TECHNICAL ANALYSIS
Session 9
SESSION PLAN
▷TIMING THE MARKET
▷TRADING AND TECHNICAL ANALYSIS
▷DOW THEORY / TREND / CORRECTION
▷SUPPORT AND RESISTANCES, REVERSAL
PATTERN
▷MOVING AVERAGES AND OSCILLATORS (ROC,
RSI, MACD)
▷LEGENDARY INVESTORS / TRADERS
▷CASE STUDY ON RISK MANAGEMENT
TIMING THE MARKET
TIMING MARKET
▷Buy at the LOWEST and sell at the HIGHEST price.
TRADING AND TECHNICAL ANALYSIS
INTRODUCTION TO TRADING
▷WHY IS IT MORE DIFFICULT TO MAKE MONEY IN
MARKETS THAN TO BE AN OLYMPIC CHAMPION?
TECHNICAL ANALYSIS
▷STUDY OF PRICE AND VOLUME
▷ANTITHESIS OF EFFICIENT MARKETS
▷STUDY OF DEMAND AND SUPPLY
▷REPETITIVE PATTERNS EXPECTATION
WHY IT WORKS / ASSUMPTIONS
▷HISTORY REPEATS
▷GREED AND FEAR ARE PREDOMINANT HUMAN
EMOTIONS
▷HUMAN BEINGS BEHAVE IN THE SAME MANNER
IN THE FACE OF GREED AND PANIC
DOW THEORY/ TREND / CORRECTION
DOW THEORY
DOW THEORY
▷CHARLES DOW IN 1884
▷First Hypothesis: Primary trend cannot be manipulated.
▷Second Hypothesis: Averages discount everything
▷Third Hypothesis: The theory is not infallible.
TREND
▷MARKET MOVES IN SUMMATION OF THREE
TREND
▷The PRIMARY TREND: It can be as long as years and is the ‘main
movement’ of the market.
▷The INTERMEDIATE TREND: lasting between 3 weeks to several
months, retraces the last primary move some 33-66% and is difficult
to decipher.
▷The MINOR TREND: is least reliable, lasting from several days to
few hours, constitutes of noise in market and may be subject to
manipulation.
TREND
▷MARKET TREND HAS THREE PHASES
▷Be it the bull trend or the bear trend, either ways there are three well-
defined phases for each. For an uptrend, the phases are Revival of
confidence (accumulation), Response (public participation), Over-
confidence (Speculation) .
▷The three defined stages of the Primary Bear Trend are Abandonment
of hope (Distribution), Selling on decreased earnings (doubting), Panic (
distressed selling )
SUPPORT / RESISTANCES AND
REVERSAL PATTERNS
REVERSAL PATTERNS
▷HEAD AND SHOULDERS
▷INVERSE H&S
▷DOUBLE / TRIPLE TOP REVERSAL
▷DOUBLE / TRIPLE BOTTOM REVERSAL
▷ROUNDING BOTTOMS
▷ROUNDING TOPS
▷SPIKE REVERSAL OR V SHAPED RECOVERY
CONTINUATION PATTERNS
▷EXPANDING TRIANGLES
▷DESCENDING TRIANGLE
▷FLAG AND PENNANTS
▷WEDGES
▷RECTANGLES
MOVING AVERAGES AND
OSCILLATORS (MOMENTUM
INDICATORS)
CONCEPTS
▷MOVING AVERAGE (REVERSION TO THE MEAN)
▷OSCILLATORS ( OVERBOUGHT AND OVERSOLD:
ROC, RSI AND MACD)
▷MARKET BREADTH (ADVANCE DECLINING
RATIO)
▷VOLUME PRICE BREAKOUTS
▷GANN AND ELLIOT
CONCEPTS
▷TRENDS (MOVING AVERAGES 200, 50, 7)
MOVING AVERAGES
RATE OF CHANGE (ROC)
▷Rate of change between current price and price prevailing
n days earlier
▷14 day ROC is
▷Price today 140 or 80
▷Price 14 days back 100
▷ROC = 140/100*140 = 140% or ??
RELATIVE STRENGTH INDEX (RSI)
▷BY WELLS WILDER
▷RSI is relative price strength compared to 7-14 days
movement in prices
▷RSI = 100- (100/ (1+RS)
▷RS = Average gain per day / Average Loss per day
RSI
MACD
▷Gerald Appel during late 70s
▷Convergence and Divergence between 2 exponential
moving averages of different periods.
MACD would represent the absolute difference between
short term and long term moving average.
Can be daily or weekly prices 12-26, 14-28 etc. Subtracting
the longer from the shorter one
Oscillates around 0 line.
SENTIMENT INDICATORS
▷TRIN STATISTIC
▷CONFIDENCE INDEX
▷AD INDEX
▷PUT CALL RATIO
LEGENDARY INVESTORS
INVESTMENT LEGENDS
▷JIM SIMONS
▷WARREN BUFFETT
▷SIR JOHN TEMPLETON
▷PETER LYNCH
▷PHILIP FISCHER
▷GEORGE SOROS
▷JIM ROGERS
▷RAY DALIO
INVESTMENT LEGENDS
▷JOEL GREENBLATT
▷CARL ICAHN
▷IAN CASSELL
▷MOHNISH PABRAI
▷RAKESH JHUNJHUNWALA
▷RAMESH DAMANI
▷VIJAY CHOPRA
▷RAMDEO AGGARWAL
▷MUKUL
THOUGHTS GREAT INVESTORS
▷RAY DALIO: You have to bet against the consensus and be
right to be successful in the markets
▷WARREN BUFFETT: Be fearful when others are greedy. Be
greedy when others are fearful
▷PHILIP FISCHER: There are fads and styles in the stock
market just as there are in women’s clothes.
▷None of us likes to admit to himself/herself that he/she has
been wrong.
GREAT INVESTORS
▷ JIM SIMONS: “Efficient market theory is correct in that
there are no gross inefficiencies, but we look at anomalies
that may be small in size and brief in time.”
▷ “Models can lower your risk. It reduces the daily
aggravation.”
GREAT INVESTORS
▷ PETER LYNCH: “Invest in What You Know.”
▷Go for a business that any idiot can run – because sooner or
later any idiot probably is going to be running it.”
▷“Stocks you trade, it's wives you're stuck with.”
INVESTORS QUALITIES
▷ABILITY TO STAND AWAY FROM THE CROWD
▷COURAGE OF YOUR CONVICTIONS
▷HUMILITY
▷ABILITY TO ACCEPT MISTAKES AND RECTIFY
▷KNOWLEDGE AND ANALYSIS AND FLEXIBILITY TO LISTEN TO
OTHER’S VIEW
LEGENDARY TRADERS
LEGENDARY TRADERS
▷JESSE LIVERMORE
▷MICHAEL MARCUS
▷BRUCE KOVNER: WORLD TRADER
▷RICHARD DENNIS
▷PAUL TUDOR JONES
▷GARY BIELFELDT
▷ED SEYKOTA
PAUL TUDOR JONES
“There is nothing new in Wall Street. There can’t
be because speculation is as old as the hills.
Whatever happens in the stock market today
has happened before and will happen again.”
LEGENDARY TRADERS 2
▷LARRY HITE
▷MICHAEL STEINHARDT
▷DAVID RYAN
▷MARTY SCHWARTZ
▷JAMES B ROGERS JR.
▷MARK WEINSTEIN
LEGENDARY QUOTES
▷“Buy rising stocks and sell falling stocks”
▷“Continue with trades that show you a
profit, end trades that show a loss”
▷“Never average losses by, for example,
buying more of a stock that has fallen”
LEGENDARY QUOTES
▷“Go long when stocks reach a new high. Sell
short when they reach a new low”
▷“Don’t become an involuntary investor by
holding onto stocks whose price has fallen”
▷“Markets are never wrong – opinions often
are”
“
▷“Patterns repeat, because human
nature hasn’t changed for thousand of
years”
LEGENDARY TRADERS 3
▷BRIAN GELBER
▷TOM BALDWIN
▷TONY SALIBA
▷BILL LIPSCHUTZ: SULTAN OF CURRENCIES
▷RANDY MCKAY
▷WILLIAM ECKHARDT
Unrealized P&L is a myth.
Bill Lipschutz
LEGENDARY TRADERS 4
▷MONROE TROUT
▷AJ WEISS : HUMAN CHART ENCYCLOPEDIA
▷STANLEY DRUCKENMILLER
▷MARK RITCHIE : GOD IN THE PITS
TRADERS QUALITIES
▷DISCIPLINE
▷PATIENCE
▷KILLER INSTINCT
▷EMOTIONAL INTELLIGENCE
▷MASTERS OF PSYCHOLOGY
▷SHARP MEMORY AND MENTALLY VERY TOUGH
3 Es OF INVESTING AND 3 Ls OF
TRADING
3 Es OF INVESTING
▷EARNING
▷EARNING
▷EARNING
3 Ls OF TRADING
▷CUTTING LOSSES
▷CUTTING LOSSES
▷CUTTING LOSSES
EDWARD O THORP AND THE ART OF
TRADING
EDWARD O THORP
▷“BEAT THE DEALER”
WARRANTS
▷Warrants Arbitrage was his entry into investment world.
▷Short sell warrants and buy equity
▷Short sell equity and buy warrants
▷He invested in Berkshire Hathway at $982 after it had
increased 80 times and multiplied now almost 400 times.
PRICING OF WARRANTS
▷His book was precursor to pricing of options by Black, Fischer
and Scholes
BLACKJACK AND TRADING
▷FIRST YOU MUST CONTINUE TO PLAY TILL THE TIME THE
GAME IS ON TO IMPROVE THE PROBABILITY OF WINNING.
▷SECONDLY IN ORDER TO ACHIEVE THE FIRST YOU MUST
MAKE VERY SMALL BETS IN TRADE. A HEURISTIC RULE OF 1 %
CASE STUDIES ON RISK
MANAGEMENT
LTCM
▷JOHN MERIWETHER
MYRON SCHOLES AND ROBERT MERTON
4 QUANT TRADERS
6 Ph.Ds FROM LEADING UNIVERSITIES
▷CAPITAL OF 1 BILLION DOLLARS
▷NA BHUTO NA BHAVISHYATO
FIXED INCOME ARBITRAGE
21 % FIRST YEAR
43 % SECOND YEAR
41 % THIRD YEAR
ENRON
▷7TH LARGEST CORPORATION IN US IN 2000
▷JEFFERY K SKILLING EX-McKINSEY AND THE FIRST
ENERGY TRADING BEHEMOTH. IT HAD 3000 SPECIAL
PURPOSE ENTERPRISES (SPEs)
▷SENTENCED TO SERVE 292 MONTHS IN PRISON
▷RECRUITING FROM HARVARD LARGE NUMBER OF
MBAS
▷McKINSEY WAS THE CONSULTANT
LEHMAN AND 2008
▷ONE OF THE OLDEST GERMAN MERCHANTS AND
VERY SUCCESSFUL INVESTMENT BANKERS OF ALL
TIMES.
▷SUB-PRIME CRISIS
▷DID ANY DERIVATIVE EXCHANGE/ CLEARING HOUSE
GOT BANKRUPT?
KEY IN RISK MANAGEMENT IS “POSITION SIZE” TO
AVOID BEING FORCED OUT OF YOUR POSITIONS
CONCEPT FOR THE DAY
▷RISK MANAGEMENT NEEDS
CLARITY OF OBJECTIVE AND
DISCIPLINED APPROACH TO
MANAGING RISK
Thanks for Your time and
Attention!
