What is breakout level ?

We have always noticed stocks moving in a trading range for long. This at times does get frustrating. Upside limit of this range is always a strong resistance level for the stock. This is where a stock witnesses heavy selling pressure/profit booking and finds it difficult to move above a certain level.

On the downside or the lower trading range of the stock is where selling pressure eases and stock starts to see buying start to come in. To explain this further, below is an example.

Lets take the chart of Shoppers stop. Chart shown below is from September 2009 through September 2010. As we can see since November 2009 till May 2010, almost for 7 months, stock was moving in a range of 320 to 400. It continued to see selling pressure as it neared 410 levels and buying interest resumed as it neared 320-330 levels.

Finally on May 28th 2010, it gave a closing above 410 levels closing 6% higher or at 424 that day. Stock witnessed huge volumes, which indicated that fresh money was entering the stock. Stock went into a consolidation mode after this breakout. Stocks consolidating after a breakout is very important for the future movement of a stock. This indicates, that yes, after a breakout, stock is not witnessing much of selling pressure or profit booking and is managing to trade above its resistance level of 410. On 1st of june Nifty corrected by 110 points, but Shoppers stop managed to hold onto its support levels and closed 4rs lower at 424.

Shoppers stop

This was a strong indication of a breakout. Stock was not witnessing selling pressure and was poised for an up-move in coming days.

We usually notice that stocks give a breakout by moving 8-10% on a particular day, but the next day or in coming days, they correct and revert back to the previous levels. To avoid entering such stocks and booking losses, one needs to wait for some consolidation in a stock after a breakout and then enter it. Shoppers stop had a fabulous rally after this breakout from 420 it rallied and made a high of 711. A return of 73% in 2 months.

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What is Resistance ?

Resistance can be defined as a level from which a stock tends to go down. Its a level which indicates that the stock is likely to witness some profit booking, and some downside is possible in the next coming days.

Its is an awareness of patterns associated with resistance zones (areas usually associated with previous trading ranges, in which prices find resistance against further upside) enables investors to more accurately define the direction of significant market trends. S

Identifying the Resistance level of stock is merely done by looking at the last 3-4 high’s of the stock from which it declined, but it takes some practice and is somewhat subjective because there are points that can be considered weak support or resistance and strong support or resistance. Resistance are areas where prices tend to consolidate and reverse. Resistance provides resistance to prices that are shooting pu.

Determining the strength of the Resistance levels also plays an important role, this is done by counting how many times did the stock price declined prices from shooting up further, in other words counting the number of times the stock declined from its support levels, The more times it declined, the stronger and more significant the Resistance point.

As seen in the left hand side chart, it shows the resistance level of Idea, it faces strong resistance around 62 levels, it manged to touch that level nearly 2-3 times, in a series.

But, once a stock successfully crosses its resistance, some more upside can be seen in the stock.

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What is Support ?

Support can be defined as a level from which a stock tends to bounce back. Its a level which indicates that the stock is likely to witness some fresh buying, and some upside is possible in the next coming days. Its is an awareness of patterns associated with support zones (areas usually associated with previous trading ranges, in which prices find support against further decline) enables investors to more accurately define the direction of significant market trends. Such patterns also suggest areas in which price reversals are likely to take place.

Stock never advance in a straight line, they tend to go up in a series of advance’s, flat or retracement period, further advance, another flat or retracement period, and so forth.

Identifying the support level of stock is merely done by looking at the last 3-4 low’s of the stock from which it bounced back, but it takes some practice and is somewhat subjective because there are points that can be considered weak support or resistance and strong support or resistance. Supports are areas where prices tend to consolidate and reverse. Support provides support to prices that are declining.

Determining the strength of the Support levels also plays an important, this is done by counting how many times did the stock price hold prices from dipping further, in other words counting the number of times the stock bounced back from its support levels, The more times it appreciated, the stronger and more significant the support point.

As seen in the left hand side chart, it shows the support level of Idea, it faced strong support around 48 levels, it manged to touch that level nearly 4-5 times, in a series.

Once it made a close above 49-50, it made a high of 62, this indicates the importance of a support levels, but if the stock would have gone below is support level of 48, it could easily see 35 levels. A trader should only make a buy decision once he witnesses some buying interest in the stock.

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What are CandleStick Charts ?

CandleStick charts is a style of bar-char used to indicated the price movements of a security over a period of fixed time.

It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.

History of CandleStick Charts
Candlestick charts are said to have been developed in the 18th century by legendary Japanese rice trader Homma Munehisa. The charts gave Homma and others an overview of open, high, low, and close market prices over a certain period. This style of charting is very popular due to the level of ease in reading and understanding the graphs. Since the 17th century, there has been a lot of effort to relate chart patterns to the ldata points instead of one. The Japanese rice traders also found that the resulting charts would provide a fairly reliable tool to predict future demand.

It was during mid 1700’s CandleStick trading became more refined. Candlestick analysis had been developed over the years simply due to the tracking of rice price movements. However, in the mid 1700’s they were really fully utilized. “The god of the markets” Homna came into the picture. Munehisa Homna, the youngest son of the Homna family, inherited the family’s business due to his extraordinary trading savvy. This at a time when the Japanese culture, as well as many other cultures, thought it common that the eldest son should inherit the family business. The trading firm was moved from their city, Sakata, to Edo (Tokyo). Homna’s research into historic price moves and weather conditions established more concrete interpretations into what became known as Candlesticks. His research and findings, known as “Sakata Rules” became the framework for Japanese investment philosophy.

The method was picked up by Charles Dow around 1900 and remains in common use by today’s traders of financial instruments.

Build of a CandleStick Chart

A CandleStick charts are made of a block of rectangle known as the body that is either black or white, and an upper and a lower shadow. The upper and lower Shadows are nothing but the line’s that represent the high and low of a candle (these lines are commonly know as wicks). The body illustrates the opening and closing trades. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the security closed lower than it opened, the body is red (filled), with the opening price at the top and the closing price at the bottom. A candlestick need not have either a body or a wick.

Candlestick patterns
There are multiple forms of candlestick chart patterns, with the simplest depicted at right. Here is a quick overview of their names:

1. White candlestick - signals uptrend movement (those occur in different lengths; the longer the body, the more significant the price increase)
2. Black candlestick - signals downtrend movement (those occur in different lengths; the longer the body, the more significant the price decrease)
3. Long lower shadow - bullish signal (the lower wick must be at least the body’s size; the longer the lower wick, the more reliable the signal)
4. Long upper shadow - bearish signal (the upper wick must be at least the body’s size; the longer the upper wick, the more reliable the signal)
5. Hammer - a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.
6. Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade (may be either a white or black body); Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade (no lower wick); Shooting star - a bearish pattern during an uptrend (small body, long upper wick, small or no lower wick)
7. Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns
8. Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns
9. Doji - neutral pattern, meaningful in combination with other candlestick patterns
10. Long legged doji - signals a top reversal
11. Dragonfly doji - signals trend reversal (no upper wick, long lower wick)
12. Gravestone doji - signals trend reversal (no lower wick, long upper wick)
13. Marubozu white - dominant bullish trades, continued bullish trend (no upper, no lower wick)
14. Marubozu black - dominant bearish trades, continued bearish trend (no upper, no lower with no lower wick)

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Why Technical Charts & Technical analysis ?

Yes, this is most common question a normal trader would ask, i.e why there is actually a need to use Technical Charts?

In-fact, I too had the same question in mind when I started just started to trade. Well, Technical charts are very useful to any trader who seeks to understand how a stock reacts to previous trends and well as helps him to foresee future events for a stock.

Imagine, if you wanted to look at the price of a script say 4-5 months ago, yes, you could get the data in a tabular form, but it would be very confusing, as searching for a particular date would be very difficult, on the other had, consider a CandleStick Technical chart, using a chart you could easily browse the stock open, high, low & close rates for a rage of dates. This would also help you know the trend of a particular stock.

Moreover, Technical charts with various Indicators such as RSI, Ichimoku clould and DMA’s can help you predict where a stock is likely to go in the next couple of days and even weeks. Technical charts are also used to predict the entry and exit levels of a asset.

Technicians say that a market’s price reflects all relevant information, so their analysis looks more at “internals” than at “externals” such as news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior – hence technicians’ focus on identifiable trends and conditions.

Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence prices in financial markets. Technical analysis holds that prices already reflect all such influences before investors are aware of them, hence the study of price action alone. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions.

Users of technical analysis are most often called technicians or market technicians. Some prefer the term technical market analyst or simply market analyst. An older term, chartist, is sometimes used, but as the discipline has expanded and modernized the use of the term chartist has become rare.

Types of Charts
OHLC - Open High Low Close charts plot the high and low of the price movement vertically and the open and close horizontally. Used to graph range and outliers.
Candlestick chart - Similar to OHLC, but open and close are filled. Often Black or Red candles represent a close lower than the open. While White, Green or Blue candles represent a close higher than the open.
Line chart - Connects each closing interval together on a line

Over the past several decades Technical Analysis with quality charts, have proven and given traders more returns on their Investment.

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What is Technical Analysis ?

Technical Analysis can be defied as the study of market activities and action, mainly using charts for the purpose of forecasting or predicating the future price trends. Here “market activities” refer to the changes in the price and volume of stock.

Technical analysis is mainly used by Trades (i.e people of often buy and sell stocks for Intraday or Swing basis) and not for Investors(i.e people how invest in a company for 3-5 years) to identify what is the next trend that the stock is going to make. It can be tough of a torch that guides a Trader to make profits in dark.

Over the time there have been many types of Technical charts have been developed, the main contributors to Technical analysis have been the Japanese, their major invention was the Candlestick Charts that are mostly used now-days by almost all Traders and Technical Analyst.

Technical Analysis supposes markets have memory. If so, past prices, or the current price momentum, can give an idea of the future price evolution. Technical Analysis is a tool to detect if a trend (and thus the investor’s behavior) will persist or break. It gives some results but can be deceptive as it relies mostly on graphic signals that are often intertwined, unclear or belated. It might become a source of representativeness heuristic (spotting patterns where there are none)

Chart formations tell stories which only technical analysts could read. Examples are double top formations which signal a potential decline in the price of the particular stock. Double bottom is the opposite signal illustrating a stock ready to advance in price. Technical analysts use such chart formations to enter or exit their positions.

Technical analysis is a form of analysis which seeks to make judgments about the performance of a share based solely on its historic and current price behavior and without reference to the underlying business, the sector the company’s in, or the economy as a whole.

There are many instances of investors successfully trading a security using only their knowledge of the security’s chart, without even understanding what the company does. However, although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

After the end of this Pathshala you shall be familiar with all the techniques used by various Technical experts to understand charts.

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What is a Technical Chart ?

Welcome to our Charting Pathshala, this has been made to help you understand and interpret Technical Charts better. It is rightly said that technical chart indicators will help you unlock many trading opportunities which in-turn can help you increase you profits. There are more than 100 of Technical Indicators that are available today, and some of them are better than others.

Normally Technical Indicators are used with conjunction with one another for best results for for good buy and sell signals.

A Technical Chart is a image or a tool showing you the trend of a particular stock, Technical charts are build using the all or one of the 4 parameters for a particular stock, these parameters mainly include the open, high, low and close of a particular stock for a particular time period (say a minute of a day or a week).

Below is a example of a Technical Chart

Technical Charting has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance.

The use of past performance should come as no surprise. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analyst’s belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, price levels are predictable.

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