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3rd Edition

STOCK BANGLADESH TECHNICAL ANALYSIS LIMITED
STOCK
BANGLADESH
TECHNICAL ANALYSIS
LIMITED

Handbook for Basic Technical Analysis

www.stockbangladesh.com

About Stock Bangladesh Limited

Mission

Our mission is simple - to make you a better investor so that you can invest conveniently at Bangladesh Capital Market. Our Stock Bangladesh tool lets you create the web's best looking financial charts for technical analysis. Our Scan Engine shows you the Bangladesh share market's best investing opportunities.

In today's world, if you rely on fundamental analysis, brokers advise, share price information, newspaper articles or business channels for your investing or trading decisions, you are asking for a painful experience in the markets.

Whether you are a first time investor, a seasoned pro, an "in and out" day trader or a long

term investor at Dhaka stock exchange, StockBangladesh.com will provide you with the

necessary information you need for maximum profits and success in today's dynamic

markets. Initially we are covering Dhaka Stock Exchange.

Goal

Our goal is to help traders and investors of Bangladesh share market to achieve above-

average returns from the markets by providing them with profitable trading signals and at the

same time protect their trading capital from large drawdowns with our sound money

management principles.

The methods used to analyze securities and make investment decisions fall into two very

broad categories: fundamental analysis and technical analysis. Fundamental analysis involves

analyzing the characteristics of a company in order to estimate its value. Technical analysis

takes a completely different approach; it doesn't care one bit about the "value" of a company

or a commodity. Technicians (sometimes called chartists) are only interested in the price

movements in the market.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply

and demand in a market in an attempt to determine what direction, or trend, will continue in

the future. In other words, technical analysis attempts to understand the emotions in the

market by studying the market itself, as opposed to its components. If you understand the

benefits and limitations of technical analysis, it can give you a new set of tools or skills that

will enable you to be a better trader or investor.

Table of Contents

About Stock Bangladesh Limited

2

Mission

2

Goal

2

Chapter 1

15

Capital

Market

16

Supply

& Demand

16

Market

Analysis

17

Three Types of Market Analysis

17

Random

Walk Theory

18

Efficient Market Hypothesis

18

Fundamental Analysis

19

Technical Analysis

20

The Market Discounts Everything

20

Price Moves in Trends

20

History Tends To Repeat Itself

20

Criticism of Technical Analysis

21

Dow Theory

22

The Basic Principles of Dow Theory

24

Dow Theory Criticism

26

Chapter 2

28

History and Construction of Charts

29

Benefits of Using Chart

29

History of Charting

30

 

Type of Charts

31

Early Charts

31

Line Charts

31

Bar Charts

32

Candlestick Charts

33

Point & Figure Chart

34

Equivolume Chart

35

Support and Resistance

36

Identification and Psychology behind Support and Resistance

37

Support & Resistance Zone

38

Support Become Resistance or Vice Versa

39

Trend Line

40

Drawing Trend Line

43

Tentative Versus the Valid Trend line

43

How to use the Trend Line

44

How to Determine the Significance of a Trend Line

46

How Trend Lines Reverse Roles

46

Measuring and Implication of Trend Line

48

Accelerating Trend Lines

49

Channel

51

Liner Regression Channel

52

 

Candlesticks

53

A

Potted history

53

Construction of Candlestick Charts

54

Candlesticks vs. Traditional Bar Charts

54

The Anatomy of the Candles

56

The Psychology of Charts and Trading

58

Candlestick Patterns

58

Bullish Pattern

59

Bullish Candlesticks

59

Bearish Candlestick

63

Reversal Candlestick

68

Neutral Candlestick

72

Heikin Ashi Candlesticks

76

 

Reasons to Use Heikin Ashi

76

Heikin Ashi Calculation

77

Interpretation

78

Doji and Spinning Tops

79

Chapter 3

81

Introduction to Chart Pattern:

82

Chart Pattern

82

Common Pattern Characteristics

82

Types of Pattern

82

Preliminary Points Common to All Reversal Patterns

83

Reversal Pattern

83

The Head and Shoulders Reversal Pattern

83

The inverse Head and Shoulders

86

Double Top

87

Double Bottom

88

Triple

Bottom

89

Triple

Top

91

Rounding

Top

92

Rounding

Bottom

93

Continuation Patterns

94

Triangles

94

Symmetrical Triangle

95

Ascending Triangle

96

Descending Triangles

97

Wedge and Climax

98

Flag and Pennant

100

Rectangle

103

Diamond Pattern

103

Measure Move

104

Gaps

105

Breakaway (or Breakout) Gaps

106

Runaway Gaps (or Measuring Gaps)

107

Exhaustion Gaps

107

Elliot Wave Theory

108

Impulse Waves

109

Impulse

110

Truncation

111

Corrective Waves

112

Zigzags

112

Flats

113

Triangles

114

The Fibonacci sequence

115

The Golden Ratio

115

Fibonacci

Retracement

116

Fibonacci Retracement in Uptrend

116

Fibonacci Retracement in Downtrend

117

Fibonacci

Fan

118

Fibonacci

Arcs

119

Chapter 4

121

Indicators and Oscillators

122

Lagging Indicators

122

Leading Indicator

122

Moving Averages

123

Types of Moving Averages

124

Simple Moving Average (SMA)

124

Weighted Moving Average (WMA)

125

Exponential Moving Average (EMA)

126

Differences between SMA, EMA and WMA

127

Interpreting

Moving Averages

128

Determining

Trend

Direction

128

Determining

Trend

Reversals

129

Determining Support and Resistance

130

Moving Average Convergence Divergence (MACD)

131

Interpreting MACD

 

132

Moving Average Crossover

132

Centerline/Zero Line Crossover

133

MACD Histogram

 

134

Average Directional Index (ADX)

135

Interpreting Average Directional Index (ADX)

138

DI or DMI Crossover

 

138

Peak of The Trend

139

Minor Crossover

139

ADX Line

140

Determining Trend Direction and Strength

141

Parabolic SAR

 

142

Volume Based Indicators

143

Principles of Volume

143

Money Flow Index

150

Introduction

150

Calculation

150

On Balance Volume

153

Calculation

153

Accumulation Distribution Line

156

Calculation

 

156

Chapter 5

159

Volatility Indicators

160

Bollinger Bands

160

Calculation

160

Signal:

W-Bottoms

161

Signal: M-Tops

162

Bollinger

Bounce

162

Bollinger

Squeeze

163

Percentage Bands or Envelopes

164

Calculation

164

Trend

Identification

165

Average True Range (ATR)

166

True Range

166

Calculation

167

Absolute ATR

168

Keltner Channels

169

Calculation

169

Momentum Indicators

170

Relative Strength Index (RSI)

170

Calculation

171

Interpreting RSI

172

Stochastics

173

Calculation

173

StochRSI

175

Calculation

175

Overbought/Oversold

176

Calculation

176

Overbought and Oversold Crossovers

176

Centerline Crossovers

177

Positive and Negative Divergences

177

Strong Trend

177

Commodity Channel Index (CCI)

177

Calculation

178

Emerging New Trend

178

Overbought/Oversold

179

Rate of Change (ROC)

180

Overbought/Oversold Situation

180

William %R

182

Calculation

182

Overbought Oversold

183

Ultimate Oscillator

184

Calculation

184

Composite indicators

186

Guppy Multiple Moving Averages

186

Interpretation

187

Trend

Direction

187

Trend

Reversal

188

Trend

Strength

189

 

190

Pullbacks

190

Breakouts

190

Tactics

191

Rules

192

Advantages

192

Disadvantages

192

Ichimoku Chart

193

 

Interpretation

194

Trend direction

194

Trend Reversal

195

Trend Strength

195

Pullbacks

196

Breakout

197

Divergence Study

198

1. Regular Divergence

199

2. Hidden Divergence

201

3. Exaggerated Divergence

203

Divergence Trading Strategy

205

Indicators Used

205

Entry

205

Exit

205

Stop Loss

205

Chapter 6

206

Behavioral Finance

207

Common Mental Mistakes

207

Overconfidence

208

Examples of Overconfidence

208

Anchoring

209

Examples of Anchoring

209

Metal Accounting

209

Examples of Mental Accounting

210

Confirmation

210

Examples of Confirmation

210

Hindsight Bias

211

Examples of Hindsight Bias

211

Herd Behavior

211

Examples of Hard Behavior

211

Applying Behavioral Finance

211

Classification of Capital Market Participants

212

Institutional Investors

212

Speculators

 

212

Retail Investors

213

Long

Term

Investors

213

Short

Term

Traders

213

High Frequency Traders

213

Zero Sum Game

 

214

Capital Market Bubble

214

Examples of Bangladesh Capital Market Bubbles

214

Investor’s Psychological Behavior

216

Chapter 7

 

219

Technical Analysis Platform

220

How to Install Amibroker

220

Chapter 8

 

242

Trading Strategy

243

Instrument Selection

243

Market Timing

243

Money Management

244

Position Sizing

244

Stop Loss

244

Exit Strategy

245

Fixed Stop

245

Trailing Stop Loss

245

Indicator Based Stop/Dynamic Stop

245

Trading Psychology

245

Knowing Yourself

246

There is no “Holy Grail”

246

Independent

Thinking

246

Patience is a Profitable Virtue

247

Sticking With the Plan

247

Psychological Problems in Trading

247

Fear

247

Greed

248

Pride

248

Overcoming Psychological Problems in Trading

248

Complete Trading Strategies

251

Trading the W Patterns

251

Entry Conditions

255

Stop Loss

256

Trading Pullbacks

256

Entry Conditions

257

Exit Conditions

257

Stop Loss

257

Reference

259

Appendix

260

Table of Figure

Figure

1.1:

Supply & Demand

17

Figure 1.2: Dow Theory Trend | HEIDELBCEM

23

Figure 1.3: Dow Theory Up Trend | BATBC

25

Figure 2.1: Line Chart | BEXIMCO

32

Figure 2.2: Bar Chart | TITASGAS

33

Figure 2.3: Candlestick Chart | TITASGAS

34

Figure 2.4: Point and Figure Chart

35

Figure

2.5:

EquiVolume Chart

36

Figure 2.6: Support & Resistance | FLEASEINT

37

Figure 2.7: Support & Resistance Zone | FLEASEINT

38

Figure 2.8: Support & Resistance | FLEASEINT

39

Figure 2.9: Support Become Resistance

40

Figure 2.10: Support Become Resistance | FEDERALINS

40

Figure 2.11: Trend Line | Up Trend

41

Figure 2.12: Trend Line | Uptrend line at work | LANKABAFIN

42

Figure 2.13: Trend Line | Down Trend

42

Figure 2.14: Trend Line | Down trend line at work | DSEGEN (Feb 2012 - Jul 2012)

43

Figure 2.15: Trend Line | Braking up trend line

44

Figure 2.16: Trend Line | Braking up trend line | DSEGEN (Feb 2012 - May 2012)

45

Figure 2.17: Trend Line | Braking down trend line

45

Figure 2.18: Trend Line | Braking down trend line | DSEGEN

46

Figure 2.19: Trend & Support Resistance

47

Figure 2.20: Trend & Support Resistance | MEGHNACEM

47

Figure 2.21: Trend & Support Resistance

48

Figure 2.22: Trend & Support Resistance | BDAUTO

48

Figure 2.23: Trend Line | Accelerating

49

Figure 2.24: Trend Line | Accelerating

50

Figure 2.25: Channel | MITHUNKNIT

51

Figure 2.26: Linear Regression Line | ABBANK

53

Figure 2.27: Bar Chart Construction

54

Figure 2.28: Candlestick Formation

55

Figure 2.29: Bar Chart (factual, but uninspiring)

55

Figure 2.30: Candlestick Chart (factual, and emotive)

56

Figure 2.31: Candlestick Formation

57

Figure 2.32: Candlesticks Terminology

58

Figure 2.33: Long White (empty)/ Green Line Candlestick | BEXIMCO

60

Figure 2.34: Bullish Candlestick | Hammer | BEDL

60

Figure 2.35: Bullish Candlestick | | Piercing Line | BEDL

61

Figure 2.36: Bullish Candlestick | Bullish Engulfing | EASTLAND

62

Figure 2.37: Bullish Candlestick | Morning Star | POWERGRID

62

Figure 2.38: Bullish Candlestick | Bullish Doji | POWERGRID

63

Figure 2.39: Bearish Candlestick | Bearish Long Black/Red line | EBL

64

Figure 2.40: Bearish Candlestick | Hanging Man | BEACHHATCH

65

Figure 2.41: Bearish Candlestick | Dark Cloud Cover | DESHBANDHU

65

Figure 2.42: Bearish Candlestick | Bearish Engulfing | DESHBANDHU

66

Figure 2.43: Bearish Candlestick | Evening Star | SINGERBD

67

Figure 2.44: Bearish Candlestick | Shooting Star | DSEGEN

68

Figure 2.45: Reversal Candlestick | Long Legged Doji | FUWANGCER

69

Figure 2.46: Reversal Candlestick | Dragonfly Doji | ASIAPACINS

70

Figure 2.47: Reversal Candlestick | Gravestone Doji | ONEBANKLTD

70

Figure 2.48: Reversal Candlestick | Star | MIDFIN

71

Figure 2.49: Reversal Candlestick | Doji Star | NAVANACNG

72

Figure 2.50: Neutral Candlestick | Marubozu | DSEGEN

73

Figure 2.51: Neutral Candlestick | Spinning Tops | ACIFORMULA

74

Figure 2.52: Neutral Candlestick | Doji | BDLAMPS

74

Figure 2.53: Neutral Candlestick | Harami | RUPALIINS

75

Figure 2.54: Neutral Candlestick | Harami Cross | ICBISLAMIC

76

Figure 2.55: Heiken Ashi Candle | FEDERALINS

78

Figure 2.56: Doji and Spinning Tops

79

Figure 2.57: Heiken Ashi Candle | GP

80

Figure 3.1: Example of Head and Shoulder Top

84

Figure 3.2: Head and Shoulder Top | DSEGEN

85

Figure 3.3: Head and Shoulder Bottom | DSEGEN

87

Figure 3.4: Double Top or M Pattern

87

Figure 3.5: Double Top or M Pattern| CITYBANK

88

Figure 3.6: Double Bottom or W pattern

89

Figure 3.7: Double Bottom or W pattern| MIDASFIN

89

Figure 3.8: Triple Bottom Pattern

90

Figure 3.9: Triple Bottom Pattern | SINOBANGLA

90

Figure 3.10: Triple Top Pattern

91

Figure 3.11: Triple Top Pattern | BXSYNTH

92

Figure 3.12: Rounding Top Pattern | AL-HAJTEX

93

Figure 3.13: Rounding Bottom | ISLAMIBANK

94

Figure 3.14: Bullish Symmetrical Triangle

95

Figure 3.15: Ascending Triangle

95

Figure 3.16: Descending Triangle

95

Figure 3.17: Symmetrical Triangle | EHL

96

Figure 3.18: Ascending Triangle | MERCANBANK

97

Figure 3.19: Falling Wedge | MEGHNACEM

99

Figure 3.20: Rising Wedge | JAMUNABANK

100

Figure 3.21: Flag & Pennant

100

Figure 3.22: Bullish Flag Pattern | MICEMENT

101

Figure 3.23: Bearish Flag | SONARBAINS

102

Figure 3.25: Bearish Pennant | BEDL

102

Figure 3.26: Rectangle or Box Pattern | METROSPIN

103

Figure 3.27: Diamond Pattern | RAHIMAFOOD

104

Figure 3.28: Measured Moves | DSEGEN

105

Figure 3.29: Downward Gap | TAKAFULINS

106

Figure 3.30: Breakaway or Breakout Gap | EASTERNINS

106

Figure 3.31: Measuring or Running GAP | EASTERNINS

107

Figure 3.32: Exhaustion GAP | NPOLYMAR

108

Figure 3.33: Ideal Elliott Waves within an Upward Motive Impulse Wave

109

Figure 3.34: Diagonal leading or ending (in upward trend)

111

Figure 3.35: Truncated Five in Uptrend

112

Figure 3.36: Single and double zigzag Corrective Pattern

113

Figure 3.37: Single and Double Corrective Pattern

114

Figure 3.38: Fibonacci in Uptrend | DSEGEN

116

Figure 3.39: Fibonacci Retracement Example | DSEGEN

117

Figure 3.40: Downward Fibonacci | DSEGEN

117

Figure 3.41: Fibonacci Fan Downtrend | DSEGEN

118

Figure 3.42 Fibonacci Fan Uptrend| GP

119

Figure 3.43: Fibonacci Arc | DSEGEN

119

Figure 3.44 Fibonacci Arc | BDFINANCE

120

Figure 4.1: Moving Average | (SMA10) | DSEGEN

124

Figure 4.2: Moving Average | (SMA30) | DSEGEN

125

Figure 4.3: Moving Average | (WMA 30) | DSEGEN

126

Figure 4.4: Moving Average | (EMA30) | DSEGEN

127

Figure 4.5: Moving Average | SMA 30, EMA 30 and WMA 30 | DSEGEN

128

Figure 4.6: Moving Average | WMA30 Trend line | CONFIDCEM

129

Figure 4.7: Moving Average | SMA10 and EMA30 Crossover | CONFIDCEM

130

Figure 4.8: Moving Average | SMA 30 Support and Resistance | AFTABAUTO

131

Figure 4.9: MACD | MICEMENT

132

Figure 4.10: MACD MA Crossovers | MICEMENT

133

Figure 4.11: MACD Centerline Crossovers | ARAMITCEM

134

Figure 4.12: MACD Histogram Study | MICEMENT

135

Figure 4.13: ADX Lines | DESCO

137

Figure 4.14: ADX DI Crossover |

138

Figure 4.15: ADX Peak of The Trend | DESCO

139

Figure 4.16: ADX Minor Crossover | DESCO

140

Figure 4.17: ADX Line | DESCO

141

Figure 4.18: ADX Determining Trend Strength and Direction DESCO

142

Figure 4.19: Parabolic SAR | DSEGEN

143

Figure 4. 21: Volume Histogram

144

Figure 4.22: Volume Leads Price

144

Figure 4.23: Bearish Volume Configuration

145

Figure 4.24: Bearish Volume Configuration

145

Figure 4.25: Volume | Parabolic Blow off

146

Figure 4.26: Volume | Selling Climax

146

Figure 4.27: Low Volume on Test

147

Figure 4.28: Bearish Volume Configuration

147

Figure 4.29: Volume | Churning

148

Figure 4.30: Volume | Accumulation

148

Figure 4.31: Volume | Temporary Exhaustion

149

Figure 4.32: Volume| Bearish Top Configuration

149

Figure 4.33: MFI | JAMUNAOIL

152

Figure 4.34: MFI & RSI | NBL

152

Figure 4.35: OBV | BEXIMCO

155

Figure 4.36: OBV | GP

155

Figure 4.37: ADL, OBV | BEXIMCO

158

Figure 5.1: Bollinger Bands | DSEGEN

160

Figure 5.2: Bollinger Bands W Pattern | DSEGEN

161

Figure 5.3: Bollinger Bands M Pattern | FUWANGFOOD

162

Figure 5.4: Bollinger Band Bounce | DUTCHBANGL

163

Figure 5.5: Bollinger Bands Squeeze and Expansion | DUTCHBANGL

164

Figure 5.6: Envelopes or Percentage Bands | DSEGEN

165

Figure 5.8: Envelopes or Percentage Bands Strength | DSEGEN

166

Figure 5.9: Average True Range

167

Figure 5.10: ATR | NTC

168

Figure 5.11: ATR | PREMIERBAN

169

Figure 5.12: Keltner Bands | MPETROLEUM

170

Figure 5.13: RSI Overbought & Oversold | BEXIMCO

172

Figure 5.14: Stochastic Overbought & Oversold | SUMITPOWER

174

Figure 5.15: StochRSI | DSEGEN

176

Figure 5.16: Commodity Channel Index (CCI) | BEXIMCO

179

Figure 5.17: Commodity Channel Index (CCI), Overbought Oversold| BEXIMCO

180

Figure 5.18: Rate of Change (ROC), Oversold | MPETROLEUM

181

Figure 5.19: William % R | MPETROLEUM

182

Figure 5.20: William % R Overbought Oversold | MPETROLEUM

184

Figure 5.21: Ultimate Oscillator | DSEGEN

185

Figure 5.22: Guppy MMA | BEXIMCO

186

Figure 5.23: Guppy MMA Trend Direction | BEXIMCO

187

Figure 5.24: Guppy MMA Trend Reversal | NHFIL

188

Figure 5.25: Trend Strength

189

Figure 5.26: Pullbacks

190

Figure 5.27: Breakouts

191

Figure 5.28: Tactics

191

Figure 5.29: Ichimoku | DSEGEN

193

Figure 5.30: Ichimoku Trend Direction | ARAMITCEM

194

Figure 5.31: Ichimoku Trend Reversal | DSEGEN

195

Figure 5.32: Ichimoku Trend Strength | ARAMITCEM

196

Figure 5.33: Ichimoku Pullback | ASIAPACINS

197

Figure 5.34: Ichimoku Breakout | HEIDELBCEM

198

Figure 5.35: Bullish Regular Divergence | ACIFORMULA

200

Figure 5.36: Regular Bearish Divergence | BEXIMCO

200

Figure 3.37: Hidden Bullish Divergence | ISLAMICFIN

202

Figure 5.38: Hidden Bearish Divergence | DSEGEN

202

Figure 5.39: Exaggerated Bullish Divergence | FASFIN

204

Figure 5.40: Exaggerated Bearish Divergence | DESCO

204

Figure 6.1: Dhaka Stock Exchange 1987 Bubble

215

Figure 6.2: Dhaka Stock Exchange 1996 Bubble

215

Figure 6.3: Dhaka Stock Exchange 2010 Bubble

216

Figure 6.4: Investor's Psychological Behavior

217

Figure 8.1: Trading Strategy | W Pattern and Semi-W Patterns Shape

252

Figure 8.2: Trading Strategy | W Patterns Trend Line Breakout | APEXADELFT

253

Figure 8.3: W Patterns Resistance Line Breakout | APEXADELFT

254

Figure 8.4: Trading Strategy | Semi W Pattern Trend Line Breakout | DESCO

254

Figure 8.5: Trading Strategy | Semi W Pattern Resistance Line Breakout | DESCO

255

Figure 8.6: Trading Strategy | Swing Point High, Swing Point Low

256

Figure 8.7: Pullbacks | 1st Pullback after MA Crossover | DHAKABANK

258

Figure 8.8: Trading Strategy | Pullbacks | Pullback after Breakout DHAKABANK

258

Chapter 1

Learning Objectives

To understand the operations, trading and investing of stock market

Understand Demand and Supply of a particular stock

Knowledge about Efficient Market hypothesis and Random walk theory

Fundamental Analysis

Technical Analysis

Principles of Technical Analysis

Dow Theory

Chapter 2

Learning Objectives

After Completing Types of Chart an investor /trader will get concept of various types

of chart, formation of chart, and uses of chart to Understand and determine overall

market trend

Candlesticks are the most popular way of visualizing price movements, demand &

Supply. After Completing Candlestick chart an investor /trader will get idea about

buyers & sellers trading psychology, Emotion of the market, Indication of market

turning points, Furnish unique market insights and Get trigger before buying / selling

any stock

From Bullish Candlestick Pattern investors/Traders will get indications of a change of

trend from bearish to bullish or confirmation a continuing bullish trend. From Bearish

Candlestick Pattern investors/Traders will get indications of a change of trend from

Bullish to Bearish or confirmation a continuing Bearish trend. From Neutral

Candlestick Pattern investors/Traders will get idea when he/she has to observe the

market or not take any buy or sell decision. Reversal Pattern will help

investors/traders to identify the possible changes of the current trend. So it allows a

trader to take position very early of a new trend

Support and resistance lines are key components of the market memory. After

learning support and resistance level, Investors particularly traders will able to

identify psychological level of price. By using Support and Resistance level an

investor or a trader can take buy or sell decision and this is very popular trading

strategy for Breakout Trader

After trend line analysis an investor/Trader will easily understand the support and resistance level of a rising or falling stock. Trend line helps investors/traders to take the appropriate position. Basically trend line breakout or break down is the starting of new trend. So it helps to take Buy or Sell decision and the Breakout Traders basically follow this trading style

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Figure 2.21: Trend & Support Resistance Figure 2.21 shows very often a down Trend will

Figure 2.21: Trend & Support Resistance

Figure 2.21 shows very often a down Trend will become a support line once it's been broken

on the upside.

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Figure 2.22: Trend & Support Resistance | BDAUTO

Now situation is different. In this situation previous down trend line now is working as

support level. See the Figure 2.22 of BDAUTOCA 2012. From January 2012 to February 2012 we have seen a downtrend and drawn downward trend line. On 3 rd February 2012 price broke the downtrend trend line. Again when the price was declined that time previous downtrend line worked as a support level and price bounced back from that level.

Measuring and Implication of Trend Line

Trend line can be used to help determine price objectives. We will have a lot more to say about price objectives in the next chapter on price patterns. In fact, some of the rice objectives addressed that are derived from various price patterns are similar to the one we

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make because on quote boards prices are often displayed either as red (black) or green (white) depending on whether the market is higher or lower compared to the previous close.

market is higher or lower compared to the previous close. Figure 2.31: Candlestick Formation If, for

Figure 2.31: Candlestick Formation

If, for example, a stock closed at 52 taka yesterday, then opened today at 56 taka, but by

afternoon trade had sold off to close at 54 taka, it would still be up 2 taka on the day.

However, the candlestick’s real body would be big and red (Black) because the stock opened

at 56 taka then closed at 54 taka. We have illustrated this in Figure 2.29.

Let’s finish off this walk through the construction by adding some terminology into the

equation.

The figure below shows the other terminology you need to be aware of with respect to the

different elements of an individual candlestick.

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Bullish engulfing lines. Engulfing patterns consist of two bodies and where the second body ―engulfs‖

Bullish engulfing lines. Engulfing patterns consist of two bodies and where the second body ―engulfs‖ the first. This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.

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Figure 2.36: Bullish Candlestick | Bullish Engulfing | EASTLAND

Morning star: The morning Star pattern is a bullish reversal signal after a

Morning star: The morning Star pattern is a bullish reversal signal after a

downtrend. The first bar has a long black body, the second body gaps down

from the first (the shadows may still overlap) and may be filled or hollow.

This is a bullish pattern signifying a potential bottom. The "star" indicates a

possible reversal and the bullish (empty) line confirms this.

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Chapter 3

Learning Objectives

Chart patterns are useful to measure the level of momentum, support and resistance,

and other indications of strength or weakness in a stock. After completing Chart

patterns it will help traders to determine market direction, trader’s psychology as well

as time of entries and exits. Not only that a trader will be able to identify chart

patterns properly

By studying Elliot wave an investor or trader can understand the various waves of a

particular stock or market very easily

Fibonacci Study help to understand the different price level from where price may

retrace or pullback

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Figure 3.6: Double Bottom or W pattern Again move to the Dhaka Stock Exchange. See

Figure 3.6: Double Bottom or W pattern

Again move to the Dhaka Stock Exchange. See the Figure 3.7. We can see a chart of

MIDFIN form December 2011 to May 2012. In 9

March

February 2012 we can see MIDFIN got

support and started to increase but again decline because of Resistance line. Again 12

2012 MIDFIN got support from the support zone and started to increased and broke the

resistance line in 25

th

th

th

March 2012.

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Figure 3.7: Double Bottom or W pattern| MIDASFIN

Both Top and Bottom patterns form over a number of monthseven yearsand are thus longer-term. They are more observable in charts using weekly and monthly data and mostly in retrospect.

Triple Bottom

The surprising thing about triple bottoms is their lack of surprises. More about that in a moment. In a bull market, triple bottoms have a low failure rate and a high average rise. In a bear market, the results are about what you would expect from a bullish pattern in a bear

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market. Almost two out of three triple bottoms will throw back, so consider that before you trade. If price continues down after the throwback, then your trade may well end up with a loss. If it rebounds, the numbers suggest that performance will suffer. In other words, the best performers are triple bottoms without throwbacks. Another surprise is that narrow patterns perform better than wide ones. Usually, width is not a good indicator of performance but height is. The reason for that unusual behavior is unclear. Of one thing we are certain, triple bottoms in a bear market act differently than those in a bull market. Often the results are opposite. For example, when the last bottom is above the middle bottom, performance excels in a bull market but underperforms in a bear market. Figure 3.8 shows a format of Triple Bottom pattern.

market. Figure 3.8 shows a format of Triple Bottom pattern. Figure 3.8: Triple Bottom Pattern Again

Figure 3.8: Triple Bottom Pattern

Again move to our real market example. Figure 3.9 shows an example of a triple bottom of

SINOBANGLA. Chart shows Prices descend to the 33 Taka to 32 Taka area three times and

each time, they turn away; the level marks a zone of support preventing future declines. The

sharp V-shaped recession, especially during the last valley, is typical for triple bottoms. The

rounded-looking rise from the first valley to the second is also characteristic of triple bottoms

but not a strict requirement.

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Figure 3.9: Triple Bottom Pattern | SINOBANGLA

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one, totaling to two. Then there are three corrective waves and five impulse waves, totaling eight waves. Each of these numbers is part of the Fibonacci sequence. If we take the progression further and include smaller and smaller waves, the number of waves continues in a Fibonacci sequence. Although this relation to Fibonacci numbers is interesting, it is portraying the ideal. But remember if you take any two whole numbers and add them together, then add to the sum the previous highest number, eventually you will arrive at phi, the Fibonacci ratio (1.618), between the highest number and the previous highest number. Thus, the ratio is the universal relation rather than the numbers themselves. It is the ratio and derivatives of it that are applied to stock markets.

Fibonacci Retracement: it

works as a support or

resistance level and shows

the possible retracement

level of price.

Fibonacci Retracement

The first thing you should know about the Fibonacci

tool is that it works best when the market is trending.

The idea is to go long (or buy) on a retracement at a

Fibonacci support level when the market is trending

up, and to go short (or sell) on a retracement at a

Fibonacci resistance level when the market is trending

down.

In order to find these retracement levels, you have to

significant Swing Highs and Swings

Lows. Then, for downtrends, click on the Swing High and drag the cursor to the most recent

Swing Low.

For uptrend, do the opposite. Click on the Swing Low and drag the cursor to the most recent

Swing High. Now, let's take a look at some examples on how to apply Fibonacci retracements

levels in the markets.

find the recent

Fibonacci Retracement in Uptrend

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Figure 3.38: Fibonacci in Uptrend | DSEGEN

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Chapter 4

Learning Objectives

Moving averages smooth out market rate fluctuations that often occur with each

reporting period in a price chart. Moving averages can be used to identify the

direction of the trend or define potential support and resistance levels

MACD confirms trend and trend reversals. The MACD chart generates signal of

picking and dumping points

Price based indicators are useful to understand the market and price movement from

different angles and views. Combination of indicators can detect exact reaction points

of the market. Individual range bound indicators and free indicators generate trading

signals through the crossover of levels

Price and volume based indicators will help to Clear understand the actual direction of

the market. Volume based indicators show weakness and strength of the market more

accurately than any other indicators

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Figure 4.8: Moving Average| SMA30 Support and Resistance | AFTABAUTO

Moving Average Convergence Divergence (MACD)

It is an oscillator technique that uses 2 exponential moving averages. The Moving Average

Convergence Divergence indicator, or simply MACD, was developed by Gerald Appel. What

makes this indicator so useful is that it combines some

of oscillator principles with a dual moving average

crossover approach. You will see only two lines on

your computer screen although three lines are actually

used in its calculation. The faster line (called the

MACD line) is the difference between two

exponentially smoothed moving averages of closing

prices (usually the last 12 and 26 days or weeks). The

slower line (called the signal line) is usually a 9 period

exponentially smoothed average of the MACD line. Appel originally recommended one set of numbers for buy signals and another for sell signals. Most traders, however, utilize the default values of 12, 26 and 9 in all instances. Later Thomas Aspray added histograms in MACD to measure the distance between MACD line and signal line.

MACD is a very popular

and widely used indicator

which can detect both

trend and momentum.

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Chapter 5

Learning Objectives

Volatility indicators help to understand the fluctuation or volatility of a stock or

market. After completing volatility indicators an investor or trader can easily

understand which stock is more volatile and which stock is less volatile

Momentum indicators help to detect early trend reversal signals and price movement

direction. Also help to determine short term entry and exit. Momentum indicators help

to identify changes of momentum in a major trend

Composite indicators allow investors to detect various entry signals from a single

indicator

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True Range

Wilder started with a concept called True Range (TR), which is defined as the greatest of the following:

Method 1: Current High less the current Low Method 2: Current High less the previous Close (absolute value) Method 3: Current Low less the previous Close (absolute value)

Absolute values are used to ensure positive numbers. After all, Wilder was interested in measuring the distance between two points, not the direction. If the current period's high is above the prior period's high and the low is below the prior period's low, then the current

period's high-low range will be used as the True Range. This is an outside day that would use

Method 1 to calculate the TR. This is pretty straight forward. Methods 2 and 3 are used when

there is a gap or an inside day. A gap occurs when the previous close is greater than the

current high (signaling a potential gap down or limit move) or the previous close is lower

than the current low (signaling a potential gap up or limit move). The image below shows

examples of when methods 2 and 3 are appropriate.

shows examples of when methods 2 and 3 are appropriate. Figure 5.8: Average True Range Example

Figure 5.8: Average True Range

Example A: A small high/low range formed after a gap up. The TR equals the absolute value

of the difference between the current high and the previous close.

Example B: A small high/low range formed after a gap down. The TR equals the absolute value of the difference between the current low and the previous close.

Example C: Even though the current close is within the previous high/low range, the current high/low range is quite small. In fact, it is smaller than the absolute value of the difference between the current high and the previous close, which is used to value the TR.

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Chapter 6

Learning Objectives

To understand the behavior of market

Introduction of market participants and their activities

Investor common psychological behavior the way to act like a professional

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Examples of Bangladesh Capital Market Bubbles

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Figure 6.1: Dhaka Stock Exchange 1987 Bubble

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Figure 6.2: Dhaka Stock Exchange 1996 Bubble

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Chapter 7

Learning Objectives

Introduction to the technical analysis platform

Manage and use of information in an organize way

Uses of various indicators

Customize own indicators

2.

3. Select CSV format and click Download.

4. Save the Downloaded file in your computer

5. Now from amibroker select File>Import wizard…

6. Pick file from your computer that you have downloaded from stockbangladesh.com

7. Click Next

8.Click Next

9. Click Finish

Data updating is completed.

Using Amibroker

Let's now take a look at

the user interface:

(Download section)

file”.

It

will

open

Click

on

“Download

last

trading

day

data

all

together

in

a

Click on “Download last trading day data all together in a As you can see the

As you can see the in the

center we have chart area

in which price chart with

moving average and

Bollinger bands is plotted

(you can control the

apperance of built-in

charts from Tools-

>Preferences window).

In the bottom of the chart

you can see date axis

(marked with red color),

and below scroll bar and

chart sheets tab control.

Scroll bar can be used to

display past quotes, while

sheet tab allows to view different chart pages/sheets.

To the right you can see Y-axis area (marked with blue color) that shows Y-scale and value labels. Value labels are color fields that display precisely the "last value" of plots. "Last value" is the value of the indicator (or price) for the last currently displayed (rightmost) bar. Y-axis area is used also to move/size chart vertically.

Next to the right is a drawing objects toolbar that allows you to choose from available drawing types (note that only most popular tools are shown here, complete set is available from Insert menu). A special tool called "Select" (red arrow) is used to select/move/resize already drawn objects and to select quotes from the chart.

Chapter 8

Learning Objectives

Know the best possible time to take entry and exit

Understanding trading strategy and its components

Learn the method to select trading instrument

Learn to average in a profitable way

Understanding what is money management, importance of money management,

components of money management

Learning the way to secure own investment

Understanding what is stop loss and its necessity

Learning how to use stop loss

Knowing which is appropriate percentage for own trading system/strategy

Learning the way to realize the gains

Learning different ways to exit while in profit

Understanding the importance of position sizing

Learn to minimize risk by diversifying portfolio

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Figure 8.7: Trading Strategy | Pullbacks | 1st Pullback after MA Crossover |

DHAKABANK

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Figure 8.8: Trading Strategy | Pullbacks | Pullback after Breakout DHAKABANK

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