JagoInvestor Presents

Basic's of Technical Analysis

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Email : manish.pucsd@gmail.com

All other content © 2007-2009 Jagoinvestor.com - All Rights Reserved

Contents1. Difference between Fundamental and Technical Analysis2. How to use Support and Resistance 3. How to use Trendlines to find Support and Resistance4. How to use Oscillators to BUY an SELL

Who must Read this Book

This book is going to teach you some basic and most important concepts of Technical Analysis . Anyone who trades or Invests in any Markets like Stock Markets , Commodities , Currency etc, can use these concepts .

These Concepts in themselves do not guarantee any success , there is much more than Technical Analysis which you need to understand and Learn like Money Managemenet , Investment or Trading Psychology and Discipline in Stock Markets .

Important Points

● Each Chapter has example's to help reader understand the concepts well.● You are Free to share the content “provided” you link back to

http://www.jagoinvestor.com and give proper credits to Author ie. Manish Chauhan .

● If you have any questions or concerns , mail me at manish.pucsd@gmail.com● Do not Use this ebook or its contents for any commercial Purpose .

Fundamental Analysis and Technical Analysis

There are two important questions which you have to answer when you want to buy shares ? They are "What to buy" and "When to buy" ? You may be familiar with Fundamental Analysis , Fundamental Analysis answers the question "What to buy" ? .

It a study of companies Financial statements , cash books , markets study to find out the future prospects of a company. It answers the question "Will this company be a good buy for long term" ? , "Will it be more valuable than what it is now " etc etc "

But !! , Even though you have picked up some excellent companies for your long term investments , That's not the end of the story . Now the biggest challenge and question you have is "When to buy it" ? You should not just go next day and buy the share , that's not the right approach . There can be a price area where buying is best in terms of risk/reward .

Technical Analysis is the study of charts , price and volume patterns and other indicators derived from price and volume . Technical Analysis gives us hint on what can happen in future , understand that it only gives you chances, not a guarantee . So everything should be taken with crossed fingers , Decisions taken on basis of TA only increases your risk/reward scenario .

Fundamental Analysis and Technical Analysis is a personal choice and one may work for you and other may not work for you . Its you who have to find out what fits your personality and if you want to use it or not .

Let us see an Example in the next Page .

I will give you an example .

Reliance is a very good long term Investment (do your own analysis to find out why, but it is :) ) .

On Feb 1 2009 , Ajay and Robert want to invest Rs 1 lac in Reliance for long term . Both of them understand that Reliance is truly long term buy . Ajay invests in Reliance on Feb 1 , because share is going up and he feels its a good time to enter other . He buys the stock at Rs 1360 . After some days Stock starts falling and reaches around Rs 1,150 . Roberts buys the stock at that time . See the Chart Below .

Here you can see that Robert has got the stock at 15% lower price , which means his profits will always be more than Ajay's by that much . What did Robert do ? Robert used simple Technical Analysis concepts and entered in the stock with better prices , It does not mean it will always happen , but there are good chances for getting better price .

In the above case of Reliance , there is no significant price difference , but there can be cases ,where there can be drastic differences , and it would be really worth to use basic Technical Analysis .

How to use Support and Resistance

Support : Support for a price is a price area where there are lots of buyers ready to buy the stocks rather than sellers . At that price point , the general perception is that its a good buy , and lots of buyers come to buy it . Hence buyers outnumber sellers and there is a higher possibility that prices will bounce back from that point . This is a point where Buying has less risk . In other words , at support levels demand is thought to be strong enough to prevent the price from declining further . Please understand that Support point is not a place from where it will for sure bounce back , Its only the higher probability that it will bounce back . Also understand that its not exactly a fixed price which should be considered as Support , generally its a range like 98-100 or 560-570 ..

Which point is Support point : Every Low made by the price can be considered as Support Area .

Support Example 1 : Below chart is for Jaiprakash Associates (click to enlarge) , It made a low of Rs 53 (closing price) on 27th Oct 2008 and then bounced up from there . Now Rs 53 is the support point , Prices went up from that point and after reaching Rs 90 , it again started heading down , You can clearly see in charts that it reached Rs 53 levels , but could not break down from that point and again bounced back from there .

It was a very good "BUY" around Rs 53 .Understand that buying around Rs 53 , is only a less-risky trade , not a "no-risk" trade . Prices can break down from there also .

Support Example 2 : Below is a chart of RPL . Here you can see thatprices made lows of Rs 70 around Dec 1 , 08 . That became a support point , and then prices reached thought levels around first week of Mar 09 , It bounces back from that point , It was a less risk trade around Rs 70 .

Resistance : Resistance is just opposite of Support , At this price levels there are more sellers than buyers and with high probability prices reverses from this point . At this point there are enough sellers in the market to prevent it from rising further .

Resistance point is the High made by a price . All the high's will act as some kind of resistance points .

Lets see examples :

Resistance Example 1 : Below is Reliance Charts , You can see that reliance made a high of Rs 1400 around Dec 2008 , After that you can see how it reversed from that point 2 times in Jan and Feb 2009 . It was a wise decision to sell at those points

You can also find many examples like this if you investigate yourself . Try to see other charts if you are interested , you can look at charts at ichart.in or http://www.bazaartrend.com/index.php , find yourself)

Important Note : When prices are near Support or Resistance levels , you should be more alert . It does not mean that you just jump onto market and buy or sell , Be patient to see the actual price reversal , Though you will loose some part , that would be a better trade . Also there are several other factors which should be considered , but for now lets not touch upon them . lets keep it simple for readers .

Lets also look at some important points

Break Down : Always remember that when prices dont hold support and break them and fall further , it tells that buyers are not strong enough and Sellers have taken over them and prices will make new lows , When support is broken , Sell further .

Example :Below is the chart of RPL , which shows how it broke down its support point and then made further lows .

Break Out : When prices dont hold resistance points and break them on upside , prices then indicate that they are going to make new highs . Better to buy at that point .

Some Other points to remember :

1. Support and Resistance points are places where you should be more alert and look for other signals to buy or Sell, just dont buy because prices have reached near support , buy it when it starts rising and there are positive signals .

2. Support once broken becomes Resistance for next time , and Resistance once broken becomes Support point for next time , use this knowledge . See : http://candlestickmania.blogspot.com/2008/07/resistance-becomes-support.html

3. Many times there are false breakout and breakdown , So it will many times happen that you get out at important levels and miss the large movement , thats fine , you can always enter after getting out .

4. This is most important point , Everything I talked about in this article can increase your chances of making more money in trading , but remember that you are dealing in Markets , and if you dont control your GREED and emotions , your failure is guaranteed . Use strict Stop losses and use Money management techniques (it means not putting all your money at once , if you have 10 lacs , put only 1 lac , dont be greedy enough , else someday you markets will punish you badly , then no Technical analysis or any thing will help . have good amount of cash with you always ).

All technical Analysis and knowledge are of no help if a person cant control his greed and emotions in Market . TA and your knowledge will contribute not more than 20% of your success in long run .

How to use Trendlines to find Support and Resistance

What is a TrendLine ?

A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. In the Uptrend , we join two low prices points and in Downtrend we join two high prices and extend it further . Next time when prices approach them , it should probably act as Support or resistance point . Let us see one example of each of them.

Example of trend line while DOWNTREND

You can see in the chart how Two high prices were joined and the line acted as Strong Resistance in future , 3 times prices touched it and broke down again , These are good price area where either one can go Short (sell) , or book there profits . You can see that now prices are again Approaching to this Resistance line ,so once prices reach this point , it may provide a good opportunity to sell .What will happen exactly , better not to predict and let market decide .

Understand that we are not saying that prices has to necessarily touch the Resistance line and then go back down , the trend line only provides Resistance , it may again go back much before touching it .

Example of trend line UPTREND

Below if the 2 yrs chart of HIND LEVER , Let us try to make a trend line which acts as support .

If you see the chart , i have connected two low prices and extended it in future , you can clearly see how it acted as support area and prices went back up from there , At the end , you can see how prices are again approaching this support area , most probably this will again hold and it should be a good BUY :)

Let us see one more example for Trend lines . This example will show us following things :

- Resistance line using trend line .- Breakout- How Resistance once broken became Support- Resistance line using trendline for shorter time frame .

Let us see a 2 yrs chart of JAIPRAKASH ASSOCIATES

You can see here how i joined two HIGH Points and extended the trendline in future , and how prices reacted to this Resistance line . Recently Prices broke out of this resistance line and then this same resistance line acted as Support line and prices bounced back from there .

Also you can see a small trendline , which was made joining the low points . you can see how prices bounced up as this support line held the prices . So , we have seen some examples of Trend lines and how they can act as Resistance or Support lines (as per situation) .

Some of the important points to note are :

●  Its more of an art to make a trendline , it depends how you make them using HIGH PRICE , CLOSE PRICE etc .

● You can make Trendline for any time frame.

●  Its not necessary for prices to touch trendlines , you should not expect  it .

● Its a wise decision to BUY OR SELL using trendlines . If trade goes in your favor , let your profits run , if it fails, cut your losses short and accept it . there is no problem with being wrong . even the best in Industry fail .

● Trendlines will be of no help unless you control your GREED in markets . dont put all your money in a single trade . Keep adequate cash for bad times .

● Once trendlines are broken , take it seriously , it has happened for a reason :) .

● Make sure that the two points used to make trendline are not very near , there should be some time gap between them to believe in them .

● More times trendline is touched by the price stronger it becomes , And stronger is the break out from that trendline .

Practise Question for you

Below is a chart , and I have drawn several trendlines in different time frames , I have marked some points with 1,2,3,4,5 , please tell me what are each of them and comments on each point . please do it individually . Let me see who comments correctly on each of them . Also tell me if there is any other trendline which could have been made , but i have left it ?

Conclusion :

So we end this Article here , We saw Importance of Support and Resistance and how to make trendlines and use them . In the next part (last part) , we will see how we can use some of the Indicators from technical Analysis to make decision better .

Also , we can see that even by visual inspection we can get some idea about which area is support and resistance area .

For people interested in learning these things in detail , I would recommend a book "How to make money trading with Charts" by Ashwini Gujral .

How to use Oscillators to BUY an SELL

What are Oscillators : Oscillators are the indicators which move from overbought to oversold area , generally from 0 to 100 . when they are nearing 100 it means stocks are overbought and "expected" to go down now . when they are nearing 0 , it means , stocks are in oversold area and fresh buying can come and move the stock up .

I will discuss just 2 oscillators which Investors can use to make better BUY AND SELL decisions .

Let take a time frame of 6 months and see how indicators gave signals of buy and sell . We will see 2 indicators here RSI and Slow Stocastics (SS) (Read what is RSI and What is Slow Stocastic ) .

Rules

When its overbought , we SELL the share .When its oversold , we BUY the share .

SS BUY signal = when blue color line crosses down the Red line .SS SELL signal = when blue color line crosses above the Red line .

RSI BUY signal = when RSI has moved below 30 and starts moving up .RSI SELL signal = when RSI has moved above 70 and starts falling down .

To make signals more stronger , we will use both the indicators signal and take BUY or SELL only when both shows same kind of signal .

OVERBOUGHT = when RSI and SS both are overboughtOVERSOLD = when RSI and SS both are oversold .

Note

At any point of time, markets may be in any of 3 state .

- Uptrend- Downtrend- Side ways Movement

Understand that these signals work best in range bound market , like we had for last 6 months . When market were moving in range of 3100-2600 . If markets are in strong Uptrend or Downtrend , these indicators will generate many false signals .

Hence , In different markets we have to use different strategies .

Uptrend Market : IN Uptrend , you should avoid selling the stock , when there is small correction , Indicators can fast move in oversold region , that is the time you should BUY . But not SELL when prices are in over bought market .

Downtrend Market : In Downtrend , you should avoid Buying the stock , only SELL when the indicators are in overbought region .

Sideways Market : In this market , you can buy and sell both .

Lets see some examples for last 6 months . This was a Sideways market (but still downward bias was there , so be careful with BUY , you can take SELL easily) .

DLF

ICICI BANK

RELIANCE CAPITAL

Some Important things to NOTE (very important)

Oscillators should not be used in Isolation alone , You should also confirm it with other things like Support and resistance to make your BUY or SELL more stronger .

For example : If prices are near the Overbought , but you see that prices have broken the resistance point , its tells you that you should not BUY . because Oscillators are secondary thing , prices are primary .

Also , If prices are near support and not breaking it , and oscillator are in over sold area , then its safe to BUY . Never rely just on Oscillators , they are only helping tools used with other signals .

Thanks

Thanks for reading the ebook . I hope you have learned some thing which can help you . To read more articles like these visit http://www.jagoinvestor.com

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