Investor Education Series: Introduction to Technical Analysis

Investor Education Series: Introduction to Technical Analysis

Technical analysis is basically the study of prices to make better investments, with charts being the primary tool. (Technical Analysis from A to Z – Steven B Achelis). The roots stem from the Dow Theory developed by Charles Dow in the early 1900s. Technical analysis is the process of analysing a share’s historical prices to try and predict probable future prices.

Bar Chart:

Technical analysis is usually done on Bar charts or Candlesticks, rarely on end-of-day line charts.

Candlesticks:

If the share price moved up in the period, the candlestick will be coloured blue and red if it went down:

Up Trend or Bull Trend:

An Up Trend is when share prices make higher and higher highs and higher and higher lows. JSE Allshare Index Bull Trend since middle 2012:

Down Trend or Bear Trend:

A down trend is when prices make lower and lower highs and lower and lower lows. The JSE Allshare Index in the 2008 Bear Trend:

Why “Bull” or “Bear”?

The terminology evolved because of the way each kill or attack. A bull strikes upward with its horns to kill and a bear slams down with its paws while standing upright. Up trends are therefore called Bull markets and down trends are called Bear markets.

Using Trendlines to Trade:

Many so-called technical analysts base their analysis. Trendlines are very weak indicators.

1. When a trendline is broken it is not necessarily an indication the trend will change as some seem to think. The trend can reverse, or it can move sideways or the trend can continue, just at a different pace. (See example below).

2. There is no target price to be established when a trendline is broken as is the case with other technical analysis patterns which we will discuss in future series.

3. One can draw too many 2 point trendline, so a trendline should have at least 3 touch points to have any meaning.

Multiple Trendlines when the Sasol moved sideways in 2009 and 20120:

Importance of Volume:

Volume is used to assess the strength of the trend, up or down and also acts as confirmation of a breakout. Volume is low, average, or high (one third of the time on the chart for each).

• Healthy Price Uptrend: volume to increase on rallies in price and decrease on selloffs.

• Healthy Price Downtrend: Volume should increase on days when prices close lower and decrease on price up days.

• Breakout Volume: Volume should increase when a price breaks out of a pattern to confirm. If volume is low on the breakout day, be careful.

• Blowoff volume – extraordinarily high volume can indicate that price trend is exhausting and can reverse.

Gerhard Lampen

Head Sanlam iTrade

Recommended Books:

Title: Technical Analysis from A to Z. Author: Steven B Achelis. ISBN: 1-55738-816-4 Publisher: McGraw-Hill, USA. Comment: Very good, easy to understand.

Title: The Winning Edge. Author: Yonaton Rom. ISBN: Also on CD. Publisher: yonatan@thewinningedge.co.za Comment: Good introduction, also does courses.

Title: Technical Analysis of Stock Trends. Author: John Magee. ISBN: 9780814408643 Publisher: AMACOM. Comment: The Definitive work on T A.

Title: Technical Analysis of the Financial Markets. Author: John J Murphy. ISBN: 9780735200661 Publisher: Prentice Hall Press. Comment: Definitive work on T A.

15 Comments
  • Lucky Mototo
    Posted at 09:52h, 11 December

    How is this different from Forex Trading like iForex?

  • JustOneLap
    Posted at 09:55h, 11 December

    RT @iSayiTrade: What is a Bear? Bar Chart? Trend? Investor Education Series: Introduction to Technical Analysis: http://t.co/7W6Y3Dfq

  • Chris Ahrens
    Posted at 09:57h, 11 December

    Forex refers to the trading of foreign currency.

  • Sanlam iTrade
    Posted at 15:00h, 11 December

    Hi Lucky. Chris is right. Technical analysis can be used on any price chart, Forex or Equities, although my examples relate mostly to equities on the JSE.

  • Mark Fiberman
    Posted at 18:08h, 11 December

    Technical analysis is a black art. Those who claim to ‘teach’ r just running scams…#jealous

  • Mthokozisi Makhoba
    Posted at 11:02h, 12 December

    I would like to learn more about investing

    • isayitrade
      Posted at 15:52h, 18 February

      Hi Mthokozisi. You will find a good Learning Centre if you register as an iView client on our website: http://www.sanalmitrade.co.za. It is free for this year if you liked our Facebook page and indicate Facebook as your referral source. https://www.facebook.com/SanlamiTrade. There are also excellent online training courses available. JustOneLap is really good and they do it rthrough webinars, so you can download it and view it whenever. And it is free.

  • Busani Gama
    Posted at 11:19h, 12 December

    i shud give this a try!

  • Sanlam iTrade
    Posted at 11:29h, 12 December

    Technical analysis is definitely an art, not a science. If you use black bar charts it is a black art, if you use blue bars, it is a blue art, if you use candlesticks it is a blue and red art.

  • Mark Fiberman
    Posted at 11:49h, 12 December

    Does the education series include Fibonacci retracements?

  • Sanlam iTrade
    Posted at 11:58h, 12 December

    We have never really studied Fibonacci retracements, so no. There is a small group of analysts who use them. You can look at the recommended books on this post. Most cover Fibonacci.

  • Petrus Thabiso Ratlou
    Posted at 15:09h, 13 December

    X_X I don’t wana Lie I don’t have No idea what technical analysis is all about.But have eager to learn financial Markets .

  • Sanlam iTrade
    Posted at 16:54h, 19 December

    Watch this FB page, we plan an exciting portfolio management competition for next year. Register on http://www.sanlamitrade.co.za as an iView client and look at the Learn centre. It is free for the first month and then only R200 per year and you get a demo portfolio to practise on.

  • Mark Fiberman
    Posted at 17:07h, 19 December

    Looking forward to da competition,investing,from my limited experience is nothing like trading though….#pessimist

  • Tiisetso Tii
    Posted at 17:43h, 19 February

    Tiisetso Tii liked this on Facebook.

Post A Comment