Some Concepts of Technical Analysis.

Pattern Name	Structure	TREND	Stop Loss	Checklist
Bullish Marubuzo		Open = Low Close= High BUY Long	Open Price= SL	3:20 Current Market Price(CMP)= High price of the day. Opening Price=Low price of the day.
Bearish Marubuzo		Open=High  Close=Low Sell Short Sell price close to a closing price of Marubozu	Closeprice=SL	Avoid trading at extremely small or long candles(above10%)
Spinning Top		Equal size candles with equal wicks.
The Doji		Non-existent candle with open price=close price		Market can swing either way after Doji.
The paper umbrella		Long lower shadow with small upper body
Hanging Man(Bearish)		Forms at top of the trend. Short Trade. Preceded by an uptrend. Risk-takers the same day initiate at the closing price. For risk-averse initiate close of the next.	High of candle=SL	Note if both patterns are available, the hammer setup is better.
Hammer(Bullish)		Forms at bottom of a trend. Long trade Longer the lower part more bullish the High-risk taker the buy on the same day Low-risk taker on next day.	Low of the hammer= SL	3:20 Risk-taker checks if the open or close price is in the vicinity and the lower shadow length should be twice the real body length.
The shooting star		Reverse paper Umbrella (long upper shadow). Pattern more reliable if the candle is red. Longer the upper wick more bearish the market. Risk-taker initiates trade at the closing price.	High of the pattern=SL	Confirm this current market price is more or less equal to the lower price and the length of the shadow is at least twice the real body. Wait till SL or Target
Bullish engulfing		Formed at bottom of a trend. Multiple candlestick and two-day trading session. Small candle day 1 and relative long candle on day 2 appear to engulf. Traders should go long. Buy price=closing price of green candle day 2.	SL=lowest between P1 and P2.	The prior trend should be a downtrend. Day 1 candle=Red Day 2=Green
Bearish engulfing		Top of trend. Day 1=Green Day 2=Red Traders should look at the shorting.		Bearish engulfing with Doji at top of the trend is highly profitable.
Piercing pattern		More than 50% but less than 100% engulfing in the bullish engulfing pattern.		The trade setup is the same as bullish engulfing.
Dark cloud cover		More than 50% but less than 100% engulfing in the bearish engulfing pattern.		The trade setup is the same as bullish engulfing.
Harami pattern		Two candle setup  The first long and second short and second are opposite in color.  Trend reversal is possible.
Bullish Harami		Bottom of the trend. Should long on this position. P1=red and long P2=green and short	The lowest low of the pattern should be =SL	Risk takers should initiate trade around the close of P2
Bearish Harami		Top of the trend. Shorting opportunity. P1=green and long P2=red and short Risk takers should short near the close of P2 after ensuring P1 and P2 form a bearish harami.	Highest high b/w P1 and P2= SL	The open price of P2 should be lower than the close of P1 and the close price of P2 should be greater than the open price of P1.
Morning Star		Bullish candlestick pattern which evolves over a three-day period. Formed at bottom of the trend. P1=New low P2=Bear shows dominance with a gap  Down. After this Doji or spinning top is formed. P3 green candle opens with a gap up and manages to close above P1 red candle opening In absence of P2’s Doji or spinning top, it appears a P1 and P3bullishulllish engulfing. Look for long.	P1 lowest low should be= SL	Confirmation of morning star on P3. P2 is a Doji or spinning top with a gap down opening and P3 opening should be gap up + current market price should be higher than the opening of P1 lowest low.
Evening Star		The Bearish at the top of the trend. P1= green opens high P2=doji or spinning top P3=opeandown and progress into the red candle. Shortening opportunities.	Highest high of P1, P2, and P3=SL	Short the stock on P3 around close to 3:20 PM After confirming P1 and P3 form an evening star.

The support and resistance

1. To find the target first need to find the support and resistance.

2. Resistance is always greater than the current market price.

S&R construction 

1. For intraday and BTST at least 3-6 months data points/

2. For long-term 12-18 months data points (used for swing trade).

3. Identify three sticky zones- hesitated to move up or down after a brief up or down move.

4. Sharp reversal after a particular price point.

5. Identify at least three price action zones that are at the same level.

6. Important to find the point in every space in time.

7. Identify current market price based on which line is s and r.

Volume Basis

Price	Volume	Expectation
IN	IN	bullish
IN	DE	Caution weak hands in buying
DE	IN	bearish
DE	DE	Caution weak hands selling

Volume should be seen with a reference point and it is usually the volume of the average of the last 10 days.

Thumb rule

1. High vol = todays vol > last 10 day avg

2. Low vol= todays vol< last 10 day avg

Moving averages(MA)

1.  Avg of the latest 5-day data point.

Simple moving average(SMA) 

1.  Line overlay on charts on how averages are behaving.

Exponential moving averages 

1.  The newest data point is given more weight.

Rules on moving averages system

1. R1= go long when the current market price is greater than 50-days EMA. invest till necessary sell conditions are satisfied.

2. R2= exit the long position when the current market price turns less than 50-day EMA.

MA Crossovers

           Use of two types of moving averages.

1. Short term = 50 day MA

2. Long term = 100 day MA

Rule 1 = Buy when short term MA above the long term MA

               Stay in trade as long as the condition is satisfied.

Rule 2 = Exit the long position when short turn MA moved lower than long term  

               MA.

EMA combination 

1. 9day with 21 days = short term trade

2. 25 day with 50 days = medium-term trade

3. 100 day with 200 day= long term trade

INDICATORS

Leading- signals a reversal of trend or start of a new trend in advance.

Ex- oscillator

Lagging- signals the occurrence of a reversal or a new trend after it has occurred.

Ex- Moving averages

First indicator

          

           Relative strength index(RSI)

Used for trend reversal and oversold and overbought price areas identification.

RSI Setup

Oscillates between 0 to 100 or 20 to 80 (same).

When reading 0 or 20 security is oversold and ready for an upward correction.

When reading 80 or 100 security is overbought and expected to be a sell-off.

RSI is always used along with another candlestick pattern to study the market.

Second Indicator

Moving average convergence and divergence(MACD)

(Short term avg - long term avg) =

- downward movement = Divergence = bullish momentum 

                                                          

+ upward movement = convergence = bearish momentum

The advanced version (9-day signal line) is the EMA of the MACD.

MACD System - Difference b/w short- long =  12-26

                            9-day EMA of the MACD

The sentiment is bullish when the MACD line crosses above 9 days EMA where MACD > 9-day line.

The sentiment is bearish When the MACD line crosses below the 9-day MACD line.                   

Third indicator 

Bollinger Band(BB)

           To identify overbought and oversold levels.

It has 3 components- Middle line = 20 day SMA

                 Upper band=+2 standard deviation of the middle line

           Lower band= -2 standard deviation  from the middle line

Ex- If SMA = 7800 and SD= 75

UB = 7800+75*2= 7950

LB = 7800-75*2= 7650

The Dow Theory

The double bottom and top formation

 

Considered a reversal pattern.

It is considered bullish hence one should look at buying opportunities.

Similar top formation but bearish in nature.

The triple bottom and top formation 

Same with three bottom and top formations.

The trading range

 

Provides multiple opportunities to trade both ways ( long and short).

Range breakout 

 Traders will initiate a long position when the stock price breaks above resistance and short when breaks down below the support level.

Look for a true breakout

Volumes are high on the breakout or immediately after the breakout.

After breakout momentum is high.

Flag Formation

 

Big move with short correction.

Risk To Reward Ratio(RRR) 

 (entry - stop loss/exit - entry)

 Look for trades that have rich RRR >1.3 or higher.

While trading patterns, structures, and volumes should be taken into consideration with a check on RRR.

The Checklist 

Step - 1

Before initiating the trade check for this list.

The stock should form a recognizable candlestick pattern.

S&R should confirm the trade.

Volume should confirm.

Step - 2

Charting software - Paid - Metastick, Ambibroker. 

                                  Free - Yahoo Finance and Google Finance.

Step -3

 Timeframe

As the thumb rule higher the timeframe, the more reliable the trading signal is.

For a swing, the trader's back period is 6 or 9 months.

For scalper, he uses a 1 or 5 min timeframe and at least 5- day data.

For while plotting S&R levels you should increase the lookback period to 2 years.

Step - 4

The opportunity universe.

Parameter to look upon to identify best stocks -

Ensure the stock has liquidity by looking at bid-ask spreads, the lesser the spread the more liquid the stock is.

Make sure that the stock is in the EQ section (available for day trade).

Nifty 50 and Sensex are called index stocks.

Step - 5

The shortlisting period 

Look at all the charts of stocks in the opportunity universe.

Look at the last 3-4 candles, recognize the pattern is developed.

If you find a shortlist for further investigation.

Evaluation Process 

After the stocks are shortlisted now proceed for detailed analysis giving 15-20 min to each chart.

Look for prior trends and if everything seems good look for volumes> 10-day average.

Check For S&R  

Long trade(support) and short trade(resistance). If S&R level > more than 4%

Away stop evaluating the charts and proceed to the next.

Look for Dow Patterns

After that calculate RRR. MIn RRR>1.5

At last look for MACD and RSI indicators.

 Fibonacci retracements

The Fibonacci ratios, i.e. 61.8%, 38.2%, and 23.6%, help the trader identify the retracement’s possible extent. 

I’ve encircled two points on the chart, at Rs.380 where the stock started its rally, and at Rs.489, where the stock prices peaked. I would now define the move of 109 (380 – 489) as the Fibonacci up move. If this stock continues to correct further, the trader can watch out for the 38.2% and 61.8% levels.

Notice in the example shown below, the stock had retraced up to 61.8%, which coincides with 421.9, before it resumed the rally.

We can arrive at 421 by using simple math as well –

Total Fibonacci up move = 109

61.8% of Fibonacci up move = 61.8% * 109 = 67.36

Retracement @ 61.8% = 489- 67.36 = 421.6