TECHNICAL ANALYSIS PLAIN AND SIMPLE PDF
Technical analysis plain and simple: charting the markets in your language / Michael N. Kahn. — 3rd ed. p. cm. ISBN (hardback: alk. technical analysis plain and simple, third edition charting the markets in your proven technical analysis techniques in simple language that any investor can. “This book is an excellent primer. As a proponent of the art-versus-science school of technical analysis, his primary focus is on the practical aspects of chart.
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A core principle of technical analysis is that a market's price reflects all relevant information impacting that market. A technical analyst therefore looks at the history of a security or commodity's trading pattern rather than external drivers such as economic, fundamental and news events. It is believed that price action tends to repeat itself due to the collective, patterned behavior of investors.
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Hence technical analysis focuses on identifiable price trends and conditions. Prices move in trends[ edit ] See also: Market trend Technical analysts believe that prices trend directionally, i. The basic definition of a price trend was originally put forward by Dow theory.
A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price.
Each time the stock rose, sellers would enter the market and sell the stock; hence the "zig-zag" movement in the price. The series of "lower highs" and "lower lows" is a tell tale sign of a stock in a down trend. Each time the stock moved higher, it could not reach the level of its previous relative high price.
Note that the sequence of lower lows and lower highs did not begin until August. Then AOL makes a low price that does not pierce the relative low set earlier in the month. Later in the same month, the stock makes a relative high equal to the most recent relative high.
In this a technician sees strong indications that the down trend is at least pausing and possibly ending, and would likely stop actively selling the stock at that point. History tends to repeat itself[ edit ] Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable and predictable price patterns will develop on a chart.
These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish.
Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. And because most investors are bullish and invested, one assumes that few downloaders remain.
This leaves more potential sellers than downloaders, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading. Chan have suggested that there is statistical evidence of association relationships between some of the index composite stocks whereas there is no evidence for such a relationship between some index composite others.
They show that the price behavior of these Hang Seng index composite stocks is easier to understand than that of the index. A body of knowledge is central to the field as a way of defining how and why technical analysis may work. It can then be used by academia, as well as regulatory bodies, in developing proper research and standards for the field. They are artificial intelligence adaptive software systems that have been inspired by how biological neural networks work.
They are used because they can learn to detect complex patterns in data. In mathematical terms, they are universal function approximators ,   meaning that given the right data and configured correctly, they can capture and model any input-output relationships. As ANNs are essentially non-linear statistical models, their accuracy and prediction capabilities can be both mathematically and empirically tested. In various studies, authors have claimed that neural networks used for generating trading signals given various technical and fundamental inputs have significantly outperformed download-hold strategies as well as traditional linear technical analysis methods when combined with rule-based expert systems.
However, large-scale application is problematic because of the problem of matching the correct neural topology to the market being studied. Backtesting[ edit ] Systematic trading is most often employed after testing an investment strategy on historic data. This is known as backtesting. Backtesting is most often performed for technical indicators, but can be applied to most investment strategies e. While traditional backtesting was done by hand, this was usually only performed on human-selected stocks, and was thus prone to prior knowledge in stock selection.
With the advent of computers, backtesting can be performed on entire exchanges over decades of historic data in very short amounts of time. The use of computers does have its drawbacks, being limited to algorithms that a computer can perform.
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Several trading strategies rely on human interpretation,  and are unsuitable for computer processing. Combination with other market forecast methods[ edit ] John Murphy states that the principal sources of information available to technicians are price, volume and open interest.
However, many technical analysts reach outside pure technical analysis, combining other market forecast methods with their technical work. One advocate for this approach is John Bollinger , who coined the term rational analysis in the middle s for the intersection of technical analysis and fundamental analysis. Technical analysis is also often combined with quantitative analysis and economics.
For example, neural networks may be used to help identify intermarket relationships. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Many investors claim that they experience positive returns, but academic appraisals often find that it has little predictive power.
Technical trading strategies were found to be effective in the Chinese marketplace by a recent study that states, "Finally, we find significant positive returns on download trades generated by the contrarian version of the moving-average crossover rule, the channel breakout rule, and the Bollinger band trading rule, after accounting for transaction costs of 0.
Subsequently, a comprehensive study of the question by Amsterdam economist Gerwin Griffioen concludes that: "for the U. Moreover, for sufficiently high transaction costs it is found, by estimating CAPMs , that technical trading shows no statistically significant risk-corrected out-of-sample forecasting power for almost all of the stock market indices.
Andrew W. Lo, director MIT Laboratory for Financial Engineering, working with Harry Mamaysky and Jiang Wang found that: Technical analysis, also known as "charting", has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis.
In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression , and apply this method to a large number of U. Lo wrote that "several academic studies suggest that Thus it holds that technical analysis cannot be effective.
Economist Eugene Fama published the seminal paper on the EMH in the Journal of Finance in , and said "In short, the evidence in support of the efficient markets model is extensive, and somewhat uniquely in economics contradictory evidence is sparse. Because future stock prices can be strongly influenced by investor expectations, technicians claim it only follows that past prices influence future prices. Technicians have long said that irrational human behavior influences stock prices, and that this behavior leads to predictable outcomes.
In his book A Random Walk Down Wall Street, Princeton economist Burton Malkiel said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: "The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future. Malkiel has compared technical analysis to " astrology ". In a response to Malkiel, Lo and McKinlay collected empirical papers that questioned the hypothesis' applicability  that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH, which is an entirely separate concept from RWH.
In a paper, Andrew Lo back-analyzed data from U. The random walk index attempts to determine when the market is in a strong uptrend or downtrend by measuring price ranges over N and how it differs from what would be expected by a random walk randomly going up or down. The greater the range suggests a stronger trend. Some of the patterns such as a triangle continuation or reversal pattern can be generated with the assumption of two distinct groups of investors with different assessments of valuation.
The major assumptions of the models are that the finiteness of assets and the use of trend as well as valuation in decision making. Many of the patterns follow as mathematically logical consequences of these assumptions.
Likewise, as in other studies, the inclusion of transaction costs reduces profitability, putting the less profitable long-term predictions at the front. Indeed, the final comment of the researchers was: The results showed that SMA signals before earning announcements can produce profits, contrary to signals after announcements.
In an attempt to verify how rewarding is Technical Analysis, Park and Irwin compared 95 modern studies on the usefulness of TA and observed that 56 found positive results, 20 obtained negative results and 19 ended up with mixed results. The random walk theory continues to be regarded as the testable implication of the efficient market hypothesis Xie, , p.
However, for many others, the problem with this theory is that it ignores the easily observed trends and momentum factors that do directly affect the price movement ibid, p. Likewise, the trader should be convinced that incredible back-test may fail when estimating the future, but this should not be used as an excuse for not following a system.
Thus, systems should be utilized in combination with any new market information, and trades are won by simultaneously knowing oneself and the markets Bedford, The aforementioned paragraphs presented an overview of the application of TA around the globe, and made it clearly evident that research of TA in the MENA region is absent.
As a matter of fact, the authors of this paper could not identify any published research that observes the application of TA trading rules to the regional stock markets in general and to the Lebanese market in particular. This lack of literature enriches the objective of this current study, making it a future valuable resource that may trigger many prospect works.
The Research Problem The purpose of this research is to explore the predictive ability of some technical analysis tools when applied to the main stocks listed on the Beirut Stock Exchange. So, this research intends to review some popular and accepted technical analysis algorithms that were reported to be efficient and effective, to apply them to the major Lebanese stocks, then conclude to what extent can these algorithms produce the desired trading signals that relatively maximize profitability.
The data consists of daily open, close, high and low prices for five Lebanese stocks: Our research will make use of the closing price which, as was mentioned before, is a weighted average of the last five transactions of the day. Similarly, any trading plan executed based on a closing price at a certain day will be practically traded on the following working day at the closing price of this next day.
In addition, the following assumptions are considered: A total unique holding period return HPR is calculated over the whole simulation period by considering the initial capital USD 10, and the final simulation capital on October 14, Then a simple average of the yearly HPRs is computed.
Then the geometric mean of the yearly HPRs is computed. Methodology This research is conducted by taking a long position along three main tracks with all trading transactions taking place at the end of the day, and considering the BSE adjusted closing price of the security.
Under this track, the position is taken at the first day of the study period and the proceeds are reinvested every day until the end of the study period. The second track relies on the interaction between a price graph, mainly a line graph which represents the sequence of closing prices of a security along time, and a Moving Average graph which smoothens the fluctuations in the security price time series.
In fact, the Moving Average is the average price of the security over a number of periods. This number depends on whether the trader is looking for short, medium or long term trends in the stock-market Khan, In our work, we will be looking at a day, day, and day Moving Averages to determine short-term, medium-term and long-term trends respectively. It is worth mentioning here that Moving Averages are the right tool that eliminates the inevitable subjectivity that arises from using direct visual methods Kinsky, , p.
The third track makes use of the aforementioned closing price line graph in conjunction with the Relative Strength Index oscillator signal. Actually, oscillators are technical analysis tools that act on market prices to generate signals that may be compared to some predefined reference levels in order to highlight oversold or overbought stock markets. Three main assumptions are considered in the research.
The first is related to the BSE trading commissions which range from 0. Even though other studies have considered a transaction cost of 0. The experimental simulation procedure is based on an investor who tries to download the stocks with all the cash at hand or sell the owned stocks and hold the cash until the next download transaction.
All simulations start with an initial sum of USD 10, This same idea applies to sale orders, if an indicator generates a sale order, no other sale order is allowed until the cash of the current sale undergoes a download transaction order.
Results and Discussions Three moving average strategies were considered and applied to six of the BSE stocks. The Moving Average of order was deemed to consider long-term forecasts, of order 50 took into account medium-range forecasts, while the Moving Average of order 15 was regarded as a means to predict short-term prices. Thus, having these ideas in mind, simulations were run for six different BSE stocks four banking stocks: Solidere-A and Solidere-B. The results of the corresponding simulations are depicted in Table 2, where the period of simulation for the majority of the runs extended from July till October Three different threshold levels are considered being the classical 70, 30 , with two alterations namely 80, 20 and 60, According to the RSI oscillator signals, a security is considered overbought when the RSI signal crosses above the upper threshold for example 70 , and oversold when it swings to below the lower for example Likewise, for the Audi stock, the download-and-hold HPR came up to be To compare the returns of these two tracks, a paired samples t- test is conducted.
Kahn M. Technical Analysis Plain and Simple: Charting the Markets in Your Language
Likewise, the results of combing the RSI decisions with commission charges of 0. These findings suggest that MA trading may be used as a principal tool to forecast and predict the future behavior of most Lebanese banking and real estate sectors with high success on the long MA and medium MA 50 ranges. Less confidence ability is put on the short ranges like in MA 15 as per the aforementioned results.
Indeed, as suggested by many investigators and traders, the real trading system is found in the integration of trading philosophy, trading psychology, and market knowledge Tudela, Nevertheless, one must keep in mind the principal clue behind TA: Limitations No use was made of financial and economic reports.
Undeniably, governments and media release dozens of reports every week that offer insights into where the financial markets are heading. In addition, news articles, central banks announcements and government policies usually dictate how different financial products and future prices will perform Person, A trader should be careful in that one of the real dangers with data-mining research based strategies is over- fitting a model to describe the past without being able to forecast the future.
Indeed, a correlative fit of past data is not at all a guarantee of success unless it is backed by a sound support theory Pham, Capital Markets in Lebanon. Retrieved October 24, , from http: Stock Trade in the Lebanese Emerging Market. Notre Dame University. Bedford, L.
The Secret of Candlestick Charting. Milton, Australia: Beirut Stock Exchange. The BSE - History. Listed Securities. The Journal of Finance, 47 5 , Brooks, A. Reading Price Charts Bar by Bar. Chen, C. Technical Analysis of the Danish Stock Market.
Business Studies Journal, 3 2 , Data Snooping on Technical Analysis: Evidence from the Taiwan Stock Market. Chong, T. Technical Analysis and the London Stock Exchange: Applied Economics Letters 15 , New Frontiers in Technical Analysis. Hoboken, New Jersey: Bloomberg Press- Wiley.
Credit Suisse. Technical analysis — Explained.
Technical Analysis of Stock Trends. Jiohn Magee Inc. Fama, E. Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, First Steps in Technical Analysis: Grimes, A.
The Art and Science of Technical Analysis. Hejase, A. Research Methods: Masadir Inc. Ilinskaia, A. How to reconcile Market Efficiency and Technical Analysis. Retrieved October 27, , from Momentum: James, J. Monthly Moving Averages: An Effective Investment Tool?
Journal of Financial and Quantitative Analysis, 3 3 , Khan, M. Technical Analysis Plain and Simple, 3rd edition. Upper Saddle River, New Jersey: Pearson education. Kinsky, R. Charting Made Simple. Kirkpatrick II, C. Technical Analysis: Pearson Education. Lento, C. Lo, A. Foundations of Technical Analysis: The Journal of Finance, LV 4 , Mills, T.
Testing Trading Rules using the FT International Journal of Finance and Economics, 2, Mitra, S. How rewarding is technical analysis in the Indian stock market?
Quantitative Finance, 11 2 , Moosa, I. Technical and Fundamental Trading in the Chinse Stock market: Park, C. What do we know about the profitability of technical analysis.Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios.
Formation of candlestick Candlestick is formed with the help of opening. These often rely on underlying technical analysis principles see algorithmic trading article for an overview. A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security.
This is considered as a bearish continuation pattern. So, this research intends to review some popular and accepted technical analysis algorithms that were reported to be efficient and effective, to apply them to the major Lebanese stocks, then conclude to what extent can these algorithms produce the desired trading signals that relatively maximize profitability.
Technical analysis holds that prices already reflect all the underlying fundamental factors. This number depends on whether the trader is looking for short, medium or long term trends in the stock-market Khan,
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