SYMBIOSIS SCHOOL OF BANKING MANAGEMENT
Constituent of symbiosis International University
Accredited by NAAC with ‘A’ Grade
Established under Section 3 of the UGC Act, 1956, vide notification No: F.9.12/2001-U-3of the Government of India.

IMPORTANCE OF TECHNICAL ANALYSIS IN DETERMINING MOVEMENT OF PRICE IN EQUITY STOCK MARKET

Internship Report submitted to SIU in partial completion of the requirement of MBA Banking Management at Symbiosis School of Banking Management
Pune-412115.

NAME OF THE STUDENT: PROJECT MENTOR (SSBM) PROJECT MENTOR / PRN: REPORTING OFFICER (AT THE BANK)

ABHISHEK AGRAWAL DR. BINDYA KOHLI AMOL ATHAWALE
PRN: 12020941031

APRIL 08 2013 TO MAY 25 2013
ACKNOWLEDGEMENT

I sincerely and religiously devote this Research Paper to all the gem of persons who have openly or silently left an ineradicable mark on this research so that they may be brought into consideration and given their share of credit, which they genuinely and outstandingly deserve. This expedition of research encountered many trials, troubles and tortures along the way. I am essentially indebted to my mentor “Amol Athawale” for this amazing learning experience. He overlooked my faults and follies, constantly inspired and mentored via the proficient direction. It was a privilege to work under his sincere guidance. I express my thanks to Dr. Bindya Kohli, Faculty at Symbiosis School of Banking Management, for her considerate support whenever and wherever needed. I honestly acknowledge the sincere guidance provided by Dr. Bhama Venkatramani, Director, Symbiosis School of Banking Management. I express my indebtedness to the management of Symbiosis School of Banking Management, for inspiring us to grab and utilize this opportunity. With profound sense of gratitude, I would like to truthfully thank a recognizable number of individuals whom I have not mentioned here, but who have visibly or invisibly facilitated in transforming this research into a success saga Symbiosis School of Banking Management

Name of the Student:
Abhishek Agrawal

TABLE OF CONTENTS A. LIST OF CHARTS & TABLES 8 B. INTRODUCTION 10 BRIEF PROFILE OF STUDENT 10 BRIEF PROFILE OF PROJECT MENTOR AT THE ORGANISATION 10 BRIEF PROFILE OF ORGANISATION 10 NATURE OF THE PROJECT/BRIEF OBJECTIVES/ RESPONSIBILITIES ASSIGNED BY THE PROJECT MENTOR. 11 C. FRAMEWORK OF STUDY 12 I. SCOPE OF STUDY 12 II. LIMITATIONS OF STUDY 12 III. PERIOD OF STUDY 13 IV. INTRODUCTION TO STOCK MARKET FUNDAMENTALS 13 Financial Instruments - Definition 13 Basics type of financial instruments 13 Bond 13 Stocks 13 Stock Exchanges 14 Primary Market 14 Secondary Markets 14 Different Phases of Market. – The Life Cycle 14 Increase 15 Constant 15 Decrease 15 Methods of Predicting Price Movements 15 Market Analysis 16 Economic Analysis 16 Fundamental Analysis 16 Technical Analysis 16 V. INTRODUCTION TO TECHNICAL ANALYSIS 17 VI. THE BASIC ASSUMPTIONS OF TECHNICAL ANALYSIS 18 1. The Market Discounts Everything 18 2. Price Moves in Trends 18 3. History Tends To Repeat Itself 18 VII. FUNDAMENTAL VS. TECHNICAL ANALYSIS 19 The Differences 19 1. Charts vs. Financial Statements 19 2. Time Horizon 19 3. Trading Versus Investing 20 The Critics 20 Can They Co-Exist? 21 D. METHODOLOGY AND ANALYSIS 22 I. THE USE OF TREND 22 Types of Trend 23 Trend Lengths 23 Trend lines 24 Channels 25 The Importance of Trend 26 II. SUPPORT AND RESISTANCE 26 Why Does it Happen? 26 Round Numbers and Support and Resistance 27 Role Reversal 27 The Importance of Support and Resistance 27 III. THE IMPORTANCE OF VOLUME 28 What is Volume? 28 Why Volume is Important 29 Volume and Chart Patterns 29 Volume Precedes Price 29 IV. THE USE OF CHARTS. 30 Chart Properties 30 The Time Scale 30 The Price Scale and Price Point Properties 31 V. CHART TYPES 32 Line Chart 32 Bar Charts 32 Candlestick Charts 33 VI. CHART PATTERNS 34 Head and Shoulders 34 Cup and Handle 35 Double Tops and Bottoms 36 Triangles 37 Triple Tops and Bottoms 38 Rounding Bottom 39 VII. MOVING AVERAGES 39 Types of Moving Averages 40 Simple Moving Average (SMA) 40 Linear Weighted Average 41 Exponential Moving Average (EMA) 41 Major Uses of Moving Averages 42 VIII. INDICATORS AND OSCILLATORS 44 Aroon 45 Aroon Oscillator 45 Moving Average Convergence Divergence 46 Relative Strength Index 47 Accumulation/Distribution Line 48 IX. OTHER IMPORTANT TOOLS IN TECHNICAL ANALYSIS 48 Fibonacci and the Golden Ratio 48 The Mathematics 48 The Fibonacci Studies and Finance 49 1. Fibonacci Retracements 49 2. Fibonacci Arcs 49 3. Fibonacci Fans 50 4. Fibonacci Time Zones 50 Conclusion 51 Parabolic SAR 51 The Indicator 51 Parabolic SAR and the Short Sale 53 Bottom Line 53 Elliot Wave Theory 53 Market Predictions Based on Wave Patterns 54 Theory Interpretation 54 Theory Gained Popularity in the 1970s 55 X. HOW TO BUILD A STRATEGY 57 Philosophy of Technical Analysis 57 What Technical Analysts Don't Care About 57 Is Technical Analysis a Long-Term Strategy? 57 Picking Stocks with Technical Analysis 58 XI. BUILDING A STRATEGY 58 1. Candle Sticks: 58 2. Bollinger Bands 59 The Bottom Line 60 3. Stochastic Oscillator 61 4. Parabolic SAR 63 5. Chaikin Money Flow 65 What Is Money Flow? 65 Using Money Flow 66 A Few Cautions 67 The Bottom Line 67 CASE STUDY: TESTING OF STRATEGY 68 1. Hindalco 68 2. Bharat Heavy Electricals 70 3. LIC Housing Finance 72 CONCLUSION & RECOMMENDATION 74 Conclusion 74 Recommendations 74 BIBLIOGRAPHY 75

A. LIST OF CHARTS & TABLES Figure 1: Different Phases of Market 14 Figure 2: Market Ananlysis - Types 16 Figure 3: Types of Trends 23 Figure 4: Trend Lengths 24 Figure 5: Trend Lines 24 Figure 6: Channels 25 Figure 7: Support & Resistance 26 Figure 8: Support & Resistance - Role reversal 27 Figure 9: Volume 28 Figure 10: Price Chart 30 Figure 11: Linear & Logarithmic Price Chart 31 Figure 12: Line Chart 32 Figure 13: Bar Chart 33 Figure 14: Candlestick Chart 34 Figure 15: Head & Shoulders pattern 35 Figure 16: Cup & Handle Pattern 36 Figure 17: Double Tops & Bottoms Pattern 37 Figure 18: Triangles Pattern 37 Figure 19: Triple Tops & Bottoms Pattern 38 Figure 20: Rounding Bottom Pattern 39 Figure 21: Simple Moving Average 40 Figure 22: Exponential Moving Average 41 Figure 23: Use of Moving Average 1 42 Figure 24: Use of Moving Average 2 43 Figure 25: Use of Moving Average 3 43 Figure 26: Aroon Indicator 45 Figure 27: MACD - Moving Average Convergence Divergence 47 Figure 28: RSI - Relative Strength Index 47 Figure 29: Fibonacci Retracements 49 Figure 30: Fibonacci Arcs 50 Figure 31: Fibonacci Fans 50 Figure 32: Fibonacci Time Zones 51 Figure 33: Parabolic SAR (Stop & Reversal) 52 Figure 34: Elliot Wave Theory 8 Waves 55 Figure 35: Elliot Wave Theory 5 Waves 55 Figure 36: Elliot Wave Theory - Wave 1, 2, 3, 4 & 5 56 Figure 37: Elliot Wave Theory - Wave A, B & C 56 Figure 38: Candlestick Chart 59 Figure 39: Bollinger Bands 60 Figure 40: Stochastic Oscillator - Overbought & Oversold Signals 62 Figure 41: Stochastic Oscillator - Divergence 63 Figure 42: Parabolic SAR 64 Figure 43: Chaikin Money Flow 66 Figure 44: Analysis of Hindalco Stock through moneycontrol.com 69 Figure 45: Recommendations for Hindalco 70 Figure 46: Analysis of Bharat Heavy Electricals Stock 71 Figure 47: Recommendations for Bharat Heavy Electricals 71 Figure 48: Analysis For LIC Housisng Finance Stock 72 Figure 49: Recommendations For LIC Housing Finance 73

B. INTRODUCTION

BRIEF PROFILE OF STUDENT
I am Abhishek Agrawal, a B.COM graduate from Madras University, currently pursuing MBA from SSBM (Symbiosis School of Banking Management) a constituent of Symbiosis International University.
Prior to MBA I have a total work experience of 4.5 years, 3 years in Eskay Home Collections (an Export Company) as an Accounts Manager and other 1.5 years in Genpact (financial Outsourcing Company)as a process Associate for client GE Money Australia (GMA).
In Genpact my work profile includes submission of quarterly reconciliations of equity and investment accounts of home lending team of GMA, cleaning up of historical balances of equity accounts, helping the team to get CAS (Corporate Audit Staff) query resolved within 48 hours, Posting FP&A journals in Oracle on behalf of FP&A team and lastly preparing journals which includes ET&L Accruals, Amortization journals and journals for issue of credit cards to new customers. In Genpact I was also part of few project viz., Chart of Accounts cleanup project, Net Income Roll back project and Reconciliation controllership Tool approval project.
During my tenure in Genpact I had received couple of awards due to my sheer hard work, one was an individual award on imagination for the work done by me in Q3’2010, and another was a team award given to me for the period Q4’2010.
Due to my interest in finance I resigned from Genpact and decided to do MBA from SSBM.
BRIEF PROFILE OF PROJECT MENTOR AT THE ORGANISATION
Mr. Amol Athawale is a double master’s degree holder from Pune University (M.COM & M.A. Economics). He has a total experience of 8 years, 3 years in SS Tulpule a CA firm as an assistant auditor and another 5 years in Kotak Securities as a Manager Research (Technical Analysis). Here, in Kotak Securities he has devised his own model and does analysis of securities based on it. It has taken him 2-3 years to create this model and still today he keeps on updating it & testing it. He posts his analysis on Kotak Securities portal so that the clients can see it and take decision based on it. He has a very good knowledge of stock market and the model he has created has a success ratio of 80%. He is a premier employee of Kotak Securities.
BRIEF PROFILE OF ORGANISATION
Originally established in 1994, Kotak Securities is a subsidiary of Kotak Mahindra Bank, which services more than 13 lakh customer accounts. The firm has a wide network of more than 1330 branches, franchisees representative offices, and satellite offices across 412 cities in India and offices in New York, London, Dubai, Mauritius and Singapore.
We process more than 400000 trades a day which is much higher than some of the renowned international brokers.
The company is a corporate member of both The Bombay Stock Exchange (BSE) and The National Stock Exchange of India (NSE). Our operations include stock broking services for trading in stock markets through branches & internet and distribution of various financial products including investments in IPOs, Mutual Funds and Currency Derivatives. Currently, Kotak Securities is one of the largest broking houses in India with substantial geographical reach to Asia Pacific, Europe, Middle East and America. Kotak Securities Limited has Rs.1,015 crore of Assets Under Management (AUM) as of 31st March, 2013.

NATURE OF THE PROJECT/BRIEF OBJECTIVES/ RESPONSIBILITIES ASSIGNED BY THE PROJECT MENTOR.
Everyone has different opinion for Stock Market. Some feels that the risk is very high for investment in stock market while some like it as they can relate it to gambling. Though most of the investors feel that stock market provides them with great opportunity to earn profit. Different person and different investor have their own opinion about it. But, the recent trend in the stock regarding its volatility leads to the depression and also losses for many investors. If the investors starts analyzing the erratic behavior of stock market they would come up with numerous reasons which could justify its behavior, however the investors has to look at this behavior from a macro level so that they may not take any wrong decision. One of the important study in this regard is Technical Analysis, it studies (forecast) movement of price through price trends, charts, chart patterns, etc., It is a tool which provides us with better knowledge regarding stock market and also helps to take better decision. Only actual price is considered while analyzing the investment opportunities.
The project is regarding stock market and how technical analysis is helpful in taking better investment decision; the project starts with an introduction of stock market, theoretical framework for technical analysis, methodology & observation technique adopted to understand the same. This project also consists of strategy building, testing of the strategy, conclusion & recommendation.
OBJECTIVES
* To find out the price trend of different stocks. * To study & forecast price movements of different stocks. * To determine which stock is more suitable for a particular investor. * To analyze the use of Technical analysis and how it is applicable to stock markets * To identify and sort out simple Technical analysis tool relevant for the formulation of various investment strategies. * Analysis of Stock Market movements during various cyclic events. * To estimate the behavior of market in the near future using Technical analysis.

C. FRAMEWORK OF STUDY
Theoretical framework is the basic theory (meaning, importance, types, etc.,) that is necessary before going deep into the research. Following are the points I have included in this framework which forms the base of my research: * Scope of study * Limitations of study * Period of study * Introduction To Stock Market Fundamentals * Introduction To Technical Analysis * The Basic Assumptions Of Technical Analysis * Fundamental vs. Technical analysis

I. SCOPE OF STUDY
Technical analysis is the most widely used tool for analyzing and predicting the trend of the stock market. This approach is one of the oldest approach to analyze Investment opportunities. Technical Analysis helps to study the behavior of the price of the stock to determine the future prices of the stock. Hence the study conducted at Kotak Securities is made to analyze the price fluctuations in stock market. II. LIMITATIONS OF STUDY
Only 6 months sample were taken for analysis. If in case the time period for analyzing stocks has been changed from 6 months to 1 month or 1 year, the analysis could show a different result.
In depth and broad study and analysis of all major and minor companies was not possible within a limited time of 7 weeks.
Moreover there are numerous tools in technical analysis and analyzing stocks with all those tools was also not possible due to time constraint.
Due to limitation of time the analysis of stocks has been done through technical analysis only, Fundamental and Economic Analysis has been skipped.

III. PERIOD OF STUDY
This project was done at Kotak Securities, Bund Garden Road, Pune Branch for a period of 7 weeks. In trhis7 weeks I have learned quite a lot regarding investing through technical analysis and will utilize this technical know-how by investing in the stock markets.

IV. INTRODUCTION TO STOCK MARKET FUNDAMENTALS
Financial Instruments - Definition
A real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset.
Basics type of financial instruments
There are two fundamental types of investment, namely bonds & stocks.
Bond
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and Indian and foreign governments to finance a variety of projects and activities.
Stocks
A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated. Stocks are also known as "shares" or "equity."

Stock Exchanges
A place, whether physical or electronic, where stocks, bonds, and/or derivatives in listed companies are bought and sold. A stock exchange may be a private company, a non-profit, or a publicly-traded company (some exchanges have shares that trade on their own floors). A stock exchange provides a regulated place where brokers and companies may meet in order to make investments on neutral ground. The concept traces its roots back to medieval France and the Low Countries, where agricultural goods were traded for cash or debt. Most countries have a main exchange and many also have smaller, regional exchanges. A stock exchange is also called a bourse or simply an exchange.
Primary Market
An Issuer/Company enters the Primary markets to raise capital. They issues new securities in Exchange for cash from an investor (buyer). If the Issuer is selling securities for the first time, these are referred to as Initial Public Offers (IPO's). Summing up, Primary Market is the means by which companies float shares to the general public in an Initial Public Offering to raise capital.
Secondary Markets
Once new securities have been sold in the Primary Market, an efficient mechanism must exist for their resale, if investors are to view securities as attractive opportunities. Secondary Market transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon.
Different Phases of Market. – The Life Cycle

Figure [ 1 ]: Different Phases of Market The first point to make is that every crowd has both a beginning and an end. There will be a time before the crowd existed and there will be a time after it has disappeared .Life cycle essentially consists of three phases-namely, Increase, Constant, Decrease.
Increase
Crowds initially come into being as a result of both a change which creates a change and an ability to respond purposefully to that change. Once a crowd with common values and common objective has been established, it will then respond positively to the input of new items of information from the environment. In particular, it will draw dynamic response from the most creative element of the crowd, especially from the crowd leadership. During the growth stage of its life cycle a crowd is completely able to maintain its integrity, even in the face of hostile environment.
Constant
At maturity, the crowd becomes self-oriented and therefore inflexible. It is able to feel comfortable, basking in the glow of its achievements, and will therefore seek to control the creativity of its smaller parts rather than the other way round. Consequently, low level fluctuations are quickly suppressed.
Decrease
Eventually, however, this rigidity will mean that the crowd is unable to adjust any further to changes in the environment. The expectations of the crowd are unchanging, and increasingly become divergent from the actual events .There then begins a decline which is marked by internal discord, uncertain leadership and hostility towards the leadership. Ultimately comes the shock which causes the crowd to disintegrate entirely. The life cycle is thus complete, and individuals are released to participate in other crowds. Hence generation and degeneration are succeeded by regeneration is a continuous process.
Methods of Predicting Price Movements
The idea that behavior in financial markets is essentially a crowd phenomenon is the basis of a comprehensive approach to accurate forecasting in equity, bond and foreign exchange markets. At one extreme, a self-aware individual is potentially unpredictable except within the very broadest of guidelines. However, at the other extreme, people as group are predictable. This is the essence of the crowd phenomenon, and it implies that the price movements in financial markets are also intrinsically predictable
Market Analysis Figure [ 2 ]: Market Ananlysis - Types
It is a study designed to define a company’s current or potential markets, forecast their directions, and decide how to expand the company’s share and exploit any new trends.
Economic Analysis
Economic theory argues that the price of any asset is determined by the interaction of demand and supply: the price will rise if demand rises or supply falls; and the price will fall if demand falls or supply rises .hence, the main task of an economist is to isolate the forces which will influence the demand for, and supply of, financial assets overtime. The main tools are the economic theory itself and statistics –the former to provide the logical framework and the latter to provide some form of quantification to the analysis and conclusions.

Fundamental Analysis
It is the analysis of security values grounded in simple factors like earnings, record variables, and management quality. Fundamental analysis makes an attempt to see & verity the worth of a particular security, and if the price of that stock diverges from its value, it acquires the advantage of the variance by purchasing or selling the stock. Fundamental analysis could involve scrutinizing a firm’s monetary statements, visiting its managers, or examining how a change within the economy affects a selected industry.
Technical Analysis
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.

V. INTRODUCTION TO TECHNICAL ANALYSIS
Technical analysis can be defined as a method that attempts to forecast future price trends by the means of analyzing market action. It was established as early as 18th century. However, most of its methods as we know them today were created in the first decades of 20th century. The core idea of technical analysis is that history tends to repeat itself. That is why we can find certain situations in the market that occur regularly. These situations can be discovered by chart analysis and technical indicators, which we can use for our advantage – and that is precisely what technical analysis is trying to do.
There are several approaches to technical analysis – such as the Dow Theory, Elliot wave theory, Fibonacci's analysis, cyclical analysis and so on. However, the most commonly used methods can be divided into two major branches – namely chart analysis (also called charting) and statistical approach. With chart analysis, the analyst is trying to find patterns that price create in the chart and that occur repeatedly. For example, head and shoulders or double bottoms are considered typical chart patterns. As soon as the analyst identifies such a pattern, he can make a trade based on the direction the price should follow based on the type of the pattern.
Another branch of technical analysis is constituted by the statistical techniques, which comprise mostly the study and use of various technical indicators. These indicators are computed from historical market data and are mostly used for forecasting trend reversals or changes in strength of the trend. Many of the indicators yield precise buy and sell signals. There are several kinds of indicators – from the very simple ones like moving averages to the very complicated such as Swing index, for which the mathematical formula is several lines long. Yet, the major drawback of using technical indicators is that they provide too many trading signals that are often contradicting each other. It is so because different indicators work best in different kind of market (or phase of the trend). In the following articles, explaining various technical indicators will be our primary concern.

VI. THE BASIC ASSUMPTIONS OF TECHNICAL ANALYSIS
“The market is never wrong. It’s the individual’s perceptions”

The field of technical analysis is based on three assumptions:
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

VII. FUNDAMENTAL VS. TECHNICAL ANALYSIS
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities.
The Differences
1. Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements.
By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification as fundamental analysis goes beyond just the financial statements for the purposes of calculating the intrinsic value.
Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.
2. Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.
The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases.
Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts.
3. Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
The Critics
Some critics see technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts focus on the fundamental side, just about any major brokerage now employs technical analysts as well.
Much of the criticism of technical analysis has its roots in academic theory - specifically the efficient market hypothesis (EMH). This theory says that the market's price is always the correct one - any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless.
There are three versions of EMH. In the first, called weak form efficiency, all past price information is already included in the current price. According to weak form efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stocks past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental analysis can provide investors with an edge. The vast majority of academics believe in at least the weak version of EMH, therefore, from their point of view, if technical analysis works, market efficiency will be called into question.
There is no right answer as to who is correct. There are arguments to be made on both sides and, therefore, it's up to an analyst to do the homework and determine his/her own philosophy.
Can They Co-Exist?
Although technical analysis and fundamental analysis are seen by many as polar opposites - the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.
Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, having both the fundamentals and technicals on your side can provide the best-case scenario for a trade.
While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought.
In the following sections, we'll take a more detailed look at technical analysis.

D. METHODOLOGY AND ANALYSIS
As the topic for my project is ‘Importance of Technical Analysis in Determining Movement of Price in Equity Stock Market’ methodology and analysis involves understanding and analysis different tools and techniques of technical analysis and come up with a strategy for investment in stock market. Following are the points that I have included under this head: * The Use Of Trend * Support And Resistance * The Importance Of Volume * The use of charts. * Chart Types * Chart Patterns * Moving Averages * Indicators And Oscillators * Other Important Tools In Technical Analysis * Strategy Building * Case Study: Testing Of Strategy

I. THE USE OF TREND
One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed.
Unfortunately, trends are not always easy to see. In other words, defining a trend goes well beyond the obvious. In any given chart, one will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend

Types of Trend

Figure [ 3 ]: Types of Trends
Source: Hansen,T. Is the Trend Really Your Friend?, http://www.tonihansen.com/
There are three types of trend: * Uptrends * Downtrends * Sideways/Horizontal Trends
As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If one wants to get really technical, he/she might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. Trend Lengths
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month

Figure [ 4 ]: Trend Lengths
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: The Use Of Trend, http://www.investopedia.com/
Trend lines

Figure [ 5 ]: Trend Lines
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: The Use Of Trend, http://www.investopedia.com/
A trend line is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trend line is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals.
An upward trend line is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trend line helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high

Channels
A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.

Figure [ 6 ]: Channels
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: The Use Of Trend, http://www.investopedia.com/

The Importance of Trend
It is important to be able to understand and identify trends so that one can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders. II. SUPPORT AND RESISTANCE
After understanding the concept of a trend, the next major concept is that of support and resistance. One often hears technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).

Figure [ 7 ]: Support & Resistance
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Support And Resistance, http://www.investopedia.com/

Why Does it Happen?
These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established.

Round Numbers and Support and Resistance
One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions.

Role Reversal
Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance. Figure [ 8 ]: Support & Resistance - Role reversal
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Support And Resistance, http://www.investopedia.com/
The Importance of Support and Resistance
Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level.
Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal.

III. THE IMPORTANCE OF VOLUME
What is Volume?
Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.

Figure [ 9 ]: Volume
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: The Importance of Volume, http://www.investopedia.com/
Why Volume is Important
Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if one is looking at a large price movement, he/she should also examine the volume to see whether it tells the same story.
Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal.
Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end.
When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume.
Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened.
Volume Precedes Price
Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.

IV. THE USE OF CHARTS.
In technical analysis, charts are similar to the charts that are seen in any business setting. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a one-year period, where each point on the graph represents the closing price for each day the stock is traded:

Figure [ 10 ]: Price Chart
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: The Use Of Charts, http://www.investopedia.com/
Chart Properties
There are several things that one should be aware of when looking at a chart, as these factors can affect the information that is provided. They include the time scale, the price scale and the price point properties used.
The Time Scale
The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually. The shorter the time frame, the more detailed the chart. Each data point can represent the closing price of the period or show the open, the high, the low and the close depending on the chart used Daily charts are comprised of a series of price movements in which each price point on the chart is a full day's trading condensed into one point. Again, each point on the graph can be simply the closing price or can entail the open, high, low and close for the stock over the day. These data points are spread out over weekly, monthly and even yearly time scales to monitor both short-term and intermediate trends in price movement. Weekly, monthly, quarterly and yearly charts are used to analyze longer term trends in the movement of a stock's price. Each data point in these graphs will be a condensed version of what happened over the specified period. So for a weekly chart, each data point will be a representation of the price movement of the week.
The Price Scale and Price Point Properties
The price scale is on the right-hand side of the chart. It shows a stock's current price and compares it to past data points. This may seem like a simple concept in that the price scale goes from lower prices to higher prices as one move along the scale from the bottom to the top. The problem, however, is in the structure of the scale itself. A scale can either be constructed in a linear (arithmetic) or logarithmic way, and both of these options are available on most charting services. If a price scale is constructed using a linear scale, the space between each price point (10, 20, 30, 40) is separated by an equal amount. A price move from 10 to 20 on a linear scale is the same distance on the chart as a move from 40 to 50. In other words, the price scale measures moves in absolute terms and does not show the effects of percent change.

Figure [ 11 ]: Linear & Logarithmic Price Chart
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: The Use Of Charts, http://www.investopedia.com/

Figure 2
If a price scale is in logarithmic terms, then the distance between points will be equal in terms of percent change. A price change from 10 to 20 is a 100% increase in the price while a move from 40 to 50 is only a 25% change, even though they are represented by the same distance on a linear scale. In Figure 2, the logarithmic price scale on the right leaves the same amount of space between 10 and 20 as it does between 20 and 40 because these both represent 100% increases.

V. CHART TYPES
There are three main types of charts that are used by investors and traders depending on the information that they are seeking and their individual skill levels. The chart types are: the line chart, the bar chart and the candlestick chart.
Line Chart
The most basic of the three charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.

Figure [ 12 ]: Line Chart
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Types, http://www.investopedia.com/
Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black. Conversely, if the right dash (close) is lower than the left dash (open) then the bar will be shaded red.

Figure [ 13 ]: Bar Chart
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Types, http://www.investopedia.com/
Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period.. There are two color constructs for days up and one for days that the price falls. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the stock's price has closed above the previous day's close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day.

Figure [ 14 ]: Candlestick Chart
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Types, http://www.investopedia.com/

VI. CHART PATTERNS
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, chartists look for these patterns to identify trading opportunities. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete.

Head and Shoulders
This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As per in Figure 1, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.

Figure [ 15 ]: Head & Shoulders pattern
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Patterns, http://www.investopedia.com/

Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in Figure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows.

Cup and Handle
A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.

Figure [ 16 ]: Cup & Handle Pattern
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Patterns, http://www.investopedia.com/

As per in Figure 2, this price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue.

Double Tops and Bottoms
This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.

Figure [ 17 ]: Double Tops & Bottoms Pattern
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Patterns, http://www.investopedia.com/
Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.

Figure [ 18 ]: Triangles Pattern
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Patterns, http://www.investopedia.com/
The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trendline is flat and the upper trendline is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.

Triple Tops and Bottoms
Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.

Figure [ 19 ]: Triple Tops & Bottoms Pattern
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Patterns, http://www.investopedia.com/

Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years.

Figure [ 20 ]: Rounding Bottom Pattern
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Chart Patterns, http://www.investopedia.com/

A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make it a difficult pattern to trade.
We have finished our look at some of the more popular chart patterns. One should now be able to recognize each chart pattern as well the signal it can form for chartists. We will now move on to other technical techniques and examine how they are used by technical traders to gauge price movements. VII. MOVING AVERAGES
Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor.

Types of Moving Averages
There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential.

Simple Moving Average (SMA)
This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10. As per in Figure 1, a trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse.

Figure [ 21 ]: Simple Moving Average
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Moving Averages, http://www.investopedia.com/
Linear Weighted Average
This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers.

Exponential Moving Average (EMA)
This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders. As per in Figure 2, a 15-period EMA rises and falls faster than a 15-period SMA. This slight difference doesn't seem like much, but it is an important factor to be aware of since it can affect returns.

Figure [ 22 ]: Exponential Moving Average
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Moving Averages, http://www.investopedia.com/
Major Uses of Moving Averages
Moving averages are used to identify current trends and trend reversals as well as to set up support and resistance levels. Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average. As per in Figure 3, when a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.

Figure [ 23 ]: Use of Moving Average 1
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Moving Averages, http://www.investopedia.com/

Another method of determining momentum is to look at the order of a pair of moving averages. When a short-term average is above a longer-term average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend.
Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average. For example, when the price of a security that was in an uptrend falls below a 50-period moving average, like in Figure 4, it is a sign that the uptrend may be reversing.

Figure [ 24 ]: Use of Moving Average 2
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Moving Averages, http://www.investopedia.com/
If the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used to suggest a long-term shift in trend.
Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.

Figure [ 25 ]: Use of Moving Average 3
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Moving Averages, http://www.investopedia.com/
Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month and 10-day average of two weeks.
Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend. So far we have been focused on price movement, through charts and averages. In the next section, we'll look at some other techniques used to confirm price movement and patterns. VIII. INDICATORS AND OSCILLATORS
Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals.
There are two main types of indicators: leading and lagging. A leading indicator precedes price movements, giving them a predictive quality, while a lagging indicator is a confirmation tool because it follows price movement. A leading indicator is thought to be the strongest during periods of sideways or non-trending trading ranges, while the lagging indicators are still useful during trending periods.
There are also two types of indicator constructions: those that fall in a bounded range and those that do not. The ones that are bound within a range are called oscillators - these are the most common type of indicators. Oscillator indicators have a range, for example between zero and 100, and signal periods where the security is overbought (near 100) or oversold (near zero). Non-bounded indicators still form buy and sell signals along with displaying strength or weakness, but they vary in the way they do this.

Aroon

Figure [ 26 ]: Aroon Indicator
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Indicators And Oscillators, http://www.investopedia.com/

The Aroon indicator is a relatively new technical indicator that was created in 1995. The Aroon is a trending indicator used to measure whether a security is in an uptrend or downtrend and the magnitude of that trend. The indicator is also used to predict when a new trend is beginning.
The indicator is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon down" line (red dotted line). The Aroon up line measures the amount of time it has been since the highest price during the time period. The Aroon down line, on the other hand, measures the amount of time since the lowest price during the time period. The number of periods that are used in the calculation is dependent on the time frame that the user wants to analyze.

Aroon Oscillator
An expansion of the Aroon is the Aroon oscillator, which simply plots the difference between the Aroon up and down lines by subtracting the two lines. This line is then plotted between a range of -100 and 100. The centerline at zero in the oscillator is considered to be a major signal line determining the trend. The higher the value of the oscillator from the centerline point, the more upward strength there is in the security; the lower the oscillator's value is from the centerline, the more downward pressure. A trend reversal is signaled when the oscillator crosses through the centerline. Divergence is also used in the oscillator to predict trend reversals. A reversal warning is formed when the oscillator and the price trend are moving in an opposite direction.
Moving Average Convergence Divergence
The moving average convergence divergence (MACD) is one of the most well-known and used indicators in technical analysis. This indicator is comprised of two exponential moving averages, which help to measure momentum in the security. The MACD is simply the difference between these two moving averages plotted against a centerline. The centerline is the point at which the two moving averages are equal. Along with the MACD and the centerline, an exponential moving average of the MACD itself is plotted on the chart. The idea behind this momentum indicator is to measure short-term momentum compared to longer term momentum to help signal the current direction of momentum. MACD= shorter term moving average - longer term moving average |
When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative. When the MACD line crosses over the centerline, it signals a crossing in the moving averages. The most common moving average values used in the calculation are the 26-day and 12-day exponential moving averages. The signal line is commonly created by using a nine-day exponential moving average of the MACD values. These values can be adjusted to meet the needs of the technician and the security. For more volatile securities, shorter term averages are used while less volatile securities should have longer averages.
Another aspect to the MACD indicator that is often found on charts is the MACD histogram. The histogram is plotted on the centerline and represented by bars. Each bar is the difference between the MACD and the signal line or, in most cases, the nine-day exponential moving average. The higher the bars are in either direction, the more momentum behind the direction in which the bars point.

Figure [ 27 ]: MACD - Moving Average Convergence Divergence
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Indicators And Oscillators, http://www.investopedia.com/
Relative Strength Index
The relative strength index (RSI) is another one of the most used and well-known momentum indicators in technical analysis. RSI helps to signal overbought and oversold conditions in a security. The indicator is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is overbought, while a reading below 30 is used to suggest that it is oversold. This indicator helps traders to identify whether a security's price has been unreasonably pushed to current levels and whether a reversal may be on the way.

Figure [ 28 ]: RSI - Relative Strength Index
Source: Janssen,C., Langager,C., & Murphy,C. Technical Analysis: Indicators And Oscillators, http://www.investopedia.com/
Accumulation/Distribution Line
The accumulation/distribution line is one of the more popular volume indicators that measures money flows in a security. This indicator attempts to measure the ratio of buying to selling by comparing the price movement of a period to the volume of that period.

Calculated: Acc/Dist = ((Close - Low) - (High - Close)) / (High - Low) * Period\'s Volume |

This is a non-bounded indicator that simply keeps a running sum over the period of the security. Traders look for trends in this indicator to gain insight on the amount of purchasing compared to selling of a security. If a security has an accumulation/distribution line that is trending upward, it is a sign that there is more buying than selling. IX. OTHER IMPORTANT TOOLS IN TECHNICAL ANALYSIS
Fibonacci and the Golden Ratio
There is a special ratio that can be used to describe the proportions of everything from nature's smallest building blocks, such as atoms, to the most advanced patterns in the universe, such as unimaginably large celestial bodies. Nature relies on this innate proportion to maintain balance, but the financial markets also seem to conform to this 'golden ratio.' Here we take a look at some technical analysis tools that have been developed to take advantage of it.

The Mathematics
Mathematicians, scientists and naturalists have known this ratio for years. It's derived from something known as the Fibonacci sequence, named after its Italian founder, Leonardo Fibonacci (whose birth is assumed to be around 1175 AD and death around 1250 AD). Each term in this sequence is simply the sum of the two preceding terms (1, 1, 2, 3, 5, 8, 13, etc.).
But this sequence is not all that important; rather, it is the quotient of the adjacent terms that possesses an amazing proportion, roughly 1.618, or its inverse 0.618. This proportion is known by many names: the golden ratio, the golden mean, PHI and the divine proportion, among others.

The Fibonacci Studies and Finance
When used in technical analysis, the golden ratio is typically translated into three percentages: – 38.2%, 50% and 61.8%. However, more multiples can be used when needed, such as 23.6%, 161.8%, 423% and so on. There are four primary methods for applying the Fibonacci sequence to finance: retracements, arcs, fans and time zones.

1. Fibonacci Retracements
Fibonacci retracements use horizontal lines to indicate areas of support or resistance. They are calculated by first locating the high and low of the chart. Then five lines are drawn: the first at 100% (the high on the chart), the second at 61.8%, the third at 50%, the fourth at 38.2% and the last one at 0% (the low on the chart).

Figure [ 29 ]: Fibonacci Retracements
Source: Kuepper,J. Fibonacci And The Golden Ratio, http://www.investopedia.com/
2. Fibonacci Arcs
Finding the high and low of a chart is the first step to composing Fibonacci arcs. Then, with a compass-like movement, three curved lines are drawn at 38.2%, 50% and 61.8%, from the desired point. These lines anticipate the support and resistance levels, and areas of ranging. Take a look at the chart below, which illustrates how these arcs do this:

Figure [ 30 ]: Fibonacci Arcs
Source: Kuepper,J. Fibonacci And The Golden Ratio, http://www.investopedia.com/
3. Fibonacci Fans
Fibonacci fans are composed of diagonal lines. After the high and low of the chart is located, an invisible vertical line is drawn though the rightmost point. This invisible line is then divided into 38.2%, 50% and 61.8%, and lines are drawn from the leftmost point through each of these points. These lines indicate areas of support and resistance. Take a look at the chart below:

Figure [ 31 ]: Fibonacci Fans
Source: Kuepper,J. Fibonacci And The Golden Ratio, http://www.investopedia.com/
4. Fibonacci Time Zones
Unlike the other Fibonacci methods, time zones are a series of vertical lines. They are composed by dividing a chart into segments with vertical lines spaced apart in increments that conform to the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, etc.). These lines indicate areas in which major price movement can be expected.

Figure [ 32 ]: Fibonacci Time Zones
Source: Kuepper,J. Fibonacci And The Golden Ratio, http://www.investopedia.com/
Conclusion
These Fibonacci studies are not intended to provide the primary indications for timing the entry and exit of a stock; however, they are useful for estimating areas of support and resistance. Many people use combinations of Fibonacci studies to obtain a more accurate forecast. For example, a trader may observe the intersecting points in a combination of the Fibonacci arcs and resistances. Many more use the Fibonacci studies in conjunction with other forms of technical analysis.

Parabolic SAR
In the world of short-term trading, experiences are defined by a trader's ability to anticipate a certain move in the price of a financial asset. There are many different indicators used to predict an asset's future direction, but few have proved to be as useful and easy to interpret as the parabolic SAR.

The Indicator
The parabolic SAR is a technical indicator that is used by many traders to determine the direction of an asset's momentum and the point in time when this momentum has a higher-than-normal probability of switching directions. Sometimes known as the "stop and reversal system", the parabolic SAR was developed by the famous technician Welles Wilder, creator of the relative strength index, and it is shown as a series of dots placed either above or below an asset's price on a chart.
One of the most important aspects to keep in mind is that the positioning of the "dots" is used by traders to generate transaction signals depending on where the dot is placed relative to the asset's price. A dot placed below the price is deemed to be a bullish signal, causing traders to expect the momentum to remain in the upward direction. Conversely, a dot placed above the prices is used to illustrate that the bears are in control and that the momentum is likely to remain downward.
The first entry point on the buy side occurs when the most recent high price of an issue has been broken; it is at this time that the SAR is placed at the most recent low price. As the price of the stock rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. This accelerating system allows the investor to watch the trend develop and establish itself. The SAR starts to move a little faster as the trend develops and the dots soon catch up to the price action of the issue. As you can see in Figure 1, the indicator works extremely well when a stock is trending, but it can lead to many false signals when the price moves sideways or is trading in a choppy market.

Figure [ 33 ]: Parabolic SAR (Stop & Reversal)
Source: Murphy,C. Introduction To The Parabolic SAR, http://www.investopedia.com/
Parabolic SAR and the Short Sale
The parabolic SAR is extremely valuable because it is one of the easiest methods available for strategically setting the position of a stop-loss order. As you become more acquainted with technical indicators, you'll find that the parabolic SAR has built up quite the positive reputation for its role in helping many traders lock-in paper profits that have been realized in a trending environment. You can also see that professional traders who short the market will use this indicator to help determine the time to cover their short positions.
It is important to note that this indicator is extremely mechanical and will always assume that the trader is holding a long or short position. The ability for the parabolic SAR to respond to changing conditions removes all human emotion and allows the trader to be disciplined. On the other hand, the disadvantage of using this indicator can also be seen in Figure 1. Notice how the signals can lead to many false entries during periods of consolidation. Being whipsawed in and out of trades can often be extremely frustrating, even for the most successful traders.
Bottom Line
The parabolic SAR is a fairly good tool for traders looking for a strategic method of gauging a stock's direction or for portioning a stop-loss order. As illustrated above, this indicator proves to be extremely valuable in trending environments, but it can often lead to many false signals during periods of consolidation. This indicator is simple to implement into any strategy, but like all indicators, it is usually best if it is used in conjunction with other indicators to ensure that all information is being considered.
Elliot Wave Theory
Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s by discovering that stock markets, thought to behave in a somewhat chaotic manner, in fact traded in repetitive cycles.
Elliott discovered that these market cycles resulted from investors' reactions to outside influences, or predominant psychology of the masses at the time. He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed "waves".
Elliott's theory is somewhat based on the Dow theory in that stock prices move in waves. Because of the "fractal" nature of markets, however, Elliott was able to break down and analyze them in much greater detail. Fractals are mathematical structures, which on an ever-smaller scale infinitely repeat themselves. Elliott discovered stock-trading patterns were structured in the same way.
Market Predictions Based on Wave Patterns
Elliott made detailed stock market predictions based on unique characteristics he discovered in the wave patterns. An impulsive wave, which goes with the main trend, always shows five waves in its pattern. On a smaller scale, within each of the impulsive waves, five waves can again be found. In this smaller pattern, the same pattern repeats itself ad infinitum. These ever-smaller patterns are labeled as different wave degrees in the Elliott Wave Principle. Only much later were fractals recognized by scientists.
In the financial markets we know that "every action creates an equal and opposite reaction" as a price movement up or down must be followed by a contrary movement. Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labeled these "impulsive" and "corrective" waves.
Theory Interpretation
The Elliott Wave Theory is interpreted as follows: * Every action is followed by a reaction. * Five waves move in the direction of the main trend followed by three corrective waves (a 5-3 move). * A 5-3 move completes a cycle. * This 5-3 move then becomes two subdivisions of the next higher 5-3 wave. * The underlying 5-3 pattern remains constant, though the time span of each may vary.
Let's have a look at the following chart made up of eight waves (five up and three down) labeled 1, 2, 3, 4, 5, A, B and C.

Figure [ 34 ]: Elliot Wave Theory 8 Waves
Source: Investopedia Staff. Elliott Wave Theory, http://www.investopedia.com/

You can see that the three waves in the direction of the trend are impulses, so these waves also have five waves within them. The waves against the trend are corrections and are composed of three waves.

Figure [ 35 ]: Elliot Wave Theory 5 Waves
Source: Investopedia Staff. Elliott Wave Theory, http://www.investopedia.com/
Theory Gained Popularity in the 1970s
In the 1970s, this wave principle gained popularity through the work of Frost and Prechter. They published a legendary book on the Elliott Wave entitled "The Elliott Wave Principle – The Key to Stock Market Profits". In this book, the authors predicted the bull market of the 1970s, and Robert Prechter called the crash of 1987.

Figure [ 36 ]: Elliot Wave Theory - Wave 1, 2, 3, 4 & 5
Source: Investopedia Staff. Elliott Wave Theory, http://www.investopedia.com/

The corrective wave formation normally has three distinct price movements - two in the direction of the main correction (A and C) and one against it (B). Waves 2 and 4 in the above picture are corrections. These waves have the following structure:

Figure [ 37 ]: Elliot Wave Theory - Wave A, B & C
Source: Investopedia Staff. Elliott Wave Theory, http://www.investopedia.com/

Note that waves A and C move in the direction of the shorter-term trend, and therefore are impulsive and composed of five waves, which are shown in the picture above.
An impulse-wave formation, followed by a corrective wave, forms an Elliott wave degree consisting of trends and countertrends. Although the patterns pictured above are bullish, the same applies for bear markets where the main trend is down.
To use the theory in everyday trading, the trader determines the main wave, or super cycle, goes long and then sells or shorts the position as the pattern runs out of steam and a reversal is imminent.

X. HOW TO BUILD A STRATEGY
Technical analysts, or technicians, select stocks by analyzing statistics generated by past market activity, prices and volumes. Sometimes also known as chartists, technical analysts look at the past charts of prices and different indicators to make inferences about the future movement of a stock's price.

Philosophy of Technical Analysis
In his book, "Charting Made Easy", technical analysis guru John Murphy introduces readers to the study of technical analysis, explaining its basic premises and tools. Here he explains the underlying theories of technical analysis:
"Chart analysis (also called technical analysis) is the study of market action, using price charts, to forecast future price direction. The cornerstone of the technical philosophy is the belief that all factors that influence market price - fundamental information, political events, natural disasters, and psychological factors - are quickly discounted in market activity. In other words, the impact of these external factors will quickly show up in some form of price movement, either up or down."

What Technical Analysts Don't Care About
Pure technical analysts couldn't care less about the elusive intrinsic value of a company or any other factors that preoccupy fundamental analysts, such as management, business models or competition. Technicians are concerned with the trends implied by past data, charts and indicators, and they often make a lot of money trading companies they know almost nothing about.

Is Technical Analysis a Long-Term Strategy?
The answer to the question above is no. Definitely not. Technical analysts are usually very active in their trades, holding positions for short periods in order to capitalize on fluctuations in price, whether up or down. A technical analyst may go short or long on a stock, depending on what direction the data is saying the price will move
If a stock does not perform the way a technician thought it would, he or she wastes little time deciding whether to exit his or her position, using stop-loss orders to mitigate losses. Whereas a value investor must exercise a lot of patience and wait for the market to correct its undervaluation of a company, the technician must possess a great deal of trading agility and know how to get in and out of positions with speed.

Picking Stocks with Technical Analysis
Technicians have a very full toolbox. They literally have hundreds of indicators and chart patterns to use for picking stocks. However, it is important to note that no one indicator or chart pattern is infallible or absolute; the technician must interpret indicators and patterns, and this process is more subjective than formulaic. Let's briefly examine a couple of the most popular chart patterns (of price) that technicians analyze.

XI. BUILDING A STRATEGY
Now that we have seen how to build a strategy, lets formulate a strategy with the help of technical analysis tools which would provide me with buy and sell signals.
As discussed above there are numorous tools in technical analysis and an analyst must choose it in a way so that it may not confuse him and he would be in a better positions to take the call.
The following are the tools I have used to formulate a strategy: * Candle Sticks * Bollinger Bands * Stochastic * Parabolic SAR * Chaikin Money Flow
1. Candle Sticks:
A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher). The candlestick's shadows show the day's high and lows and how they compare to the open and close. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices. Candlesticks reflect the impact of investors' emotions on security prices and are used by technical analysts to determine when to enter and exit trades. Candlestick charting is based on a technique developed in Japan in the 1700s for tracking the price of rice.

Figure [ 38 ]: Candlestick Chart
Source: Investopedia Staff. Definition of 'Candlestick', http://www.investopedia.com/

The Bottom Line The candlestick charting pattern is one that any experienced trader must know. As Japanese rice traders discovered centuries ago, investors' emotions surrounding the trading of an asset have a major impact on that asset's movement. Candlesticks help traders to gauge the emotions surrounding a stock, and thus make better predictions about where that stock might be headed.

2. Bollinger Bands
A band plotted two standard deviations away from a simple moving average, developed by famous technical trader John Bollinger. Bollinger Bands® consist of a center line and two price channels (bands) above and below it. The center line is an exponential moving average; the price channels are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction).
A stock may trade for long periods in a trend, albeit with some volatility from time to time. To better see the trend, traders use the moving average to filter the price action. This way, traders can gather important information about how the market is trading. For example, after a sharp rise or fall in the trend, the market may consolidate, trading in a narrow fashion and criss-crossing above and below the moving average. To better monitor this behavior, traders use the price channels, which encompass the trading activity around the trend.

Figure [ 39 ]: Bollinger Bands
Source: Investopedia Staff. Definition of 'Bollinger Band®’ http://www.investopedia.com/

Because standard deviation is a measure of volatility, Bollinger Bands® adjust themselves to the market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

The Bottom Line
As one the most popular technical analysis indicators, Bollinger Bands® have become crucial for many technically oriented traders.While every strategy has its drawbacks, Bollinger Bands® have become one of the most useful and commonly used tools in spotlighting extreme short-term prices in a security. Buying when stock prices cross below the lower Bollinger Band® often helps traders take advantage of oversold conditions and profit when the stock price moves back up toward the center moving-average line. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.
By extending their functionality through the use of Bollinger Band® "bands", traders can achieve a greater level of analytical sophistication using this simple and elegant tool for both trending and fading strategies.

3. Stochastic Oscillator
A technical momentum indicator that compares a security's closing price to its price range over a given time period. The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. The stochastic oscillator generally uses the past 14 trading periods in the calculation but can be adjusted to meet the needs of the user. This indicator is calculated with the following formula:

Calculation

There are three versions of the stochastic oscillator fast, slow and full. The purpose of each version of the stochastic is to smooth the oscillator and help remove some of the randomness. The fast stochastic oscillator is the basic version of the indicator and is the one represented by the above equations. The slow and full stochastics smooth the data that is provided by the raw data given in the fast stochastic. Both of these oscillators reflect the same period and plot two lines.
Slow Stochastic:

The number of periods used in calculating the slow %D can be adjusted to meet the user's needs.
Full Stochastic:

Figure [ 40 ]: Stochastic Oscillator - Overbought & Oversold Signals
Source: Investopedia Staff. Definition of 'Stochastic Oscillator' http://www.investopedia.com/

The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Transaction signals occur when the %K crosses through a three-period moving average called the "%D".
Stochastic Signal Generation
The main signal that is formed by this oscillator is when the %K line crosses the %D line. A bullish signal is formed when the %K breaks through the %D in an upward direction. A bearish signal is formed when the %K falls through the %D in a downward direction.

Figure [ 41 ]: Stochastic Oscillator - Divergence
Source: Langager,C & Murphy,C. Exploring Oscillators and Indicators: Stochastic Oscillator, http://www.investopedia.com/

Divergence can also be used to formulate buy–and-sell signals. When looking for divergence the %D line is the one most used as it gives clearer signals due to its smoothed nature. A divergence signal is formed when the %D and the security move away from one another, signaling a weakening of the trend.

4. Parabolic SAR
A technical analysis strategy that uses a trailing stop and reverse method called "SAR," or stop-and-reversal, to determine good exit and entry points.
Also known as Parabolic Stop And Reverse (PSAR)
This method was developed by J. Wells Wilder. Basically, if the stock is trading below the parabolic SAR (PSAR) you should sell. If the stock price is above the SAR then you should buy (or stay long).

The parabolic SAR is a popular indicator that is mainly used by traders to determine the future short-term momentum of a given asset and enables them to determine where stop orders should be placed.
One of the most interesting aspects of this indicator is that it assumes that a trader is fully invested in a position at any point in time. For this reason, it is of specific interest to those who develop trading systems and traders who wish to always have money at work in the market.
The parabolic SAR indicator is graphically shown on the chart of an asset as a series of dots placed either above or below the price (depending on the asset's momentum). A small dot is placed below the price when the trend of the asset is upward, while a dot is placed above the price when the trend is downward. As you can see from the chart below, transaction signals are generated when the position of the dots reverses direction and is placed on the opposite side of the price as it was earlier.

Figure [ 42 ]: Parabolic SAR
Source: Murphy,C. How is the Parabolic SAR used in trading?, http://www.investopedia.com/

As you can see from the right side of the chart, using this indicator by itself can often lead to entering/exiting a position prematurely. Many traders will choose to place their stop loss orders at the SAR value because a move beyond this will signal a reversal, causing the trader to anticipate a move in the opposite direction.

5. Chaikin Money Flow
Marc Chaikin developed money flow, which uses both price and volume to record a more complete picture of the price action of a particular issue.
What Is Money Flow?
Software provider Tradestation 7 describes money flow in the following way: "[Money flow is] an indicator that calculates an indexed value based on price and volume for the number of bars specified in the input Length. Calculations are made for each bar with an average price greater than the previous bar and for each bar with an average price less than the previous bar. These values are then indexed to calculate and plot the money flow. The use of both price and volume provides a different perspective from price or volume alone. The money flow indicator tends to show dramatic oscillations and can be useful in identifying overbought and oversold conditions."
Let's break this down into a language that we can all understand. The first thing is to explain accumulation/distribution, which is the momentum indicator that determines money flow. Chaikin understood that if a stock closed above its midpoint for a given session, the stock exhibited accumulation that day. Conversely, distribution is the order of the day if the stock closed below its midpoint. For the mathematician in you, the calculation for the midpoint of an issue is simply the highest trade of the day added to the lowest trade of the day, divided by two. Chaikin then uses price and volume together to finish the calculation. Using a 21-day trading period, he adds the accumulation/distribution number for 21 days and then divides this number by the sum of the volume for the same 21-day period.

Figure [ 43 ]: Chaikin Money Flow
Source: Investopedia Staff. The Basics Of Money Flow, http://www.investopedia.com/
Using Money Flow
Tradestation 7 sets up the money flow indicator a little differently than some of the other software makers on the market, so on your computer you may see something different from what is shown in the chart above.
In the chart of Ross Stores (Nasdaq:ROST), money flow is measured in a 14-day period. The display is formatted so it better shows the overbought and oversold situations of this issue. Novice traders as well as veterans may want to play around with time periods to get a better look from time to time. It can't hurt and sometimes it may just pay off. There is nothing wrong with using a shorter period and being a little aggressive now and again.
In the chart, we are using 80/20 format to show the overbought (80) positions and the oversold (20) positions. You will sometimes see a format of 70/30.
Represented by the first shaded area occurring on or about the third week of October 2002, the money flow moved above the 80 line and thus became overbought: as you can see in the price action portion of the chart, Ross Stores peaked out at $45.50 before falling off to the $41.75 level in just a few trading days. The second overbought position in this chart occurs on Jan. 3, 2003, and at that time the stock rose to the $48.00 level and then over a period of six weeks dropped to a level of about $33. Then, at this $33 level or so, an oversold reading is indicated by another shaded area.
If we read a little further into this chart of Ross Stores, the period from the oversold position of late February to the end of the time period of this chart is very interesting. If the investor had used money flow as the only indicator to determine entry and exit points and therefore bought Ross at the last oversold point, he or she, at the end of July, would be looking at a paper profit of at least 30%. The indicator has not pushed through the 80 level and for the most part has hovered around the mid-range of 40 to 60 on our chart. You can also see a pattern of higher highs and higher lows in the four-month uptrend.

A Few Cautions
It is important you take into account other indicators that will support your entry and exit points, and note that spiky tops often indicate that money flow is about to top out. Furthermore, gaps in price action may present another problem you should be aware of: we determine the money flow by calculating the midpoint of price action, but, if large gaps occur, then the midpoint is missing and the money flow numbers are skewed.

The Bottom Line
This is a simple look at what can be a more complicated indicator. Although money flow can be excellent for identifying overbought and oversold positions, its dependency on accumulation/distribution may distort its numbers if the midpoint is missing. Remember always to use the signals of other indicators to verify your entry and exit points.

Conclusion
After devising a strategy one should be well aware of different patterns like head and shoulders, double tops and bottoms, triangles, cup and handle, rounding top and bottom, etc., It is also important to know Elliot wave theory as this kind of wave pattern is frequently seen in the markets. Apart from this an analyst should be ready to withstand loss as no analyst in the world has given correct analysis all the time. Moreover an analyst should test his/her strategy in different time frames regularly to test its validity. One of the most important point is that an analyst should be flexible in his strategy and should be ready to make any changes if required as technical analysis is not about analysing movement of price it is about tracking and analysing the psycology of investers. Two points an invester should always remember to become a good analyst are ‘Market is never wrong’ and ‘Trend is my friend’

CASE STUDY: TESTING OF STRATEGY
Now that I have devised a strategy let me take some real time examples and see whether this strategy is useful in determining the movement of prices or not.

Testing the strategy:
1. Hindalco

Figure [ 44 ]: Analysis of Hindalco Stock through moneycontrol.com
Source: Created through http://www.moneycontrol.com/

Analysis
From the above chart, we can see that candle stick is breaking the upper bollinger band on a regular basis, it means that its pushing the resistance level, thus the stock will continue to rise in the coming days. Moreover the stochastic is also on a rising trend.
In the last 6 months it reached its peak at 135.05 on 02-jan-2013 while it was in a rising trend, since then the trend has reversed and has fallen to 88.00 on 26-mar-2013 and since then it has again started in an up trend and the closing market price as on 17-may-2013 is 110.15.

Script Name | Hindalco | Call | Long | Recommended at | 110 | Target | 120 | Stop Loss | 106 | % Increase | 9.09% | Risk to Reward Ratio | 3:5 |

Figure [ 45 ]: Recommendations for Hindalco
2. Bharat Heavy Electricals
Analysis
From the below chart we can see that the stock has gone into a rising trend since 11-April-2013. Also the candle sticks is breaching the upper bollinger band which means its trying to push up the resistance level. Moreover the stochastic is also in the rising trend after it reached its bottom on 11-April-2013. Thus we can say that there is a high probability of upward movement of price in BHEL.
Around six months back it started it was in a sideways trend and since 04-Feb-2013 when the price was 219.05 it went into a downward trend and reached its lowest at 176.5 on 26-Mar-2013. Its downtrend was over and it started into uptrend on 11-April-2013 when the price was 178.25. Now the price as on 17-May-2013 is 201.9.

Figure [ 46 ]: Analysis of Bharat Heavy Electricals Stock
Source: Created through http://www.moneycontrol.com/

Script Name | Bharat Heavy Electricals | Call | Long | Recommended at | 202 | Target | 220 | Stop Loss | 198 | % Increase | 8.91% | Risk to Reward Ratio | 2:9 |
Figure [ 47 ]: Recommendations for Bharat Heavy Electricals
3. LIC Housing Finance

Figure [ 48 ]: Analysis For LIC Housisng Finance Stock
Source: Created through http://www.moneycontrol.com/
Analysis
From the above chart we can see trhat the upper bollinger band is regularly breached by the candle sticks, this shows that the stock is in rising trend and is moving its resistance to a higher level. The volume shown by Chaikin Money Flow also support this movement. Moreover the stochastic is in rising trend and has not reached its peak. Thus, we can say that the stocks will continue to rise in the coming days.

Script Name | LIC Housing Finance | Call | Long | Recommended at | 276 | Target | 300 | Stop Loss | 270 | % Increase | 9.09% | Risk to Reward Ratio | 1:4 |

Figure [ 49 ]: Recommendations For LIC Housing Finance
In the last 6 months it reached its peak at 300.25 on 02-jan-2013 while it was in a rising trend, since then the trend has reversed and has fallen to 209.00 on 21-mar-2013 and since then it has again started in an uptrend and the closing market price as on 17-may-2013 is 275.6.

CONCLUSION & RECOMMENDATION
Conclusion
There is enough proof in support of the utility of moving averages, momentum, support and resistance and a few patterns. There are varied theories inside technical analysis. All of them rely on market psyche being foreseeable, and the repeating chart patterns.By its nature, technical analysis tends to be helpful for short-run investment instead of long-run investment. Technical analysis and fundamental analysis are 2 quite different approaches, however one doesn't fully exclude the other. If you specialise in fundamentals, there is still worh in analyzing the chart of an organization you're going to purchase or sell. Similarly, if you specialise in technical signals, it's useful to check the fundamentals of the firm.
Recommendations
Technical analysis is helpful in more than 80% cases but still there is need to decide tradeoff between profit and loss. So investment must be done prudently.Risk should be minimized while uncertain period by hedging your investment or keepingaway from market during volatile times if we are not sure of which way the market willmove. Generally when market becomes range bound and we are not in position to findout which way the market will move, we should liquidate our positions.We should always keep in mind whether we are investing for long term or short term andaccordingly we should analyze the situation. For short term, along with trend we mustalso look for what the confirmatory indicator say.Along with Technical analysis, one must keep track records of Fundamental analysis as itmakes overall analysis more precise.

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