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I. Technical Analysis
II. Fundamental Analysis
Random Walk Hypothesis or Theory
• Share prices increase or decrease randomly or unpredictably on a day-to-
day basis.
• It is impossible to outperform the market without assuming additional risk (due to
randomness).
• Outperform – To gain a better return than that of an index or market.
• The study of chart patterns plays the main role in technical analysis.
• (See patterns and charts on the following pages)
Candlestick Chart – Shows the opening and closing
prices, as well as the high and low for a specific
time period (hour, day, week, etc..).
Candlestick Pattern Names
Chart Pattern Basics
Reversal Pattern Continuation Pattern
• The trend will change or reverse • Ignoring minor fluctuations, a
course at the completion of the continuation pattern will trend in
the same direction (increasing or
pattern. decreasing).
• An upward trend will change to a • Continuation patterns are typically
downward trend and vise versa. the most accurate if followed for a
• Head and shoulders period of time.
• Three Line Strike • Triangles
• Two Black Gapping • Flags
• Three black Crows • Pennants
• Rectangles
• Etc..
• Other Examples??
Reversal Pattern Example: Head and Shoulders
• Predicts a future downward trend “Bullish to Bearish”
• One of the most reliable patterns in technical analysis.
• An inversed head and shoulders (bottom) pattern would indicate an
upward trend.
• Head and shoulders top patterns are shown.
Continuation Pattern Example: Triangular Continuations
• Uses trendlines which follow the trading highs and lows for a particular period.
• Portrays a representation of the general direction of share price as a whole.
II. Fundamental Analysis
• The belief that a share has a true or correct value (intrinsic value), which
might be different from its stock market value. Markets are not efficient.
• Fundamental Analysts study qualitative and quantitative, business and
financial conditions and economic indicators.
• Qualitative measurements – measuring the quality of something- uncountable and
intangible elements and values.
• Examples??
• Quantitative measurements – tangible and measurable values and elements.
• Examples??
• Economic Indicators – Statistics about economic activity such as business cycles
(expansion and contraction).
• Study both macroeconomics and microeconomics
• Macroeconomics – Conditions of the economy, market and industries ‘as a whole’.
• Microeconomics – Economic conditions of a particular company or individual.
What do Fundamental Analysts Assess?
• Revenue – Gross income (all the money a company brings in)
• Earnings – Revenue minus expenses (not including taxes or interest)
• Future Growth – Increase in revenue, dividends, earnings (micro) and general
GDP (Gross Domestic Product), job growth, markets, etc.. (macro)
• Return on Equity – Profits relating to shareholder equity
• Return – How much an investor/owner receives.
• Profit Margins – similar to earnings but expressed as a ratio – percentages.
• How much ‘out of’ every dollar is considered earnings.
• Can be used to measure success as a whole or for individual goods sold.
• Example: Production cost of a small ice cream cone = $.50, Cost of a small ice cream cone = $1.00 – The
profit margin is $.50 or %50.
• Risk – Mitigating different types of risk by identifying, assessing (examples: risk
assessment, SWOT analysis) managing (example diversification) and monitoring
outcome.