Introduction To

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Introduction To Technical Analysis
Trading TraderMade International Ltd Market
Leading Trading Sales Tools
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Introduction

• TraderMade International
• DBFS Group LLP
• Global leader in advanced Trading Charting and
  Technical Analysis software
• The banks who use TraderMade represent 88 of the
  FX market liquidity
• Brian McNulty
• Co-Founder and Head of Business Development,
  DBFS Group
• Senior Technical Trader, Rand Merchant Bank
• Technical Analyst, Automated Trading

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Agenda

• Introducing Technical Analysis
• Foundations Of Technical Analysis
• Chart Construction Terminology
• Traders Tools Moving Averages
• Common Patterns
• Traders Tools Oscillators
• 3 Elements Of Successful Trading
• Bringing it all together
• Questions and Answers

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Introducing Technical Analysis

• Technical Analysis is the study of market
  action, primarily through the use of charts, for
  the purpose of forecasting future price movement
• John Murphy TAOTFM
• Determine future price directions
• Primarily done through studying charts
• Where did it come from?
• Japanese rice traders to see how much people
  were paying / SD
• Charles H . Dow in 1884 stock market averages
  publication
• Robert Rhea 1932 Dow Theory

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Who uses technical analysis

• A Trader is someone who takes a position in the
  market
• Technical Analysis is used by anyone who requires
  a view on a market
• Categories
• Traders
• Hedge Fund Managers
• Corporate Treasuries
• E-commerce / Sales teams
• Retail (HNI , Private Investors)
• What is the purpose of a Trader
• Speculative (Buy low, sell high! simple?)
• Hedging (manage risk)
• Go long, go short or stay out
• Percentages and probability analysis
• Money management

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Different schools of thought

• Fundamental Forecasting
• Studies the cause of the market / why
• Focuses on supply and demand
• Predicting future moves based on monetary
  policy, economic conditions weather, political
  etc
• Calculate the intrinsic value
• Technical Forecasting
• Believes the fundamentals are factored in
• Pattern recognition and analysis
• Study of past behaviour
• in times of confusion, charts come out!
• These techniques are complimentary!
• Majy market practitioners use both
• Technical is indirectly studying fundamentals
• Listen and understand both
• Use to confirm signals / build into your model

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Foundations of Technical Analysis

• The 3 premises on which technical approach is
• based are
• Market action discounts everything
• History repeats itself
• Prices move in trends

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Market Action Discounts Everything

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

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Foundations History Repeats Itself

• Human Psychology
• Chart patterns have been identified and
  categorized for over 100 years. Human psychology
  does not tend to change, hence patterns that have
  worked well in the past, are assumed to work well
  in the future.
• Crowd Theory
• Group behaviour is more predictable than
  individual. In the markets, vast majority behave
  as groups
• Self-fulfilment
• Enough people believe in it and it will become
  true

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Foundations Introducing Trend

• The trend is absolutely essential to the
  technical approach
• A trend can be defined as the direction of the
  market.
• An uptrend is a succession of higher highs and
  higher lows and a downtrend is a succession of
  lower highs and lower lows.
• The whole purpose of charting the price action of
  a market is to identify trends in early stages of
  their development for the purpose of trading in
  the direction of those trends.
• Why? A trend in a motion is more likely to
  continue than to reverse.
• The majority of the rest of the tools are simply
  to help measure the trend in order to
  participate.

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The Concept Of A Trend (continued)

• Why not just buy (go long) when the market is
  going up then?
• It is all about timing
• In too early on the wrong side
• In too late market will move against you
• Corrections
• Enters a sideways market get whipped!
• More bad news.major trends have 3 phases
• Accumulation informed buying by most astute
  investors - bad news assimilated
• Public Participation Most technical trend
  follows begin to participate, prices begin to
  advance rapidly and business news improves
• Distribution Newspapers begin to print
  increasingly bullish stores speculative volume
  and public participation increases. (note this is
  when those long at 1 sell!!)
• Hope to show some ways Traders can identify
  trend early enough along with some other
  indicators that can mean we are not always in 3!

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Chart Construction Terminology

• Types of Charts
• Price Bar (daily yearly) most common
• Line Chart (close only)
• Candlestick
• Volume total of trading activity
• Terminology
• Placing an order (bid /offer)
• Long / Short
• Stops
• Minimal Price Objective
• Corrections
• Support and Resistance
• Trend lines

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Fundamentals of charting Support Resistance

• The basic idea behind this support-resistance
  theory is that the understanding of the future
  lies in the past.
• Price levels that were significant in the past
  will be of importance for the price action in the
  future.
• Usually a support or resistance level is
  identified by previous lows or previous highs and
  is a level beyond which prices may have
  difficulty in moving. They are therefore
  considered important levels
• Trend reversal could be identified by watching
  the support and resistance levels.
• Role Reversal

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Fundamentals of charting Trendlines

• They are diagonal lines that either define and
  area of support in the market or an area of
  resistance. It identifies the current trend of a
  market
• In an uptrend a line is drawn connecting the lows
  to form a trendline. This is because the buyers
  in the market are pushing the market in an
  uptrend
• The trendline then helps not only to determine
  the extremities of the corrective phases but
  maybe even more importantly tells us when the
  trend is changing a reversal
• Filters - Validity of the trendline breaking

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Fundamentals of charting Channels

• The important line in a channel pattern is still
  the trendline. The channel line is purely a
  measuring line and should not be used as a
  trading signal. It can be used as a take profit
  indicator but it should not be used to establish
  a position against the prevailing trend.
• The channel line can be used for short term
  profit taking
• Once the channel line has been drawn on the
  chart, the width can be measured and projected
  from the break of the trendline. This is the
  Minimum Price Objective (MPO).

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Traders Tools - Moving Averages

• Remember, the trend is your friend!
• Purpose of most tools is to work out which way
  the trend is going asap
• MAs are therefore used to smooth out some of the
  "noise
• that occurs in the market so that the underlying
  trend is more easily viewed
• Moving Averages are the most popular method of
  doing so but be aware using MAs in a trendless
  market is one of the quickest ways to lose money!
• Cannot simply trade one (too long, too short,
  non-trending_

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Common Patterns

• We know already that markets move in trends with
  peaks and troughs in their price movements
• We have also seen how we can use tools such as
  Moving Averages to identify the start and end of
  trends
• The problem is that markets dont always trend up
  or down - they also move sideways.
• Another challenge of a trader is to work out
  whether this period of transition is just a pause
  before a continuation or the sign that a reversal
  of trend will happen.
• There are specific patterns that can help the
  trader to decide which it is
• Reversal Patterns These patterns normally
  indicate an important reversal in trend is
  happening
• Continuation Patterns These patterns usually
  indicate that the sideways price action is
  nothing more than a pause in the prevailing
  trend.
• This is done by identifying recognisable patterns
  within the price movements, which can then be
  used to generate price objectives for potential
  future moves
• i.e. Is a reversal or continuation likely and
  if so, predict where the market will move too

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Reversal Patterns Head Shoulders

• Breaking of the neckline very high probability
  pattern

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Reversal Patterns Double Top

• Two Peaks
• Filters

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Continuation Patterns Flags Pennants

• Continuation patterns are usually shorter
• Continuation patterns tell us that a sideways
  movement on a chart may be just a pause in the
  prevailing (longer-term) trend, after which
  prices will continue to move in the same
  direction as before.
• They must have been preceded by a sharp and
  almost straight line move.
• flying at half mast

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Continuation Patterns Triangles

• Triangle Patterns are not traded until the break
  out occurs.
• Expected direction is up
• Trend signal confirmation s given by closing
  penetration
• Ascending Triangles bullish
• Descending Triangles - bearish

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Traders Tools - Oscillators

• Another useful tool in a non-trending market.
  Provides the technical trader with a tool that
  can enable to profit from these periodic sideways
  and trendless markets.
• Runs continuously
• Also used to warn us that a trend reversal is
  possibly approaching
• Used to warn of a trend reversal before the
  prices reach the actual top or bottom
  (deceleration of the price increase / losing
  momentum)
• Overbought or oversold
• It is studying the rate of ascent or decent
• M P Px (where Px is price x days ago)
• Types Stochastics, RSI, Larry Williams, MACD

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Traders Tools - Oscillators
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The 3 Elements Of Successful Trading

• Price Forecasting - what to do
• Which way a market is expected to trend. (buy or
  sell)
• It is the crucial first step in trading decision.
  
• Timing when
• Trading tactics, or timing, determines specific
  entry and exit points.
• Money Management how much
• Covers the allocation of funds.(portfolio
  make-up,
• diversification, how much money to invest or
  risk in one market, the use of stops, reward to
  risk ratios)

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Bringing a Trading strategy together

• Do your homework not really a part time job!
• Pick one or two oscillators you are comfortable
  with
• Combine with trend indicators and confirmation
  signals and volume indicators
• Back test and paper trade
• Have a plan, NEVER trade impulsively
• Understand money management / diversify
• Trade light until proof of concept
• Automated entry and exit (profit and stop) -
  even if not generated by algorithmic trading
  system
• Always place your protective stop when you place
  your order
• Exit a losing trade as early as possible
• Learn to be happy in the minority!

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Questions and Answers
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Further Reading

• Technical Analysis of the Financial Markets
  John J. Murphy
• Deciphering The Market
• J.M.W Tadion
• Forecasting Financial Markets
• - Plummer