Lesson Objective: To know the basic principles of chart-based analysis, including overlays and oscillators.

In-Depth Notes:

1. The Principles of Technical Analysis:
Technical analysis is the study of past market data (price and volume) to forecast future price movements. Technical analysts believe that all known information is already reflected in the price, and that price movements follow predictable patterns. Technical analysis is a complement to fundamental analysis, providing a framework for timing entry and exit points.

  • Core Principles:

    • Market Action Discounts Everything: All known information (fundamental, economic, political) is already reflected in the security’s price.

    • Prices Move in Trends: Prices move in trends (upward, downward, or sideways).

    • History Tends to Repeat Itself: Price patterns and investor behavior tend to repeat over time.

2. Price Charts:

  • Line Charts: Plot the closing prices of a security over a specified period. Line charts are simple and provide a clear view of the overall trend.

  • Bar Charts: Plot the high, low, open, and close for each period. Each bar represents a single period (day, week, month).

  • Candlestick Charts: Originated in Japan and are widely used by technical analysts. Each candlestick shows the high, low, open, and close for the period. Candlestick patterns provide insights into market sentiment.

3. Trend Analysis:

  • Trend: The general direction of the price movement. Trends can be upward (bullish), downward (bearish), or sideways (range-bound).

  • Trend Lines: Lines drawn on a chart to connect a series of price highs (resistance) or lows (support). An upward trend line connects higher lows; a downward trend line connects lower highs.

  • Support and Resistance:

    • Support: A price level where buying pressure is strong enough to prevent the price from falling further.

    • Resistance: A price level where selling pressure is strong enough to prevent the price from rising further.

    • Breakout: When the price breaks through a resistance level (breakout to the upside) or a support level (breakout to the downside), it often signals a significant price move.

4. Technical Indicators – Overlays and Oscillators:
Technical indicators are mathematical calculations based on price and volume data.

  • Overlays: Indicators that are overlaid on the price chart.

    • Moving Averages: Averages of price data over a specified period. They smooth out price fluctuations and identify the direction of the trend. Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) are widely used.

    • Bollinger Bands: A volatility indicator that consists of a moving average and two standard deviation bands above and below the moving average.

  • Oscillators: Indicators that oscillate between fixed boundaries (e.g., 0 to 100) or around a centerline.

    • Relative Strength Index (RSI): A momentum oscillator that measures the speed and change of price movements. RSI above 70 suggests overbought conditions; RSI below 30 suggests oversold conditions.

    • Moving Average Convergence Divergence (MACD): A trend-following momentum indicator that shows the relationship between two moving averages.

    • Stochastic Oscillator: A momentum indicator that compares a security’s closing price to its price range over a specific period.

 
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