Technical AnalyisWorkshop-Study Material

Workshop on Computerised Technical Analysis of Stocks
&
Techniques of Successful Trading!
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Contents
Preface
Section I - Technical Analysis & Dow Theory

Chapter 1
Technical Analysis
Definition
History, Philosophy & Basic Tenets
Advantages & limitations of Technical Analysis
Chart Construction - Types of Charts
Chapter 2
Dow Theory
Markets discount everything
Definition of Trend - Uptrend, Downtrend, Sideways & Mixed Trend
Retracement & Consolidation
Basic Structure of the Trend - Impulse & Corrective Waves
The Dynamic Impulse
Different Chart durations & their time frame validity
Section II - Technical Indicators

Chapter 3
Support & Resistance

Definition
Factors determining Support & Resistance
Previous Important / Significant highs & lows
Trend lines
Fibonacci Retracement levels
Chapter 4
Breakouts & Breakdowns

Definition
Importance of Volumes on Breakouts / Breakdowns
Confirmation of a Breakout / Breakdown
Pullback & Final Thrust
Academy of Practical Technical Analysis Research & Training

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Chapter 5
Continuation Patterns
Triangles
Symmetrical / Ascending / Descending

Wedges - Rising / Falling
Price & Time targets in respect of the above patterns
Rounding Bottoms / Cup & Handle pattern
Flags & Pennants
Head & Shoulders
Chapter 6
Japanese Candlestick Reversal Patterns

Hammer
Shooting Star / Inverse Hammer
Hanging Man
Piercing Pattern / Engulfing Bullish Pattern
Dark Cloud Cover / Engulfing Bearish
Tweezers Tops / Bottoms (Double Tops / Bottoms)
Abandoned Baby Tops / Bottoms (Island Reversals)
Chapter 7
Moving Averages
Types - Simple / Weighted / Exponential
Signals in respect of Moving Averages
Different Combinations of Moving Averages
Chapter 8
Oscillators - Momentum Indicators

RSI / Stochastics
MACD
Overbought & Oversold zones
Negative & Positive Divergence
Chapter 9
Trading System
Understanding the Indicators and their strike rate
Choosing between different Tools/Indicators
Combining different Tools/Indicators for optimum results
How to form a Trade Set-up
Ingredients of a Successful Trade setup

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Section III - Case Studies

Trade Setup I
Accumulation on a correction / fall
Trade Setup II
At Support / Resistance levels
Trade Setup III
At Breakouts / Breakdowns along with Continuation Patterns

giving Price & Time targets
Trade Setup IV
At Market Bottoms/Tops with a Japanese Candlestick

Reversal Pattern
Trade Setup V
Based on Moving Averages
Trade Setup VI
Based on Oscillators / Momentum Indicators
Trade Setup VII
Trading System combining the above
Section IV - Golden Rules of Trading

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Preface
Stock markets are highly volatile. The sharp movements that occur in stock prices provide us
with great opportunities to make profits if one can time the markets. However, majority of the
traders find themselves on the losing side and end up making huge losses. This is mainly due to
the characteristics of the human mind viz. - Greed, Fear and Hope. Some people never book
profits as they are greedy for more profits whereas some panic and book losses in the fear of
losing heavily only to see the stock move the way they had predicted after they have exited.
The worst affected are those who are on the wrong side of the market trend but still hold on to
a stock in the hope that their price levels will come sooner or later.
Technical Analysis is the art of predicting and forecasting future price trends based on the
current and the historical price data. It is a study of price charts along with volumes and is
based on demand & supply and also depicts the psychology of the masses. The charts take into
account everything that is likely to impact the prices, some of the factors being fundamental
reasons, stock specifics news / results, occurrence of events affecting some sectors / stocks,
political events, natural disasters etc. To summarize Technical Analysis includes everything
that can impact the prices, and the way the prices move indicate the future price trends or the
direction in which the stock prices are likely to move in the future.
The patterns made in the price charts depict the psychology of the masses and will work across
all markets viz. equities, commodities, currency etc. Also patterns will work across all time
horizons i.e. patterns made during the earlier markets highs or lows are likely to be repeated,
may be the price levels of the stocks can differ. Technical Analysis helps in spotting changes in
trends and price patterns based on which one can take timely investment / trading decisions. It
is a very effective tool to time the markets i.e. determine the entry levels, the stop-loss as well
as the target levels. However, a word of caution here is that Technical Analysis is not infallible,
as it is linked to the psychology of the masses and minds of people can be confused, fluctuating
and indecisive at times. At such times Technical Analysis may fail or may not give clear
indications of the direction.
To generate positive returns from the stock markets on a consistent basis, just technical
tools and indicators are not enough. One needs a combination of Technical Indicators, a
proper money management system and most importantly a sound psychological
conditioning of the mind. Also as a trader, one needs a well defined Trade Set-up based
on which one can determine the entry point in a stock, the stop-loss levels, the target
levels (Risk to Reward ratio) and the approximate time horizon. This is an attempt to
understand the age old as well as time tested theories of technical analysis in the context
of our markets & times and practically use it in our investment / trading decisions,
thereby protecting our capital & generating better returns on the same.
ALL THE BEST!!

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History, Philosophy, Basic Tenets of Technical Analysis

Technical Analysis is a study of the past price action to predict the future price
Trends. This means that the price of a share tells us as to how the share is going to
move in the future and any reasons, let it be Fundamental or Technical, that could lead
to a rise or a fall in the share prices is reflected in the price of that share. To give a
simple example if a company is going to post excellent results, this will be reflected in
the share price with a good rise which will be on account of insider buying. Similarly the
opposite of this also is true. What we saw above was a fundamental factor responsible
for the movement in the share prices. Besides these Fundamental factors there are
Technical Factors viz. the Laws of Demand & Supply which also could lead to sharp
movements in the share prices. These factors work on Mass Psychology and are closely
linked to the Human Mind. Under a given set of circumstances all minds tend to work in
the same direction. The theories of Technical Analysis are based on this concept and
hence the share price movements can be predicted more often than not based on these
theories.
Hence Technical Analysis is a subject which can successfully identify the
beginning of a sharp rise or fall in the share prices. However, it is incorrect to say
that Technical Analysis can predict or forecast all the moves correctly, as at
certain times the markets itself are undecided.
Though Technical Analysis is being practiced in the West as well as some Asian
countries like Japan for more than past 100 to 150 years, it has become popular in India
only in the last 15 to 20 years.
To sum it up Technical Analysis:
A study of price charts along with volumes.
Is based on the law of Demand and Supply.
Works best in stocks that have a mass following.
Depicts the mindset of masses i.e. mass psychology.
The basic difference between Technical Analysis and Fundamental Analysis is that FA
tries to find reasons for a stock to move up or down and based on the reasons predicts
the price movements whereas TA is not concerned with the reasons and it believes that
the way a stock price moves currently tells you where it is heading for in the future.

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Advantages of Technical Analysis:
It is independent of any news or occurrence of events as any of these are

reflected in the stock price.
Most of the Fundamental information such as announcement of Results or any

other which affects the price of a share reaches a common Investor the last but
an Investor following TA can get early signals based on price movements though
he may not know the exact nature of information.
Since TA is based on Mass Psychology which can change and is fluctuating at

times, Technical Analysis recommends use of Stop-losses which if strictly
implemented can save Traders and Investors from a much bigger loss in the
future.
Limitations of Technical Analysis
If not backed by proper study of Fundamentals, TA cannot distinguish between

small moves and big moves as well as Stocks that move on support of masses and
stocks that are manipulated by a few individuals or groups or so called
Operators.
Many a times Stop-Losses based on Technical Analysis get triggered in choppy

market conditions and the price moves back to its original level or as expected.
TECHNO - FUNDA - The Best Approach

Ideally one should use a combination of both Fundamental Analysis as well as Technical
Analysis to decide on an Investment strategy. Fundamental Analysis should be used to
spot stocks which have a potential to rise and Technical Analysis should be used to
determine the timing i.e. the entry and exit levels.

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Chart Construction
The X-axis on a chart plots the periods for which prices are plotted and the Y-axis plots
the value or the price of the share. This could range from a few hours to a few years.
This means that prices can be plotted based on the prices that range from hours to
years. Thus we could have minute charts as well as hourly, daily, weekly, monthly,
quarterly, yearly charts based on the above data.
Short Term Traders trade on the basis of daily charts as they are more interested in the
immediate movement in the stock prices, whereas Medium term to Long term Traders
are more dependent on weekly / monthly charts as they want more returns for which
they are prepared to wait for a longer duration.
There are 3 types of charts which are commonly used by chartists. These are
1. Line charts: The closing prices are plotted on the graph and are joined to form a
line.
2. Bar Charts: The Bar uses open / high / low / close for the session.
3. Candlestick Charts: Also use open / high / low / close for the session.
The 4 quotes that are used to construct a Bar Chart or a Candlestick chart are in the
order of Open / High / Low / Close
Line Chart

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In a Bar chart the open is indicated by a small hash (- ) which is drawn on the left side of
the Bar and the close by another hash on the right side of the bar.
BAR CHARTS
High
High
Open
High
Close
Close
Low
Open
Low
Open
High
Close
Close
Open
Low
Low

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CANDLESTICK CHARTS
In a Candlestick chart the real body i.e. the 2 ends of the body, show the opening and the
closing price for the given period. The lines at the top and bottom of the real body are
called the shadows and they denote the high and the low for that session. The rectangle
is called as the real body of the candle and it denotes the open and the close. The colour
of the body denotes the open and the close of that session. If the open to close is on the
higher side i.e. it is a bullish candle and vice versa if the close is lower than the open it is
a bearish candle. Generally the colors used to denote bullish candles are white, green or
blue and the bearish candles are red or black.
High
High
Close
Open
Open
Close
Low
Low

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Dow Theory & Trend Analysis

Charles H. Dow after whom the Dow Jones Wall Street index in named is the founder
of many theories and his contribution to the theory of Technical Analysis is immense.
Even after so many years what he propagated is still valid and he is rightly termed as
the Grandfather of Technical Analysis.
Dow defines Trend as the direction in which the market moves. Based on the same we
have:
An Uptrend
A Downtrend
A Sideways Trend
In an Uptrend the share prices move in the upward direction making new highs in the
process. Hence the best indication of an Uptrend is the prices making a higher top
higher bottom.
H4
H3
Uptrend
H2
H1
L4
L3
L1
L2
As seen above prices make a higher top as well as a higher bottom and one should try
and buy on every correction in an uptrend.

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In a Downtrend the share prices move in the downward direction making new lows in
the process. Hence the best indication of a downtrend is the prices making a lower top
lower bottom.
H1
H2
Down Trend
L1
H3
L2
H4
L3
L4
As seen above prices make a lower high as well as a lower low and one should try and
sell on every rise.
In a Sideways trend the share prices move in a narrow band, neither going upward nor
downward. One should wait for a cleat cut breakout and not trade in a sideways trend.
Sideways Trend
Dow has also defined Trend in terms of time, viz.

Primary (Major)
Secondary (Intermediary)
Minor
1 to 3 years
6 to 12 months
3 to 6 months
However, a trader should decide his own trading timeframe and accordingly decide
which charts to use.

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Time frame validity of different charts
Time frame validity means the time frame for the signals spotted in the charts of
different durations hold good. Normally a signal spotted is valid for around 5 to 8 times
of its duration. This means that a signal in a daily chart is valid for the next around 5 to 8
days, and the expected move should begin in that time frame.
Period
Seen
Valid For
Daily Charts
At the end of the Day
Weekly Charts
At the end of the Week
Monthly Charts
At the end of the Month
Intraday (60 Mins)
During the day
Intraday (30 Mins)
During the day
Short term
( 4 - 6 Days)
Medium Term
(4 - 6 Weeks)
Long Term
(4 - 6 Months)
Short Term
(1 - 2 Days)
Intraday Trades
(2 - 3 Hrs)
Importance of Volumes
Volumes lead prices. If prices start moving up on high volumes, there is a very good
chance that this rise will be sustained. However, it very important to understand where
the volumes have occurred and the price movement that that has taken place along with
the volumes.
Broadly one can conclude that:
Price Action
Interpretation
Price Rise with high volumes
Bullish
Price Rise with low volumes
Not so Bullish
Price Fall with high volumes
Bearish
Price Fall with low volumes
Not so Bearish

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Though the above is true and applicable in normal situations, there are some exceptions
and at extreme points i.e. at highs where the prices have already moved up sharply and
at lows when the prices have fallen sharply this logic may not work.
Hence, if one sees a good price rise at an important bottom with a significant rise in
volumes, one can go long. However, one must take the average volume for the past 5 to
8 sessions and not for just one session as that can lead to a whip-saw (false signal).
High volumes at significant Bottoms and Breakouts normally indicate the Trend.
However prices can fall on not so high volumes and hence at significant market tops one
may not always see high volumes which may follow later. However, breakouts or
breakdowns which indicate a further continuation of a move have to be normally
accompanied by high volumes.

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Theory of Support & Resistance

Theory of Support and Resistance
A stock is said to have taken Support at a price level when in a downward move, it stops
and moves in the upward direction. Vice-versa a stock is said to have taken Resistance
at a price level when in an upward move, it stops and moves in the downward direction.
Trend line
Resistance
Trend line
Support
SUPPORT
RESISTANCE
Ideally in an Uptrend one should buy or go long on every fall at a significant

support level and in a Downtrend one should sell or go short on every rise at a
significant resistance level.
Following are the tools for Support and Resistance.
Previous Significant Highs and Lows
Trendlines
Retracement Levels
Significant highs and lows are those levels from where the markets have moved up or
have fallen down sharply in the past. When the stock prices test these levels anytime in
the future, they will act as strong support and resistance levels.
A Trend line is another excellent tool which gives us important Support and Resistance
levels. A trendline is a line joining 2 or more significant highs or lows or 2 important
prices, which gives important support and resistance levels.

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Basic Rules for drawing Trendlines
Trendlines are lines drawn by joining 2 significant points on the chart.
The angle of a good Trendline should be from 0 to 45 degrees.
Support is when a share price touches a Trendline and moves up.
Resistance is when a share price touches a Trendline and moves down.
One should Buy when the price takes support on the Trendline and moves up &
Sell when the price meets with resistance at a Trendline and moves down.
Channel Lines are 2 parallel lines within which the price of a share moves in a
sideways trend. They are very effective in a sideways market and also when the
trend changes from sideways to either direction.
Retracement is the correction that occurs in the price of a share. In a falling market
the retracement will be in the upward direction and in a rising market it will be in the
downward direction.
A
61.8% R
38.2% S
50%R
50%S
38.2% R
61.8% S

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Normally it is seen that 38.2 %, 50 % and 61.8 % are good retracement levels and the
markets have a tendency to take support in case of an uptrend and face resistance in
case of a downtrend at or around these levels. These levels also give an indication of the
current trend or a likely change in the same. Although the retracement levels work
more often than not, there could be times where the prices may move beyond the
normal retracement levels.
Consolidation is a process where the prices move sideways or in a range before a big
move is likely to commence. It is like that the market is taking a breather before a big
move is about to commence. The move after consolidation is normally in the direction of
the prevailing trend.

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Breakouts and Breakdowns
Breakout is the phenomenon where the prices move upwards out of a range
breaking an important resistance level in the process. Normally a breakout is to be
supported by high volumes and it indicates a further up move in that stock.
Breakdown is the phenomenon where the prices move downwards breaking an

important support level in the process. Normally a breakdown is to be supported by
high volumes and it indicates a further down move in that stock.
Pullback is the tendency of the share prices to come back towards the Trend line
after a breakout or a breakdown and is a precursor to a big / dynamic move that is
to follow.
Support becomes Resistance and Resistance becomes Support on a breakout /

breakdown of a Trend line.
A Breakout or a Breakdown has to be supported by high volumes and the

absence of it may lead to loss of momentum and failure of the pattern.

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Continuation Patterns
Patterns are formations on charts which can be identified by a set of similar
characteristics which occur time and again. Patterns reflect the mindset of the masses at
that point of time and work very well in trended markets.
Continuation Patterns are patterns which occur in continuation of a move. They show
the continuation of the trend. Needless to say that one can get an entry when a part of
the move is already over and not at the beginning of a move. The best thing about
continuation patterns is that, once the pattern is confirmed these patterns give a sense
of the targets in terms of price as well as time and they work accurately most of the
times. Though one gets an entry based on a continuation pattern not exactly at the
beginning of a move, the targets come very fast in most of the continuation patterns.
Symmetrical Triangle Breakout

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Symmetrical Triangle Breakdown
Rising Wedge: A Wedge is a sloping triangle. In case we have a break down from an
upward sloping triangle it is termed as a rising wedge. All the other properties of
triangles remain the same for a Rising Wedge. A Rising Wedge at or near the market top
is very bearish and a sharp decline in the prices is likely once the prices break down
from the rising wedge.
Rising Wedge Breakdown

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Falling Wedge: In case we have a breakout from a downward sloping triangle it is
termed as a Falling Wedge. All the other properties of triangles remain the same for a
Falling Wedge. A Falling Wedge at or near the market bottom is very bullish and a sharp
rally in the prices is likely once the prices break out from the rising wedge.
Falling Wedge Breakout
Head & Shoulders Pattern:

This pattern resembles the anatomy of the human body. I.e. two shoulders and the head
with the head placed on the two shoulders. Head & Shoulders pattern occurring at a
market top is a strong downward reversal pattern. The Trend line joining the two
shoulders and the head is termed as the neckline.
The target after the breakdown and the pullback, in case there is one, is equal to the
length measured from the neckline to the top of the head. The same length is measured
downside from the neckline level or the pull back towards the neckline, whichever is
higher. The target of price movement of C to D in the diagram shown below is equal to
the price movement of A to B. Head and Shoulders pattern at significant market tops can
lead to trend reversal from bullish to bearish and as such is also termed as a reversal
pattern.

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Head & Shoulder pattern
Inverse Head & Shoulder Pattern
The Inverse Head & Shoulder pattern is exactly opposite of the Head & Shoulders
pattern and occurs at market bottoms. The Inverse H & S is an upward reversal
pattern. The Trendline joining the two shoulders and the head is termed as the
neckline.
The target after the breakout and the pullback, in case there is a pull back, is equal to the
length from the neckline to the bottom of the head. The target of price movement of C to
D in the above case is equal to the price movement of A to B. Inverse Head & Shoulders
pattern at significant market bottoms can lead to a trend reversal from bearish to
bullish and as such is also termed as a reversal pattern.

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Flags / Pennants:
Flags & Pennants appear in the continuation of a move. Normally after a steep rally or a
fall the markets pause momentarily or consolidate before the move begins again in the
same direction.
Flag Breakout
Pennant Breakout
The difference between a flag and a pennant is that, in a flag there is a rectangle and in a
pennant there is a triangle after the flagpole which resembles the sharp rally or the fall
before the consolidation.
The targets for both patterns are measured similarly. The length of the flagpole is
replicated once the breakout or the breakdown occurs and the target measured from
the breakout / breakdown point is equal to the length of the flagpole.

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Flag Breakdown
Pennant Breakdown

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The Japanese have been using candlesticks since around 3 centuries and traders were
using the same to trade in rice and paddy. Candlestick patterns have become popular in
the West and then in India in the last 20 to 25 years and they provide a lot of variety in
charting. Though there are hundreds of candlestick patterns, the primary patterns are
important and keep repeating time and again and also work very effectively in our
markets.
We will cover the bullish patterns at market bottoms and the corresponding bearish
patterns at market tops.
Hammer (Bullish at Market Bottoms)

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Inverted Hammer (Bearish at Market Tops)
Bearish Patterns (at Significant Market Tops)
Inverted Hammer Long Upper Shadow,

very small Body, no Lower Shadow
Shooting Star (Bearish at Market Tops) - Resembles an Inverted Hammer

but appears after a big bullish candle with a gap between the two bodies

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Hanging Man (Bearish at Market Tops) - Only on confirmation of the low of the
hammer being broken on a closing basis

Sell on Closing
below the low of the
Hanging Man
Hanging
Man
Piercing Pattern (Bullish at Market Bottoms)
Bullish Patterns (at Significant Market Bottoms)
Piercing Pattern
(cutting into 50% or more of the 1st body)

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Dark Cloud Cover (Bearish at Market Bottoms)
Dark Cloud Cover
(covering 50% or more of the 1st body)
Bullish Engulfing Pattern (Bullish at Market Bottoms)
Bullish Engulfing Pattern
(engulfing the 1st body fully)

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Bearish Engulfing Pattern (Bearish at Market Tops)
Bearish Engulfing Pattern
(engulfing the 1st body fully)
Morning Star Pattern (Bullish at Market Bottoms)
Morning
Star
Cutting into 50% or more of the 1st body

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Evening Star Pattern (Bearish at Market Tops)
Evening
Star
Cutting into 50% or more of the 1st body
Tweezers Bottoms (Double Bottoms - Bullish at Market Bottoms)
Tweezers Bottoms

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Tweezers Tops (Double Tops - Bearish at Market Tops)
Tweezers Tops
Bullish Island Reversals (Bullish at Market Bottoms) - Also termed as

Abandoned Baby Bottoms
Island Reversals
At Significant Market Bottoms

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Bearish Island Reversal (Bearish at Market Tops) Also termed as

Abandoned Baby Tops
Island Reversals
At Significant Market Tops
Combinations of Doji (Bearish at Market Tops)
Gravestone Doji
Harami Cross

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Spinning Tops (Bearish at Market Tops)
Spinning Top

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Theory of Moving Averages

Moving Averages theory is the most conventional theory and is used by most Analysts
very successfully. Though at times the Moving Averages give late signals, but they are
safe and work more often than not and help us determine the trend of the market.
Commonly used Moving Averages are
Simple Moving Average (SMA)

Weighted Moving Averages (WMA)
Exponential Moving Averages (EMA)
SMA gives equal weightage to all the data.

WMA gives more weightage to the latest data.
EMA has the best of both and covers a larger period of time. It is the most popular as it
helps spot early signals.
Ideal combinations for different durations of charts.
Most Traders prefer a combination of 3 MA s for confirmation.
Some of the common combinations used are:
13 / 34 / 55
For a move in 15 to 30 trading sessions.
3 / 8 / 13
1/3/5
1 hour/ 3 hours / 5 hours
For Intra-Day to 1 day.
Moving Averages theory is a confirmatory theory and is criticized on the count that
many a times it gives late signals but the positive thing is that it gives confirmed signals.

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MOVING AVERAGE TRADING SYSTEM WITH A 3 TO 4 WEEKS VIEW
For a buy signal
Trading System based on Moving Averages

Buy Signal for 15 to 30 days time frame:
MAs used
13 / 34 / 55
Book
profit
55 Days EMA
Buy II
34 Days EMA
13 Days EMA
Buy I
Signals from MA s.
3 MA s should be almost parallel and equidistant and turning upwards.
The 3 MA s should be in the Ascending order i.e. lowest MA at the bottom, and
highest MA at the top.
The first signal to buy (Anticipatory) is when the price cuts the Short term MA
from the bottom.
The second signal to buy (Confirmatory) is when the Short term MA cuts the
Long term MA from the bottom which confirms that the trend is going to
continue.
When the 2nd MA line cuts the third MA line, though the trend continues to
remain up, a good correction normally occurs and one should book profits.
In case the trend changes in between, the Short term or the lowest MA will turn
down. If this happens one should exit the stock.

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When the trend changes from up to down.
For a Sell Signal
Sell Signal for 15 to 30 days time frame:
13 Days EMA
34 Days EMA
Sell I
Sell II
55 Days EMA
MAs used
13 / 34 / 55
Book
Profit
3 MA s should be almost parallel and equidistant and turning downwards.
The 3 MA s should be in the order such as the lowest MA at the top, and highest
MA at the bottom.
The first signal to sell (Anticipatory) is when the price cuts the Short term MA
from the top.
The second signal to sell (Confirmatory) is when the Short term MA cuts the
Medium term MA from the top.
When the 2nd MA line cuts the third MA line, though the trend continues to
remain down, a good correction normally occurs and one should book profits.
In case the trend changes in between, the Short term or the lowest MA will turn
up. If this happens one should exit the stock.

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Sell Signal for 3 to 5 Trading Sessions:

3 Days EMA
Sell
8 Days EMA
EMAs used
3/8
Buy Signal for 3 to 5 Trading Sessions:

EMAs used3/8
8 Days EMA
Buy
3 Days EMA

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Oscillator Analysis
Oscillators or momentum indicators as that are called at times give an advance
indication of change in trend. Oscillators are drawn along with the price to spot signals.
Some commonly used Oscillators are
RSI (14 E 9) -Relative Strength Index
STOCHASTICS (% K 5, % D 3, E 3)
MACD (9 24 E 9) - Moving Average Convergence Divergence
The most common of the above is the RSI and the Stochastics. Between these two, many
traders prefer the Stochastics as it is smoother and does not turn too often. Also it helps
spot smaller moves. MACD gives good signals but late signals.
STOCHASTICS (% K 5, % D 3, E 3)
The 2 dotted lines are the overbought and oversold zones.
The Oscillator has 2 lines. One is the Oscillator line and the other is the trigger line.
When the Oscillator goes above the overbought zone, it means that a lot of buying has
taken place and that a downward correction may be overdue. Similarly when the
Oscillator goes below the oversold zone, it means that a lot of selling has taken place
and that an upward correction may be overdue.
The overbought and oversold zones are normally 70 and 30 in the RSI and 75 and
25 in the Stochastics. However, they are indicative and can be changed as per the
stock as well as the market conditions.

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Signals based on the Oscillators

1. Divergence
Negative Divergence
Sell in the overbought zone when there is a Negative Divergence between the
price and the Oscillator. I.e. the price making a higher top but Oscillator making a
lower top.

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Positive Divergence
Buy in the oversold zone when there is a Positive Divergence between the price
and the Oscillator. I.e. the price making a lower bottom top but Oscillator making
a higher bottom.

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2. Crossover
RSI 14 E 9 (in daily charts)

Over Bought
Sell
Over Sold
Sell
Buy
Oscillator Line
Buy
Trigger Line
Buy in the overbought zone when the Oscillator line cuts the trigger line from
below on the first day.
OR
Sell in the overbought zone when the Oscillator line cuts the trigger line from
above on the first day
An Oscillator gives early signals but it also gives many whipsaws (false
signals). To avoid this it should be used along with patterns and other
indicators and not in isolation.

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Successful Trading System

It is very important to understand the use of each Indicator and also where the
Indicator works or fails. More so the combination of the tools or the indicators which if
used together in combination gives extremely positive results. This is what a successful
trading system is. It should be able to determine the extent of the move and be able to
distinguish between a normal move and a dynamic move which can give phenomenal
returns. It should also determine the point of entry and the stop-loss levels which will
determine the risk to reward ratio in a trade. If one is right on these parameters, the
trade is bound to be to be successful as the psychological or the mental makeup of a
trader is positive and helps him implement the trade in a confident manner.
To conclude, a successful trading system is a combination of technical tools or
indicators, the financials as well as the right trading psychology which goes a long way
in the execution of a trade.
Stop-Loss
The word Stop-loss means stopping a further loss. It means that one should square of
the deal if it goes against him as it would save a further bigger loss. That means a trader
who has a long position has to keep his stop-loss at a price which is lower than that.
Similarly a trader carrying a short position should have his stop-loss at a higher level.
Stop-losses are ideally meant to protect a trader or an investor from a sudden change of
trend of the markets in general or a stock in particular.

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Different Techniques of placing Stop-losses
There are specific points where a trader should place the stop-loss.
1. Below the bottom of a move in case of a buy and
Above the top of a move in case of a sell
Stop-Loss
Sell
Buy
Stop-Loss
2. Above or Below the Trendline in case of a breakout
Stop-Loss
Trend line
Buy
Sell
Stop-Loss
Trend line

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Concept of Trailing Stop-losses
The concept of trailing stop-loss works extremely well in a clearly trended market.
Trailing stop-loss means changing ones stop-loss with the move and avoiding the risk of
a sudden movement against the direction in which one is trading. The main advantage
of a trailing stop-loss is that one does not end up booking profits very early in a dynamic
move and gets the benefit of almost the full move and gets out when there could be a
change of trend.
Trailing Stop-Loss in an Upward Move
4th Trailing S-L
3rd Trailing S-L

2nd Trailing S-L
1st Trailing S-L

Original
Stop-loss
Trailing Stop-Loss in a Downward Move

Original
Stop-loss
1st Trailing S-L
2nd Trailing S-L
3rd Trailing S-L
4th Trailing S-L

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Formulating a Successful Trading System

A Trader must create a system or be enslaved by another mans
system. - William Blake
A Trading system is a combination of technical tools or indicators, the financials as well
as the right trading psychology which goes a long way in the execution of a trade.
If one does not get those parameters on which the system is based one should refrain
from trading in the market at that point of time. Most of the traders lose money because
they indulge in random trading based on their instincts.
A trader must be disciplined enough not to have a go at the markets on a hearsay or a
random basis. He has to have a reason which should ideally be supported by the price
patterns.
Based on the Technical parameters one can develop his own trading system based on
the tools he prefers. An example of an ideal trading system is given below:
A reversal pattern at the right place: A right place for a reversal pattern is at a
significant market top or a bottom. This can be identified by a rise of around 8 /
13 or 21 days from an important high or a low. Also if one is buying or selling
after a correction, one must also ensure that the pattern has occurred at the
retracement level of at least 50 %.
Risk to Reward ratio of 1: 3 on every trade spotted: One cannot time the
market to perfection all the time and end up buying at bottoms and selling at
tops. Hence a good strategy has to be formed to supplement the Technical signals
one generates. At times a trader can end up losing money even if his call is right
but is not supported by the right trading strategy and vice versa. One has to buy
or sell in such a way that his R to R ratio is always 1: 2 or more.
Trendline Support or Resistance / Breakout or Breakdown supported by

strong volumes along with a continuation pattern.
Japanese Candlestick Reversal Patterns.
A Signal based on Moving Averages.
A signal based on Oscillators.

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Section III - Case Studies

Trade Setup I
Accumulation on a correction / fall
Trade Setup II
At Support / Resistance levels
Trade Setup III
At Breakouts / Breakdowns
along with a Continuation Pattern giving Price & Time targets
Trade Setup IV
At Market Bottoms/Tops with a Japanese Candlestick Reversal

Pattern
Trade Setup V
Based on Moving Averages
Trade Setup VI
Based on Oscillators / Momentum Indicators
Trade Setup VII
Trading System combining the above

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Trade Setup I - Accumulation on a correction / fall based on Volumes
Fall in Prices
Rise in Prices
Rise in Volumes
Fig.1.1 MTNL Weekly Chart - Oct 1999
Rise in Prices
Rise in Volumes
Fig.1.2 Bhel Monthly Chart - Nov 2000

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Rise in Prices
Rise in Volumes
Fig.1.3 India Bulls Daily Chart - Oct 2007
Rise in Prices
after consolidation
Rise in Volumes
Fig.1.4 Unitech Weekly Chart - March 2009

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Trade Setup II - Buy / Sell at Support / Resistance levels
Multiple Resistances
Fig.2.1 SBI Weekly Chart - 1998-99
Multiple Supports
Fig.2.2 Reliance Daily Chart - March 2009

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Multiple Supports
Fig.2.3 ACC Daily Chart - June - July 2009
Resistance 1
Resistance 2
Fig.2.4 Renuka Sugars - Daily Chart 2008

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Trade Setup III - At Breakouts / Breakdowns along with a Continuation Patterns
Breakdown
Likely TGT
after
Breakdown
Fig.3.1 Infosys Daily Chart - March - May 2006
Breakdown
Likely TGT
Fig 3.2 Reliance Capital Daily Chart - March - May 2008

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Likely TGT
Time
TGT
Triangular Formation
Fig 3.3 BSE Sensex Monthly Chart -2003
Rising Wedge
Breakdown
Fig 3.4 Nifty Daily Chart - 2008

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Symmetrical
Triangular
Fig 3.5 Nifty Daily Chart - 2002
Breakout
Breakout
V Pattern
Rounding
Bottom

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Fig 3.6 Tata Motors Weekly - 2009
Inverse H&S
Breakout
Fig 3.7 Oriental Bank - Weekly 2009
V Pattern
Breakout

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Fig 3.8 Reliance Capital - Daily Sept 2007
Inverse H&S
Breakout
Fig 3.9 Cummins - Weekly chart August 2009

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Fig 3.10 BSE Sensex - Daily chart August 2007
Fig 3.11 Vijaya Bank - Daily chart May 2009

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Fig 3.12 Tata Motors - Weekly chart June - July 2009
Trade Setup IV - At Market Bottoms/Tops with

Fig 4.1 BSE Sensex Weekly Chart -2004

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Fig 4.2 Nifty Daily Chart - Oct 2008
Fig 4.3 Reliance Weekly Chart - 2008/2009

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Fig 4.4 BSE Sensex Daily Chart - Feb 2007
Fig 4.5 BSE Sensex Daily Chart - Feb 2007

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Fig. 4.6Tata Motors Weekly Chart - July 2007
Fig 4.7 Hind Oil Exploration Weekly Chart - May 2006

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Fig 4.8 Balrampur Chini Weekly Chart - March - Aug 2007
Fig 4.9 BSE Sensex Daily Chart - April 1999

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Fig. 4.10 BSE Sensex Daily Chart - Feb 2008

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Trade Setup V - Based on Moving Averages
Fig 5.1 Nifty Weekly Chart March 2009

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Fig 5.2 SBI Weekly Chart - March 2008
Fig 5.3 Nifty Daily Chart - July 2009

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Fig 5.4 Reliance Capital Daily Chart - Jan 2009

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Trade Setup VI - Based on Oscillators / Momentum Indicators
Fig 6.1 BSE Sensex Weekly Chart - Nov 2007 - Jan 2008
Fig 6.2 Nifty Daily Chart - March - April 2003

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Fig. 6.3 Nifty Daily Chart - March - April 2003
Fig 6.4 SBI Weekly Chart - Dec 2006

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Fig 6.5 Nifty Daily Chart - July - Sept. 2009
Fig 6.6 SBI Daily Chart - Jan 2009

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Trade Setup VII - Trading System combining the above
Fig 7.1 Nifty Weekly Chart - Jan 2008
Fig 7.2 L&T Monthly Chart - Mar - Jun 2009

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Section IV Golden Rules of Trading
Trend is your Friend!!
Trend is your Friend Always Trade in the direction of the Trend with
reasonable stop - loss levels and never against it. As a Trader one is
concerned about the Trend for the next 4 to 5 days. If, after a continuous
rise or a fall for a few days some reversal patterns appear, one can take
this as a trading opportunity.

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Ride on Profits & Cut Losses
Ride on Profits & cut losses If a trading decision is right one can
partly book profits partly & wait for more gains depending upon in
which phase of the settlement one is in. However, if one is caught one
the wrong side, it is better to square of rather than wait for things to
happen in your favour. However, if one is certain and has decided the
stop loss levels, one should not panic and reverse the decision in haste.

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Dont be too Greedy!!
Do not be too Greedy Even though one is one the right side of the
Trend and one should ride the trend one should not get too greedy and
book profits at pre-decided target levels.

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Take Trading decision Yourself!!
Take Trading decisions yourself and do not listen to others. Also do

not be biased while analyzing if one has already taken a position.

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Always be Flexible!!
Always be Flexible This means that if one is following a certain trend

or a pattern and if there is a change in the Trend and if one is convinced
about it, he should immediately reverse his position rather than waiting
for things to happen. In fact one should be so fast that he should change
and trade in the direction of the Trend.

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Dont be a compulsive Trader!!
Do not be a compulsive Trader Trade only when you sense an

opportunity and not as a matter of habit as this can lead to heavy losses.

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Make use of all the Trading Tools!!
Make use of all the Trading Tools for and do not be over dependent
on any particular tool or be biased towards or against any particular
tool. No one Technique or Tool seen above is more important or less
important than the others. All are equally important. Different Tools
work better than other & give different results at times. Ideally one
should use a combination of Japanese Candlesticks Patterns /
Trendlines as well as previous significant levels for Support &
Resistance Moving Averages / Oscillators / Volume Breakouts and take
a decision when majority of these indicators are favourable.

Page 76

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Workshop on Computerised Technical Analysis of Stocks

Section I - Technical Analysis & Dow Theory

Section II - Technical Indicators

Support & Resistance

Breakouts & Breakdowns

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Symmetrical / Ascending / Descending

Japanese Candlestick Reversal Patterns

Oscillators - Momentum Indicators

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Section III - Case Studies

Accumulation on a correction / fall

At Support / Resistance levels

Trade Setup III

At Breakouts / Breakdowns along with Continuation Patterns

At Market Bottoms/Tops with a Japanese Candlestick

Based on Moving Averages

Based on Oscillators / Momentum Indicators

Trade Setup VII

Trading System combining the above

Section IV - Golden Rules of Trading

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

ALL THE BEST!!

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

History, Philosophy, Basic Tenets of Technical Analysis

A study of price charts along with volumes.

Is based on the law of Demand and Supply.

Works best in stocks that have a mass following.

Depicts the mindset of masses i.e. mass psychology.

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

It is independent of any news or occurrence of events as any of these are

Most of the Fundamental information such as announcement of Results or any

Since TA is based on Mass Psychology which can change and is fluctuating at

Limitations of Technical Analysis

If not backed by proper study of Fundamentals, TA cannot distinguish between

Many a times Stop-Losses based on Technical Analysis get triggered in choppy

TECHNO - FUNDA - The Best Approach

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Dow Theory & Trend Analysis

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

Dow has also defined Trend in terms of time, viz.

Academy of Practical Technical Analysis Research & Training

Workshop on Computerised Technical Analysis of Stocks

At the end of the Day

At the end of the Week

At the end of the Month

Intraday (60 Mins)

During the day