Conquering Technical Analysis Webinar Conquering Technical Analysis Webinar

Wednesday, 13 February 2013Wednesday, 13 February 2013

Presenter: Shaun van den BergPresenter: Shaun van den Berg

: Head of Client Education at PSG Online: Head of Client Education at PSG Online

• What is Technical Analysis?

• Simple vs Complex Charts

• Chart Setups

• Psychology of Trading

• The Trading Plan

• The Stockbroker Report

• Summary

• Conclusion

AgendaAgenda

Presenter: Shaun van den Berg

What is Technical Analysis?What is Technical Analysis?

Presenter: Shaun van den Berg

Two broad categories used to analyse shares to make investment decisions:

• Fundamental analysis: – Characteristics of a company– Estimate its value

• Technical analysis:– Does not care about the "value" of a company.– Technicians (also called chartists) only interested in

price movements.

IntroductionIntroduction

•Fundamental Analyst– Goes into each store– Studies the product – Decides whether to buy

•Technical Analyst– Sits on a bench in the mall – Watches people go into the

stores. – Disregards intrinsic value of the

products in the store – Decision based on the patterns

or activity of people going into each store.

Shopping Mall AnalogyShopping Mall Analogy

Source: www.investopedia.comPresenter: Shaun van den Berg

• Method to evaluate securities – Shares, indices, futures, commodities, exchange

rates, etc.

• Analyse market activity (historical performance)

– Past prices– Volume

• Use charts and other tools • Identify patterns • Future activity – Direction/ trend

What is Technical Analysis?What is Technical Analysis?

Presenter: Shaun van den Berg

• Study of supply & demand

• Attempts to determine:

– What direction or trend - Continue into future

• Attempts to understand:

– The emotions in the market by studying the market itself, as opposed to its components

• Some chartists use technical indicators & oscillators

• Others rely on chart patterns.

• Most use some combination of the two.

Price ActionPrice Action

• The market discounts everything (Priced in)– Price discounts everything (Reflects all information).– Broader economic factors (GDP, inflation, interest rates) – Company's fundamentals (Financial information relative to price)

– Market psychology (Greed, Fear & Expectations)

• Price moves in trends (The trend is your friend)– Price movements are not totally random– Once a trend is established, future price movement is more

likely to be in the same direction than to be against it. – Most technical trading strategies are based on this assumption.

• History tends to repeat itself (Market sentiment) – The "What" is more important than the "Why."– Market players react consistently to similar market stimuli over

time. – Emotional aspect of the market (Bullish or Bearish)

Basic AssumptionsBasic Assumptions

Simple versus Complex ChartsSimple versus Complex Charts

Presenter: Shaun van den Berg

• Step #1: What is the Overall Trend? – Identify the overall trend – use trend lines,

moving averages or peak/trough analysis. • As long as the price remains above its up trend

line, selected moving averages or previous lows, the trend will be considered bullish.

• As long as the price remains below its down trend line, selected moving averages or previous highs, the trend will be considered bearish.

Chart AnalysisChart Analysis

Trending & Trading RangesTrending & Trading Ranges

Trading Range

Trading Range

Trading Range

Trading RangeTrending

Trending

Trending

Trending

Three types of trend:

– Uptrends

– Downtrends

– Sideways/Horizontal or Neutral Trends

Trend AnalysisTrend Analysis

Example of a Up Trend (SAB)Example of a Up Trend (SAB)

Higher Highs

Higher Lows

Key & Critical Support LevelsKey & Critical Support Levels

Key

Critical Early warning Something is not right Protect profits Raise your stops Critical level – Beginning of new trend

Example of a Down Trend (TKG)Example of a Down Trend (TKG)

Lower Highs

Lower Lows

Key & Critical Resistance LevelsKey & Critical Resistance Levels

Key

Critical Early warning – Move is pausing Move is coming to an end Protect profits (if short) Tighten your stops (if short) Critical level – Move up is complete

Trend Lines (SAB)Trend Lines (SAB)

Resistance Trend line

Support Trend line

Moving Average CrossoversMoving Average Crossovers

• Step # 2: Where is Support? – Congestion (trading range) or previous lows

below the current price mark support levels. • A break below support would be considered

bearish (Open short positions / Sell).

• Step # 3: Where is Resistance? – Areas of congestion and previous highs

above the current price mark the resistance levels.

• A break above resistance would be considered bullish (Open long positions / Buy).

Chart AnalysisChart Analysis

Example of a Sideways Trend (ANG)Example of a Sideways Trend (ANG)

Resistance

Support

2006 2013

• Step # 4: Where is Momentum?– Momentum is usually measured with an

oscillator such as the MACD indicator. • If MACD is above its 9-day EMA (exponential

moving average) or positive, then momentum will be considered bullish, or at least improving.

• If MACD is below its 9-day EMA or negative, then momentum will be considered bearish, or at least deteriorating.

Chart AnalysisChart Analysis

MACD IndicatorMACD Indicator

• Step # 5: Where is Buying/Selling Pressure? – For shares and indices with volume figures

available, an indicator that uses volume is used to measure buying or selling pressure.

• When Chaikin’s Money Flow (CMF) is trading above zero, buying pressure is dominant.

• Selling pressure is dominant when the CMF indicator moves below zero.

Chart AnalysisChart Analysis

Chaikin’s Money Flow (CMF)Chaikin’s Money Flow (CMF)

Volume Price Trend (VPT)Volume Price Trend (VPT)

• Step # 6: Where is Relative Strength? – The Relative Strength indicator is a line

formed by dividing one data stream (share) by another (usually a benchmark).

• For shares it is usually the share price divided by the JSE Overall Index.

– The plot of this line over a period of time will tell us if the share is:

• Market outperforming (rising) • Market under performing (falling), or• Market performing (moving sideways) relative to

the JSE Overall Index.

Chart AnalysisChart Analysis

Relative StrengthRelative Strength

Data 1 = BHP BillitonData 2 = JSE Over Index

Synthesise StepsSynthesise Steps

Chart Setups Chart Setups

Presenter: Shaun van den Berg

• Chart setups are situations where all or most of the chart conditions are "right" for a long or short entry. – "Right" conditions, depending on the setup,

may or may not include other indicators. • Technical indicators support price & volume

action– Indicate or support what the action is, but– Do not dictate what to do, or – When to do it

Chart SetupsChart Setups

• Many setups are a result of self-fulfilling prophecies – Traders see the same chart patterns & price

action. • Early identification & perhaps even an early entry is

important • Understand all influences & indicators &

interpretation.• Only experience will get you to

– Understand how they work, – When to use them, and – Trust chart setups.

• Back-test, Paper trade (Simulator) & Start small. – Pick a trade candidate, – Plan your trade – Execute your plan.

Chart SetupsChart Setups

• The stronger the primary trend the more confidence you should have.

• Watch for big changes in volume as price approaches targets.

• Increased volume should accompany any breakout.

• Big volume spikes start & end a rally regardless of time frame.

• Play around with various charts but always use more than one time period using the support-resistance levels of one to tell you where your limits are in the other.

• Above every resistance level & below every support level lie plenty of orders to buy or sell once price breaks one way or the other. – This is what accounts for major volume increases on a

breakout or breakdown.

Chart Setups: Observations Chart Setups: Observations

• All stop-losses should be set to allow a 2% - 3% loss & no more.

• Smart money tends to put on trades when markets are quiet; amateurs tend to jump on the news.

• Buy the rumour, sell on the news. • Buyers wait for pullbacks & sellers wait for resistance • Technical indicators show what is going on with price

– They DO NOT dictate what you should do.

• Technical indicators are either:– Momentum type - showing you strength of the trend, – Overbought and Oversold type - showing you

weakness at support/resistance.

Chart Setups: Observations Chart Setups: Observations

Ascending TriangleAscending TriangleDescending TriangleDescending TriangleSymmetrical TriangleSymmetrical Triangle

Chart SetupsChart Setups

• Bullish chart pattern - easily recognizable - distinct shape created by two trend lines.

• One trend line is drawn horizontally - level that has historically prevented the price heading higher (i.e. resistance)

• Second trend line connects a series of increasing troughs or higher lows/ supports.

• Enter a long position when the price breaks above the top resistance.

Ascending TriangleAscending Triangle

• The more mature in time the pattern is the stronger it is.

• Trade the primary trend.

• Set buy limits just above the highs of horizontal resistance.

• Increased volume must accompany the breakout.

Ascending Triangle - RulesAscending Triangle - Rules

Ascending TriangleAscending Triangle

Ascending TriangleAscending Triangle

Mature Bullish Broken resistance Increased volume

Open: 28300cHigh: 28892cLow: 28300cClose: 28892c

Resistance @ 28500c

Entry Price: 28510c

• A bearish chart pattern • One trend line connects a series of lower highs• Second trend line - strong level of support. • Watch for a move below support - suggests

downward momentum is building.• Once the breakdown occurs - enter a short

position

Descending TriangleDescending Triangle

• The more mature in time the pattern is the stronger it is.

• Trade the primary trend.

• Set sell limit just below the lows of horizontal support.

• Increased volume must accompany the breakout.

Descending Triangle – Rule Descending Triangle – Rule

Descending TriangleDescending Triangle

Descending TriangleDescending Triangle

Support @ 39320c

Open: 39770cHigh: 40096cLow: 38851cClose: 39190c

Entry Price: 39315c Mature Bearish Broken support Increased volume

• Easily recognisable chart pattern• Distinct shape created by two converging

trend lines. • Draw two trend lines that connect a series of

sequentially lower peaks & a series of sequentially higher troughs.

• Both trend lines act as barriers that prevent the price from heading higher or lower.

• Once the price breaks above or below one of these levels, a sharp movement often follows.

Symmetrical TriangleSymmetrical Triangle

Symmetrical TriangleSymmetrical Triangle

• Can break either way – Up or down

• Stick with the primary trend.

• Set buy limit just above the high of descending trend line resistance.

• Increased volume must accompany the breakout.

Symmetrical Triangle - RulesSymmetrical Triangle - Rules

Symmetrical TriangleSymmetrical Triangle

Open: 15900cHigh: 16700cLow: 15701cClose: 16700c

Resistance @ 15883cEntry Price @ 15890c

Mature Bullish Broken resistance Increased volume

Psychology of Trading Psychology of Trading

Presenter: Shaun van den Berg

The definition of a successful trader is someone who feels The definition of a successful trader is someone who feels good about themselves and enjoys playing the gamegood about themselves and enjoys playing the game.

• You must win the battle within yourself first, before you can win in the markets.

• Trader’s mental & emotional state• Approach your trading with the right mind-set

& attitude.• Train the mind to a level of mental fitness &

toughness– Make decisions with a clear & unclouded mind. – Keep emotions under control (Discipline)

• Visualise yourself as a successful trader– Become that person - Less likely to allow your

emotions to make mistakes / inconsistent

Psychology of Trading Psychology of Trading

Psychology of TradingPsychology of Trading

Source: Goal Mapping by Brian Mayne

• Control your emotions– Spend time every day, working on the discipline of

trading (Keep a trading journal) – Do not take losses personally– Negative personal evaluations (What did I do right?)– Self-image as a winning trader– Treat trading like a business

• Back-test a system - Confidence– Find system that suits your personally– Back-test/ Paper trade / Start small (Real-time)– Appropriate money to trade system– Go for it!

Psychology of TradingPsychology of Trading

The Trading Plan The Trading Plan

Presenter: Shaun van den Berg

1. What market(s) do you want to trade?– JSE Top 40 shares

– JSE Mid caps (next 60)

2. What instruments do you want to trade?– CFD & SSF for equities

– ALSI & ALMI for indices

3. What timeframes do you want to trade? – Intra-day for ALSI / ALMI

– Swing trades (2-5 days) for SSF (Shorts)

– Position trading (weeks) for CFDs (Longs)

4. Describe what strategies you want to trade.– Breakouts from continuation chart patterns

– Overbought / Oversold levels

The Trading Plan The Trading Plan

5. What are the entry rules of the strategies?– Long positions – breakout above resistance– Short positions – breakout below support

6. What are the exit rules of the strategy?– Target prices established by chart patterns– Previous key support & resistance levels– Retracement levels / Stop loss

7. When do you trade & when do you not trade?

– Done the homework / prepared– No preparation / tired / late / impulsive

8. What money management approach are you using?

5. Risk/ Reward ratio: 1:2 at least

6. Position sizing (Risk 2% of capital per trade)

7. Stop loss levels from support/ resistance

The Trading Plan The Trading Plan

The Stockbroker ReportThe Stockbroker Report

Presenter: Shaun van den Berg

The StockbrokerThe Stockbroker

Presenter: Shaun van den Berg

Open Trade IdeasOpen Trade Ideas

Presenter: Shaun van den Berg

OpenDate Stock Direction Entry Take Profit Stop-loss Yesterday Close P&L %

20130115 GRT Long 25.15 26.00 23.50 25.75 2.3920130116 APN Long 163.00 178.00 158.00 163.00 0.0020130117 WHL Long 64.68 72.00 59.50 67.20 3.9020130121 AVI Long 55.85 60.00 53.99 55.94 0.1620130206 LHC Long 32.10 36.00 30.99 32.68 1.8120130207 JDG Long 41.00 44.00 40.00 42.05 2.5620130208 SHP Long 180.60 205.00 174.00 176.00 -2.55

• Methodology – Top 100 list (Scan / Manual)

• Risk Management– Risk/ Reward ratio – at least 1:2 times

• Trade Ideas (CFD & SSF) – Trend analysis: Moving Averages/ Trend lines /

Support & Resistance– Price & volume action – Support & Resistance levels– Stochastic indicator - Overbought / Oversold levels– Entry & Exits / Stops

Trade Ideas Summary Trade Ideas Summary

Presenter: Shaun van den Berg

• What is Technical Analysis – Price & volume action

• Simple vs Complex Charts– 6 Steps - Process

• Chart Setups – Continuation Patterns– Trading Rules

• Psychology of Trading– Attitude & Mindset– Control Emotions

• The Trading Plan – 8 Questions: Preparation - Confidence

Webinar SummaryWebinar Summary

• Next Webinar: Fundamentals for Value Investing– Lunch (13h00–14h00): Wed, 20 February 2013 (Full)

– Evening (18h00–19h00): Thurs, 21 February 2013 (95%)

• Next Traders Forum– PTA: Tues, 26 February 2013 (18h00 – 20h00) – JHB: Tues, 12 March 2013 (18h00 – 20h00) – DBN: Wed, 17 April 2013 (18h00 – 20h00)

• Good Luck • Happy Trading!

ConclusionConclusion

Presenter: Shaun van den Berg

Contact us

Travis Robson

Travis.robson@psgonline.co.za

(011) 996 5204

Shaun van den Berg

Shaunvdb@psgonline.co.za

(011) 996 5254

Presenter: Shaun van den Berg