Technical Analysis of Financial

Markets – Lecture #1

Timothy Fong
Icebreaker
1) Find a partner in the class and ask him/her the
following questions:
 What is your name?

 What is your academic/professional background?

 Why are you taking this course?

 What kind of experience do you have in stock

trading?
 What is your top trading/investment strategy for
2017?
2) Report to the class what you have found
Quick Bio of Tim Fong
 Background in financial engineering, derivatives trading and risk
management
 Currently Managing Director at the Office of the Superintendent
of Financial Institutions Canada
 Canadian representative on the Basel Committee of Banking
Supervision’s Trading Book Groups
 Instructor at the University of Toronto’s School of Continuing
Studies responsible for financial trading and risk management
courses
 Developed the next-generation trading bands (aka Fong’s
Bands) and his research paper on “Regime-Switching Trading
Bands Using A Historical Simulation Approach” was published in
the 2013 IFTA Journal, a professional journal published by the
International Federation of Technical Analysts
 Recipient of the school’s “Excellence in Teaching Award” in 2008
 Recipient of the Queen Elizabeth II Diamond Jubilee Medal for
significant contribution to Canada through personal and
professional achievements in 2013
Agenda
 Course Overview
 Quote of the week
 Introduction to Technical Analysis
 Stock of the Day
 Charting Techniques
 Arithmetic Scale vs. Ratio Scale
Course Overview
 Weekly lesson plan
 Textbook for the course: Technical Analysis Explained by Martin
J. Pring, 5th Edition
 Reference book: Technical Analysis of Financial Markets by John
Murphy
 Evaluation
 Certificate in Financial Trading and Option Strategies
 Technical Analysis Course as part of the Certificate Program in
Derivatives Market Strategies at CSI
 Access to internet and Microsoft Excel
 Trading exercises
 Refer to http://learn.utoronto.ca/registration.htm and the
calendar for general information on registration, grading and
other school polices
Quote of the week

“If you don’t bet, you can’t win.

If you lose all your chips, you can’t bet.”
– Larry Hite
Median = $32,020
 Stock Trader’s Mindset

Option Trading Strategies

(Leverage and Risk Mgmt)

Technical Analysis
(Short Term Forecasting)

Fundamental Analysis & Value-

Algorithmic Trading
Investing Strategies
(Automatic Execution)
(Long Term Forecasting)
Types of Trader
 Day Traders:
 Intraday
 Use simple technical analysis including
support/resistance and patterns
 Swing Traders:
 1 day to 1 month
 Use technical analysis including oscillators
 Position Trader:
 1 month to 1 year
 Use technical analysis and fundamental analysis
Two Key Questions for You
 Have you heard of the 90/90/90 rule?

 What are the differences between an

institutional trader vs. a retail trader?
Market Knowledge
 What is the meaning of “bullish”? How
about the meaning of “bearish”?

 Why do traders need so many screens?

What are the typical “4 Screens” they
need?
Introductory Example
A Few Comments on the
Introductory Example
“A picture is worth thousands words.”
1) What is the name of the company?
2) What is the company’s symbol?
3) What is the time frame of chart?
4) What kind of chart is that?
5) What kind of prices does the middle/blue curve bounded by
the upper and lower grey curves represent?
6) Where do you get the chart from?
7) As a general observant (without any prior technical analysis
background), what are the top 3 observations?
Free Charting Platforms
1. www.stockcharts.com
 Easy to use
 Plenty of education resources
 Will be used for the course
2. www.tradingview.com
 More sophisticated in general
 More quantitative indicators available
 Can conduct backtesting
Group Exercise 1
 Without knowing the subject matter,
what are your key observations on the
previous chart?
Learning Outcomes
 By the end of the course, you will be able to figure
out what and when to buy/sell in the context of profit
maximization and risk minimization by:
 Plotting various types of charts (for free)
 Drawing trendlines
 Recognizing trading patterns
 Using signals generated by quantitative indicators
 Analyzing volume, breadth and sentiment of the markets
 Applying risk management and money management
techniques
 Measuring and monitoring the trading performance
Example of a Quantitative
Indicator – Parabolic SAR
The $995 Dollars Question
stock price

time
 If a stock moves up from point A to point B,
what would the trajectory or path look like in
reality? Draw it on a piece of paper.
What is technical analysis?
 The process of making prediction about
the future by analyzing historical market
action.
 Market action includes the four primary
sources of market data are 1) price, 2)
time, 3) volume (or open interest for
derivative contracts) and 4) breadth.
Three Key Assumptions
1. All market influences are discounted (or
reflected) in prices.
 Focus on price action
2. History repeats itself.
 That explains why chart patterns are important
3. Prices move in trends.
 information is first disseminated from informed
professionals or insiders to aggressive investors,
and then to the general investing public. In
addition, technicians claim that processing new
information takes time.
Group Exercise 2
 “Buy on rumors, sell on news” is a
classic wisdom or phrase in financial
trading.

 Can you explain the above wisdom

using the basic principles underlying
technical analysis?
Fundamental vs. Technical
Analysis
Benefits of Technical Analysis
1. Adaptability to any trading medium
and time dimension
2. Forecasting price movements as TA
uses market price as leading indicator
3. Improvement in market timing in
terms of entry and exit points
Charting Techniques
 Bar Chart
 Line Chart
 Candlestick Chart
 Point and Figure Chart (will be covered
in Lecture #6)
Benefits of Using Charts
1. Summarize a lot of information in a
concise way
2. Help identify price patterns, trends
and breakouts
3. Allow the market action to be
analyzed objectively (without emotion)
Construction of Bar Charts
 Most commonly used price
chart
 Also known as open, high,
low, close (OHLC) chart
 Volume is usually found at
the bottom of most bar
charts
 Volume represents the total
number of shares traded on
a given day
 Volume is used for
confirmation of a breakout
Construction of Line Charts
 Only closing prices are
shown
 There is obviously more
information on a bar chart
 The closing price is the most
important among OHLC
prices because these
positions are held overnight
or over a weekend.
Construction of Candlestick
Charts
Construction of Candlestick
Charts
 Used by Japanese farmers to
monitor crop prices around
1600s
 Body tells you something
about the direction and
magnitude of the price
change
 Shadow tells you something
about the intra-day volatility
 Candlestick charts make
certain patterns more
recognizable
 Group Exercise 3

If you see the above candlestick pattern,

1. Is this a bar chart or candlestick chart?
2. Is this a bullish or bearish signal?
3. Can you explain the market psychology behind
this?
4. If the vertical line of the Gravestone Doji is two
times long, does that make this pattern stronger
or weaker?
Arithmetic Scale vs. Ratio
Scale
 Arithmetic Scale (Linear Scale)
 Show identical distances for identical
point/price moves
 Example: the space between 2 to 4 is the
same as that between 20 and 22
 Problem: 100% from 2 to 4 but only 10%
return from 20 to 22 (visual distortion)
 Application: short-term charts (<=1 yr)
Arithmetic Scale vs. Ratio
Scale (continued)
 Ratio Scale (Log Scale)
 Show identical distances for identical
percentage moves
 Example: the space between 2 to 4 is the
same as that between 4 and 8
 Application: long-term charts (> 1 yr)
Example - Arithmetic Scale

equal distance = equal price change

Example - Log Scale

equal distance = equal percentage change