all sensitive prices (open, high, low, close) must be closed
below the previous red candle.
 Then the next green candle must be opened with gap up.
 Then we can take buy position.
 Stop Loss:- Stop loss must be your last or current candles lowest low.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3)
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
Evening Star
Conditions to Qualify:
 Market should be in up trend.
 Last candle must be green.
 The next red candle all sensitive prices (open, high, low, close) must be closed
above the previous red candle.
 The next red candle must be opened with gap up.
 Then we can take buy position.
 Stop Loss:- Stop loss must be your last or current candles highest high.
 Target:- Your target must be double than your stop loss(i.e. Risk Reward Ratio1:2 or 1:3).
 Exit:- if your stop loss or target doesn’t hit then within 15 days exit your position.
 CHART PATTERNS: Trend: 
A trend analysis is an aspect of technical analysis that tries to predict the future
movement of a stock based on past data.

Trend analysis is based on the idea that what has happened in the past gives
traders an idea of what will happen in the future.

Trends can be classified into three types:
- Uptrend
- Downtrend
- Sideways/Horizontal trend
Uptrend Line:
An uptrend line is formed by connecting two or more low points and has a
positive slope and. Uptrend lines act as support and indicate that net-demand is
increasing even as the price rises. When the prices remain above the trend line,
the uptrend is considered solid and intact and a break below the uptrend line
indicates that net-demand has weakened and a change in trend could be
imminent.
Downtrend line:
Downtrend line have a negative slope and is formed by connecting two or
more high points. . Downtrend lines act as resistance, and indicate that net-supply
(supply less demand) is increasing even as the price declines. As long as prices
remain below the downtrend line, the downtrend is solid and intact. A break
above the downtrend line indicates that net-supply is decreasing and that a
change of trend could be imminent.
Sideways Trend:
As long as prices remain below the downtrend line, the downtrend is solid and
intact. A break above the downtrend line indicates that net-supply is decreasing
and that a change of trend could be imminent. Shares that fluctuate within a price
range over a period of days, weeks, months, or even years are considered to be in
a sideways trend.
 SUPPORT AND RESISTANCE
Support
A straight line that connects three or more data points of a stock’s closing price or low
price is called a support.
Support is the point where buying pressure is more than the selling pressure or you can
say demand is greater than the supply. When stocks trades near support level it can be
utilized as buying opportunity by keeping support as stop loss for your trade. Support is
the psychological point where traders are willing to buy on the expectation that the stock
price won’t drop more.
Resistance
Resistance is the point where selling pressure is more than the buying pressure or you
can say supply is greater than the demand.
Resistance is the psychological point where traders are willing to sell with the
expectation that the stock price won’t increase more. It is also considered as ceiling
because these price levels prevent the stock from moving the price upward. When the
stock trades near resistance level, trader/investor can liquidate his buy position or he
can use this as a selling opportunity by keeping the resistance line as stop loss.
Note: Once a resistance or support level is broken, its role is reversed. If the price falls
below support level, that level becomes resistance, if the price rises above resistance
level, that level will act as a support level.
Rules to determine importance of Support & Resistance
1. The more number of times the price halts or bounces from a particular price, the
greater is its importance as support & resistance level.
2. The greater volume traded at a support & resistance level, greater is its importance.
Support & Resistance in Technical analysis of stocks
DOUBLE TOP AND DOUBLE BOTTOM
Double Tops & Double Bottoms appear at the end of price trends. You need a trend or a
sharp move prior to a double top or bottom so that you have something to trade on the
way back.
Otherwise called M Tops and W Bottoms for visual reasons, these are two of the best
known chart patterns.
Identifying a double top and a double bottom
The characteristics are fairly obvious, there are two price peaks or two lows at similar
levels. There are however a couple of less obvious criteria that the patterns need to fulfil
in order to confirm their identity:
1. There should always be “white space” between the two peaks or troughs. This
means on a double top that price should pullback from the first top and there
should be a price gap between the low of the candles on the top and the high of the
candles at the low of the pullback (in the dip). The price gap represents “white
space” on your chart (assuming your charts have a white background).
2. Ideally the second top should be the same height or slightly lower than the first
top. The second bottom should be slightly higher than the first bottom or level as
a maximum. The second peak or trough should have less energy associated with
it. That could mean fewer candles or price bars at the second bottom or top. A
quicker, sharper reversal. Remember we are looking for a trend reversal to
confirm. Trends can last a long time, so we need to be sure.
3. The double top pattern is not confirmed until price breaks the low of the pullback
between the tops. The double bottom pattern is not confirmed until price breaks
the high of the pullback between the bottoms.
Trading a double top or a double bottom
There are two possible entry points for trading double tops and double bottoms. One is
more adventurous than the other. As always you need to work out your risk and reward
for the trade set up.
The traditional entry point is when price confirms the pattern. For double tops this is
when price breaks below the low of the pullback in-between the two tops. When this
happens the support level formed by the low of the pullback has been broken. For double
bottoms this is when price breaks above the high of the pullback in-between the two
bottoms.
Your stop for these trades should be beyond the highest of the two peaks for double tops
and below the lowest of the two lows on double bottoms.
If the pullback between the tops or bottoms has been significant then waiting for price to
confirm the pattern may mean losing out on a major part of the reversal move. This is on
one hand the less risky entry because the pattern has been confirmed, however it may
mean that the risk and reward on the trade does not work out.
In these cases you could enter a trade below the lows of the congestion area at the second
top or bottom. Bear in mind that taking this entry means that the pattern has yet to be
confirmed. However it does mean that you have quite a tight stop. If the pattern works
out then this could be a great risk and reward trade.
Where to find Double Tops & Double Bottoms
Essentially you are looking for reversal points on your chart. Look back on your charts to
see where the market has reversed previously. Where are the strong support and
resistance levels? Has price reversed several times from the same points?
When price reaches these levels, stops and starts to pullback then you can be on alert for
this type of chart pattern.
You are looking for the end to a good trend. Wait for the initial trend to be broken and
then see what happens. The definition of an uptrend is higher highs and higher lows. So
when the market puts up a lower high with the second top you know that something has
changed. The definition of a downtrend is lower lows and lower highs. When the market
puts up a higher low with the second bottom you know that the trend could be changing.
Two double bottoms in one day on the DAX index chart
Here you can see two perfect double bottoms that appeared on the DAX futures market
in the same day that I wrote this article.
On both occasions the patterns completed successfully. The second lows were higher
than the first lows. They both followed sharp downward moves and were succeeded by
equally strong reversals. They both had “white space” between the two lows.
HEAD AND SHOULDERS
The head & shoulders pattern plays out in a specific sequence as described below. The
only real variable is how long it takes to complete each step in the sequence.
1. Price is in a clear uptrend, then reaches a peak and starts to decline. This peak forms the
"right shoulder" in the pattern.
2. Price completes a brief decline and rallies again to an even higher peak. Price then begins
to decline from this higher peak which forms the "head" in the pattern. Some traders
consider this to be more significant if volume is noticeably lower during the rally to the
peak forming the "head". Lower volume during this phase suggests that even though price
is rising, there is a lack of conviction on the part of buyers.
3. Price rallies for a third and final time, but fails to reach the high price achieved during the
previous rally to the "head". From this third peak price declines again, in the process
forming the "left shoulder" in the pattern. If volume is increasing as price moves back
down towards potential support, some traders consider it to be a sign that the support
level may not hold.
4. A "neckline" is formed by connecting the low prices registered between the left shoulder
and the head and the head and the right shoulder. Typically, this line is not exactly
horizontal.
5. Price must break below the neckline in order to complete the pattern, thereby reversing
the original trend. This price break is considered to be much more significant if it is
accompanied by high and/or above average volume which indicates increased urgency
on the part of sellers.
INVERSE HEAD AND SHOULDERS
A head & shoulders bottom pattern is also commonly referred to as an "inverse" head &
shoulders pattern because it resembles the traditional pattern simply flipped on its head.
1. Price is in a clear downtrend, then reaches a trough and starts to advance. This forms the
(inverse) "right shoulder" in the pattern.
2. Price completes a brief advance and declines again to an even lower trough. Price then
begins to advance from this lower trough which forms the (inverse) "head" in the pattern.
Some traders consider this to be more significant if volume is noticeably lower during the
decline to the trough forming the "head". Lower volume during this phase suggests that
even though price is falling, there is a lack of conviction on the part of sellers.
3. Price declines for a third and final time, but fails to reach the low price achieved during
the previous decline to the "inverse head". From this third trough price advances again,
in the process forming the (inverse) "left shoulder" in the pattern. If volume is increasing
as price moves back up towards potential resistance, some traders consider it to be a sign
that the resistance level may not hold.
4. A "neckline" is formed by connecting the high prices registered between the left shoulder
and the head and the head and the right shoulder. Typically this line is not exactly
horizontal.
5. Price must break above the neckline in order to complete the pattern, thereby reversing
the original trend. This price break is considered to be much more significant if it is
accompanied by high and/or above average volume which indicates increased urgency
on the part of buyers.
Using head & shoulders pattern to help determine price targets
Another unique feature of the head & shoulders pattern for many traders is that it can be
used to estimate a price target after the pattern is complete and the neckline is broken.
To find the estimated distance of the subsequent price move after the neckline is broken,
go back and measure the vertical distance from the peak of the head to the neckline. Then
subtract this same distance down from the neckline beginning at the point where price
first penetrates the neckline after the completion of the right shoulder. This gives the
minimum objective of how far prices may decline after the completion of this top
formation.
Price target using head & shoulders top pattern
Measure the distance from the head to the neckline to determine the spread amount.
Find the breakout point - where the outside of the right shoulder meets the neckline - and
measure down the distance found in Step #1 to determine a potential downside price
target level.
Price target: head & shoulders bottom
Measure the distance from the head directly up to the neckline.
Find the breakout point - where the outside of the right shoulder meets the neckline - and
measure up the distance found in Step #1 to determine a potential upside price target
level.
ROUNDED TOP AND BOTTOM
The rounded top and bottom are reversal patterns designed to catch the end of a
trend and signal a potential reversal point on a price chart.
The rounded top pattern appears as an inverted 'U' shape and is often referred to as an
‘inverse saucer’ in some technical analysis books. It signals the end of an uptrend and
the possible start of a downtrend. This means that the rounded top can indicate an
opportunity to go short.
The rounded bottom pattern appears as a clear 'U' formation on the price chart and is
also referred to as a ‘saucer’. It signals the end of a downtrend and the possible start of
an uptrend. This means that the rounded bottom can indicate an opportunity to go long.
The rounded top can indicate an opportunity to go short and the rounded bottom can
indicate an opportunity to go long.
How to identify a rounded top pattern
The chart below shows what a rounded top pattern looks like:
1. Uptrend
2. Rounded top
3. Neckline
In order for the pattern to occur, the price must first rally upwards and consolidate for
an extended period, forming the rounded top. It then eventually falls back down below
the neckline of the consolidation area.
Every trader needs a trading journal. As a Tradimo user, you qualify for the $30
discount on the Edgewonk trading journal. Simply use the code “ tradimo” during the
checkout process to get $30 off. Use this link to get the discount.
How to trade the rounded top
To trade this pattern look for the neckline that is marked on the chart below. Once the
price breaks through and a candle closes below the neckline, you can enter the market
with a sell order.
The chart below shows the neckline being broken by the price – this is where short
traders can enter the market.
1.
2.
3.
4.
5.
Uptrend
Rounded top
Neckline
Close of candle that breaks the neckline
Short entry
The stop loss is placed above the neckline of the pattern. If the price trades beyond this
point, the probabilities of the pattern working out have decreased and you do not want
to be in the market any longer.
The profit target is measured by taking the height of the actual pattern and extending
that distance down from the neckline.
The chart below demonstrates the stop loss and take profit levels:
1.
2.
3.
4.
5.
Uptrend
Rounded top
Neckline
Height of pattern
Same distance away from neckline as 4
1. Short entry
2. Stop loss
3. Take profit
How to identify a rounded bottom pattern
The chart below shows what a rounded bottom pattern looks like:
1. Downtrend
2. Rounded bottom
3. Neckline
This pattern also requires a sustained price move, this time to the downside before
consolidating for an extended period and forming the rounded bottom. The price then
begins to rally back above the neckline of the consolidation area. At this point the
pattern has been completed.
How to trade the rounded bottom
We will now look at how to trade the rounded bottom pattern.
Enter the trade
To trade this pattern look for the neckline that is marked on the chart below. Once the
price breaks through and a candle closes above the neckline, you can then enter the
market with a buy order.
The chart below shows the neckline being broken by the price – this is where long
traders can enter the market.
1.
2.
3.
4.
Downtrend
Rounded bottom
Neckline
Close of candle that breaks the neckline
1. Long entry
The stop loss is placed below the neckline of the pattern. If the price trades below this
point, the probabilities of the pattern working out have decreased and you do not want
to be in the market any longer.
The profit target is measured by taking the height of the actual pattern and extending
that distance up from the neckline.
The chart below demonstrates the stop loss and take profit level:
1.
2.
3.
4.
5.
Downtrend
Rounded bottom
Neckline
Height of pattern
Same distance away from neckline as 4
1. Long entry
2. Stop loss
3. Take profit
FLAG PATTERN
A flag pattern is a trend continuation pattern, appropriately named after it’s visual
similarity to a flag on a flagpole. A “flag” is composed of an explosive strong price move
that forms the flagpole, followed by an orderly and diagonally symmetrical pullback,
which forms the flag. When the trendline resistance on the flag breaks, it triggers the next
leg of the trend move and the stock proceeds ahead. What separates the flag from a typical
breakout or breakdown is the pole formation representing almost a vertical and
parabolic initial price move. Flag patterns can be bullish or bearish.
Bullish Flag
This pattern starts with a strong almost vertical price spike that takes the short-sellers
completely off-guard as they cover in frenzy as more buyers come in off the fence.
Eventually, the price peaks and forms an orderly pullback where the highs and lows are
literally parallel to each other, forming a tilted rectangle.
Upper and lower trendlines are plotted to reflect the parallel diagonal nature. The
breakout forms when the upper resistance trend line breaks again as prices surge back
towards the high of the formation and explodes through to trigger another breakout and
uptrend move. The sharper the spike on the flagpole, the more powerful the bull flag can
be.
Bearish Flag
The bear flag is an upside down version of the bull flat. It has the same structure as the
bull flag but inverted. The flagpole forms on an almost vertical panic price drop as bulls
get blindsided from the sellers, then a bounce that has parallel upper and lower
trendlines, which form the flag.
When the lower trendline breaks, it triggers panic sellers as the downtrend resumes
another leg down. Just like the bull flag, the severity of the drop on the flagpole
determines how strong the bear flag can be.
TECHNICAL INDICATORS

A technical indicator is a mathematical calculation that can be applied to a stocks
past patterns, like price, volume, or even to another technical indicator.

Technical indicators do not analyze any part of the fundamental business like
earnings revenue and profit margins.

Technical indicators are most extensively used by active traders in the market as
they are primarily designed for analyzing short-term price movements.

To long-Term investors most technical indicators are of little value.
Categories of indicators
There are two categories of indicators i.e. lagging and leading indicator.
What is a lagging indicator?

Lagging indicators measure a company’s incidents in the form of past accident
statistics.
Why use lagging indicators?

Lagging indicators are the traditional safety metrics used to indicate progress
toward compliance with safety rules. These are the bottom-line numbers that
evaluate the overall effectiveness of safety at your facility. They tell you how many
people got hurt and how badly.
The drawbacks of lagging indicators.

The major drawback to only using lagging indicators of safety performance is that
they tell you how many people got hurt and how badly, but not how well your
company is doing at preventing incidents and accidents.

The reactionary nature of lagging indicators makes them a poor gauge of
prevention. For example, when managers see a low injury rate, they may become
complacent and put safety on the bottom of their to-do list, when in fact, there are
numerous risk factors present in the workplace that will contribute to future
injuries.
What is a leading indicator?

A leading indicator is a measure preceding or indicating a future event used to
drive and measure activities carried out to prevent and control injury.
Why use leading indicators?

Leading indicators are focused on future safety performance and continuous
improvement. These measures are proactive in nature and report what employees
are doing on a regular basis to prevent injuries.
Conclusion

To improve the safety performance of your facility, you should use a combination
of leading and lagging indicators.

When using leading indicators, it’s important to make your metrics based
on impact. For example, don’t just track the number and attendance of safety
meetings and training sessions – measure the impact of the safety meeting by
determining the number of people who met the key learning objectives of the
meeting / training.
TYPES OF TECHNICAL INDICATORS
Trend Indicator

These technical indicators measure the direction and strength of a trend by
comparing prices to an established baseline.
Momentum Indicator

These technical indicators may identify the speed of price movement by
comparing the current closing price to previous closes.
Volatility Indicator

These technical indicators measure the rate of price movement, regardless of
direction.
Volume Indicator

These technical indicators measure the strength of a trend based on volume of
shares traded.
Moving Average: 
A simple moving average is formed by computing the average price of a security
over a specific number of periods.

Most moving averages are based on closing prices.

A 5-day simple moving average is the five-day sum of closing prices divided by
five. As its name implies, a moving average is an average that moves.

Old data is dropped as new data comes available. This causes the average to move
along the time scale.

Below is an example of a 5-day moving average evolving over three days.
Daily Closing Prices: 11,12,13,14,15,16,17
First day of 5-day SMA: (11 + 12 + 13 + 14 + 15) / 5 = 13
Second day of 5-day SMA: (12 + 13 + 14 + 15 + 16) / 5 = 14
Third day of 5-day SMA: (13 + 14 + 15 + 16 + 17) / 5 = 15
The first day of the moving average simply covers the last five days. The second day of
the moving average drops the first data point (11) and adds the new data point (16). The
third day of the moving average continues by dropping the first data point (12) and
adding the new data point (17). In the example above, prices gradually increase from 11
to 17 over a total of seven days. Notice that the moving average also rises from 13 to 15
over a three-day calculation period. Also, notice that each moving average value is just
below the last price. For example, the moving average for day one equals 13 and the last
price is 15. Prices the prior four days were lower and this causes the moving average to
lag.
Exponential moving averages (EMAs):Exponential moving averages (EMAs) reduce the lag by applying more weight to recent
prices. The weighting applied to the most recent price depends on the number of
periods in the moving average. EMAs differ from simple moving averages in that a given
day's EMA calculation depends on the EMA calculations for all the days prior to that day.
You need far more than 10 days of data to calculate a reasonably accurate 10-day EMA.
There are three steps to calculating an exponential moving average (EMA). First,
calculate the simple moving average for the initial EMA value. An exponential moving
average (EMA) has to start somewhere, so a simple moving average is used as the
previous period's EMA in the first calculation. Second, calculate the weighting
multiplier. Third, calculate the exponential moving average for each day between the
initial EMA value and today, using the price, the multiplier, and the previous period's
EMA value. The formula below is for a 10-day EMA.
Initial SMA: 10-period sum / 10
Multiplier: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18
.18%)
EMA: {Close - EMA(previous day)} x multiplier + EMA(previous day).
MACD (Moving Average Convergence/Divergence) /Mac-Dee:
The MACD turns two trend-following indicators, moving averages, into a
momentum oscillator by subtracting the longer moving average from the shorter
moving average.

The MACD fluctuates above and below the zero line as the moving averages
converge, cross and diverge.

The MACD Line is the 12-day Exponential Moving Average (EMA) less the 26-day
EMA. Closing prices are used for these moving averages.

A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal line
and identify turns.

The MACD Histogram represents the difference between MACD and its 9-day EMA,
the Signal line.

The histogram is positive when the MACD Line is above its Signal line and negative
when the MACD Line is below its Signal line.
RSI (Relative Strength Index): 
RSI is represented by a chart that tracks a stock’s price on a scale of 0-100. Most
RSI charts have lines at the 30 and 70 mark. If the stock moves above 70, it’s
considered overbought, meaning there’s too much buying pressure on the stock
and it could fall lower.

If the stock moves below 30, that is a signal that the stock is oversold, and buyers
could soon come in and drive the price higher. However, it’s worth noting that RSI
can sometimes stay above 70 or below 30 for prolonged periods of time.
Supertrend: 
The Buy and Sell signal changes as soon as the indicator flips over the closing price.

A buy signal is generated when the stock/index price turns greater than the
indicator value. At this stage, the indicator color turn green and you can also see a
crossover of the price versus the indicator (price greater than indicator value)

A sell signal is generated when the stock/index price turns lesser than the
indicator value. At this stage, the indicator color turn red and you can also see a
crossover of the price versus the indicator (price lesser than indicator value)