Charting 101 Securities Trader Group Presented by: Craig Schwenn

PowerPoint Presentation

Charting 101Securities Trader Group

Presented by: Craig SchwennThis webinar/meetup is for educational purposes only. All examples and analysis are intended for these purposes and should not be considered as specific investment or trading advice. All hypothetical examples are for the purposes of teaching principles and are not intended to suggest future results. The risk of loss in trading securities can be substantial. Traders must consider all relevant risk factors including their own personal financial situation before trading. DisclaimerTechnical AnalysisComponents of a Price ChartSupport & ResistanceCommon IndicatorsCharting Software for Stocks

OverviewTechnicalAnalysis4Forecasting future price movement based on the analysis of past price movementDiffers from Fundamental Analysis as traders are not concerned with companys financial reportsTraders use a variety of charts and indicators in comparison to price to determine directionTraders often develop rule-based trading styles

Technical Analysis (TA)Technical Analysis is the art of forecasting future price movement based on the analysis of past price movement. I say it is an art as it takes time, experience, and practice to become a skilled trader using technical analysis.

Technical Analysis differs from Fundamental Analysis as traders are not concerned with companys financial reports or economic conditions because they feel price already reflects this information. How many times have you seen a positive earnings report come out and then the stock price begins to drop. The opposite happens as well. Instead of trading the news or reports, technical analysts will trade price action.

To make trading decisions, traders will use a variety of charts and indicators to analyze price and its general direction

Traders often develop rule-based trading styles whether they are long-term traders or day traders. Having established rules to make trading decisions helps prevent traders from making decisions based on emotional responses to price changes.5Refers to the general direction of a stocks priceMany traders like to trade in the direction of the trendThree (3) types of trendsUpDownSidewaysThree (3) phasesAccumulationGeneral ParticipationDistributionPrice Charts are used to identify these trendsThe TrendThe trend refers to the general direction of a stocks price. Traders use price charts and indicators to identify the trends strength and direction.

There are three (3) types of trends: Up, Down, and sidewaysUp : The uptrend is made up of a series of Higher Highs and Higher Lows (see paint.net)Down : The downtrend is made up of a series of Lower Highs and Lower Lows (see paint.net)Sideways: A sideways trend has a series of Highs and Lows that occur in the same general area (see paint.net)

Three (3) phases (see paint.net)Accumulation: this is where market makers are testing to see if the selling is done and accumulation their stock portfolio before the stock moves upwardGeneral Participation: This phase is when many retail traders begin to invest in the stock. This is phase where the uptrend or downtrend occurs:Distribution: This phase the market makers are begin to unwind their stock positions that they acquired through the accumulation phase

Price Charts are used to identify these trends

6PriceCharts7Shows the movement of price of a financial instrument over a selected period of timeTime is shown on the X-axis and price is shown on the Y-axisCornerstone for Technical AnalysisUsed to recognizeTrendsChart & Candlestick patternsSupport & ResistanceWhat is a Price Chart?What is a Price Chart?It is the movement of price of a financial instrument over a selected period of time (months, wks, days, minutes). For simplicity, I will be just referring to stocks for the remainder of the webinar, but keep in mind that the information presented today is useful for many different financial instruments such as futures, indexes, and ETFs.

Time is shown on the X-axis and price is shown on the Y-axis

Price charts are the cornerstone for Technical Analysis8Sample Chart SPY (ETF)

Chart is taken from StockCharts.com. As you can see this is a chart of a common ETF which trades roughly 1/10th of the dollar value of the S&P 500 index. This price chart is a daily chart. At the bottom, you can see it plots the ETF over a 6 month period. On the right, you can see the price. With these 2 pieces of information, you can plot a stocks price movement over time. You can see that the SPY ETF has moved from roughly $162 to $184 within the last 5 months.

9Chart type is determined by how the price is plottedTypesLine Chart Bar Chart Candlestick ChartPoint and Figure ChartMany OthersChart TypesChart type is determined by how the price is plotted

Below are the most common types of charts used in Technical AnalysisTypesLine ChartBar Chart Candlestick ChartPoint and Figure Chart

10Most basic chart typeOnly plots closing price of financial instrument for specified time frame which are connected by a line

Line Chart

Line charts are the most basic type of price chart.

They only plot the closing price of a stock for a specified time frame. So, if you are charting a daily chart, then the line will represent the stocks price at the end of the day. If you were plotting price in 5 minute intervals, then the line would be the stocks closing price after every 5 minutes11Chart is created by a several vertical lines representing each plotted time intervalVisually provides more data regarding the stocks price for the time interval The OHLC BarOpenHighLow CloseBar ChartThe left dash represents the stocks price when the stock market opened

The highest point of the vertical line represents the highest price the stock reached during the trading session

The lowest point of the vertical line represents the lowest price the stock reached during the trading session

The right dash represents the stocks price when the stock market closed

This one bar shows how much the price moved throughout the day and how much price increased, or decreased, from open to close

12Bar Chart

While the bar chart is very useful, it can be difficult to read the left and right dashes and thus difficult to determine if the stock price increased or decreased. To help with this, charting software usually allows you to color code the bars. 13Similar to bar chart Shows the stocks open, high, low, and close values for the time period

Candlestick Chart

The Candlestick Chart is similar to a bar chart. Each candlestick shows the open, high, low, and close values for the stocks price over a specified time period.

It is how is drawn that is different.

The high and low is still represented by a vertical line. However, the open and close price values are used to create a rectangle which is known as the real body.

If the close is higher than the close, price increased, then the real body is not filled (left)

If the close is lower than the open, price decreased, then the real body is filled (right)14Candlestick Chart

As you can see, candlestick charts make it easy to visually see whether a price increased or decreased for a time interval without needing any special color coding. 15Consist of columns of Xs and OsXs represent rising pricesOs represent falling pricesTime is NOT a factor in creating a P&F chartUsed to filter out noise in stock movement and to easily find support and resistanceSee StockCharts.com for more informationPoint and Figure (P&F) ChartConsist of columns of Xs and OsXs represent rising pricesOs represent falling pricesTime is NOT a factor in creating a P&F chart, however, numbers & letters are placed within a P&F chart box which represents the MonthUsed to filter out noise in stock movement and to easily find support and resistance.

I am not real familiar with P&F Charts, but I wanted to show them in case you come across them. To get more information on P&F charts, visit StockCharts.com Chart School.16Point and Figure chart

Support&Resistance18Support & Resistance are areas on a price chart where supply and demand meetSupply = Selling = ResistanceDemand = Buying = Support Support: Price point where there is more buying pressure than selling pressure which drives prices up (bullish)Resistance: Price point where there is more selling pressure than buying pressure which drives prices down (bearish)Support = ResistanceDefinitionSupply where traders try to take profit or where traders sell to try to make some of their money back..

Support = Resistance What was once Support becomes resistance and vice versa19Highs and LowsTrend LinesMoving AveragesGapsOther OptionsEven Price PointsIndicatorsFinding Support and ResistanceS&R is established by connecting common highs or lows with horizontal linesA S&R line becomes stronger as more price points hit and fail to break the lineStock Price has a long memoryAll time highs and all time lows represent strong resistancePrevious highs or lows can become a short term resistanceOften will not get a perfect S&R line Create S&R Zones

Highs and LowsStock Price has a long memory - 21Get as much data on the chart (monthly time frame)Change chart type to Line ChartMark all time highs and all time lowsCreate lines where two (2) or more price points will touch lineSwitch chart type to candlestick chart and adjust if appropriateSwitch to weekly chart to see if there are any new shared Highs or LowRepeat for daily chartOnce done, update only when price exhibits new H/LHow to Draw Lines Connect price in a rising (bull) or falling (bear) trendUsually connects the low price points in a rising trendUsually connects to the high price points in a falling trendCan draw the opposite to these rules if price is showing strong pattern (see SPY) The more points touching the line, the strong the trend line and thus support or resistanceDrawing trend lines can help traders see chart patterns

Trend LinesShow Example23Show the average stock price over specified time intervalDrawn for you by most charting softwareOne of the most commonly used indicatorsCommon Short Term moving averages ( < 50 ) are 10, 20, or 30Common Long Term moving averages are 50, 100, and 200Long Term MAs provide stronger support & resistance, but often introduce more severe volatility when brokenMoving Averages (MA)I will be talking about Moving Averages in a little more detail in a few minutes, but I wanted to point out that they do offer support and resistance (apple, spy)

Because hundreds of thousands of traders watch moving averages, they often become self fulfilling prophecies

Common Short Term 10, 30 (not as common as longer term)Long Term 50, 100, 200

Violations of larger moving averages are more severe and tend to increase volatility

24An area on the chart where there were no trades during regular market hoursTypically is created when the opening price is higher (or lower) than the previous days closeThere are different types of gapsThe wicks of the two candles represent support and resistance

GapsUse TXN as an example (around July 2013) (for bull)

Use MMM as an example for bear gap and support (around Oct 2012) also apple in 201325Even Price Points IndicatorsVolume at PricePivot PointsBollinger Bands??

Other Options for S&REven Price Points (talk about watching a live chart as it approaches dollar amounts can jump significantly). The larger the stock, the larger the price points. A $10 stock may see support/resistance at 1 or 2 dollar increments, whereas a $100 will likely see support or resistance at $10 intervals. This isnt a strong support and resistance, but can be a minor one.

Indicators can cause support and resistance if enough people are using them. Some common indicators people use to look for support and resistance are

Volume at PricePivot PointsBollinger Bands

26CommonIndicatorsNumber of shares bought and sold within a given time periodOften overlooked by many tradersSupports or denies the price action by measuring the commitment behind the moveVolume spike can indicate a possibleBreak through of support or resistanceReversal in an established trendVolumeBAC in Sep Dec 2012 was a support zone, then a big break out28Moving Averages smooth a stocks closing price over a given periodHelp define current direction of a stockTwo common types of moving averagesSimple Moving Average (SMA)Exponential Moving Average (EMA)Considered a lagging indicatorAdjust time period of moving average according to trading styleSome traders use the cross over point from different MA periods to enter & exit tradesMoving Averages29Calculated by subtracting a longer moving average (MA) from the shorter moving averageUnbounded IndicatorCommon indicator setting is 12, 26 and 9 EMAs (signal line)Positive MACD (above 0) means the shorter MA is above the longer MA and gaining momentumWhen MACD crosses center line it signals that the shorter MA crossed the longer MASome traders use the crossover of the MACD and signal line to enter and exit tradesOften shows signs of trend reversals through divergenceMoving Average Convergence-Divergence (MACD)SPY30Momentum IndicatorShows location of close relative to the high-low range over a set periodCommon interval is 14 %K with a trigger line of 3 %D The trigger line is used to enter and exit tradesRange is from 0 to 100> 80 is overbought< 20 is oversoldNot ideal for trending markets, but great in sideways marketsUsed to recognize divergences as wellStochastic OscillatorCommon setting is 14 %K with a trigger line of 3 %D31Momentum oscillator which measures change of price movementsCommon interval is 14Range is 0 to 100Overbought when > 70 and oversold when < 30Considered bullish when > 50 and bearish when < 50Like most oscillators, works best in sideways trendsCan be used to find divergences

Relative Strength Index (RSI)** NOTE You can draw32You can draw on indicators to find support and resistance or divergenceNever use just one indicator to make trading decisionsBe careful of indicator overload, i.e. analysis paralysisThe perfect indicator does not existFinal ThoughtsCharting SoftwarePurpose: To plot a financial instruments price over timeTypesDesktop ApplicationsWeb ApplicationsOther (i.e. Excel)

Charting Software for StocksPurposeThe primary function of charting software is to plot a financial instruments price over timeA financial instrument can refer to stocks, options, indexes, futures or any other instrument that has a data feed that provides changes in price data over time.While displaying price over time is the basic function, many traders prefer to use software that allows them to add indicators and draw lines over the chart.

TypesMost charting software will either be a Desktop application or a Web application. There are other applications that will create stock charts, such as Excel. While they can produce stock charts, they are not as robust or very useful for most traders.

35There isnt a perfect solutionDetermining Factors

Which One is the Best?Financial InstrumentsCostData SeriesTime FrameAnalysis TypeIndicators

Drawing ToolsScanning OptionsBack Testing / StrategiesAlerting OptionsConnect to BrokerNo Perfect SolutionAs with most software, there isnt a perfect solution for all traders. In order to determine which one is the best for you, you must decide which features are important to you.

FactorsFinancial Instruments This is one of the most important factors. I would say that all charting software will plot stock prices, but not all will show options, futures, forex, or bonds. It is important to understand what you plan to trade in order to pick the right platform.Cost Depending on the features you need to trade your financial instrument, prices for charting software can range from free to thousands of dollars.Data Series Do you plan on Day Trading, Swing Trading, or Long-Term investments? Then you will need a real time data feed that offers tick data. Other types will likely just need an End of day data feed. One thing to note here is that some platforms have the data built in and others require that you provide your own data feed through a 3rd party subscriptionTime Frame This also depends on the type of trader you are and the Data Series available through the platform.Analysis Type Most charting software offers a lot of technical analysis options like drawing tools, indicators, and customization, but not all provide options for Fundamental analysis.Indicators Most platforms provide a wide array of built-in indicators. This is sufficient for most traders, especially new traders as they learn to trade. However, traders who have developed or are using custom indicators will need a platform that will allow them to program their indicator into the software.Drawing Tools These are the tools used to draw on top of charts and save a copy of the chart for future reference. The common tools like line and text drawings are available almost everywhere, but some advanced drawing tools like Fibonacci or elliot wave may not be availableScanning Options Scanners are typically used for stocks and etfs. Not all platforms have scanners, or if they do, they dont have much for selection criteria . So, if you are the type of trader who is looking for the best stocks based on a specified set of paramters, this feature will be important to you. Strategies/Alerting Options/Connect to Broker are more for advanced traders and may become important to you down the road36My Personal Recommendations for BeginnersBroker StockCharts.comThinkOrSwimResource Document on STG Meetup pageRecommended SolutionsThere is many different charting software available. Here are my recommendations if you are just starting outBroker - If you already have a broker, try using the platform they provide. These are usually effective for many traders and are either free or become free after a number of trades are made. StockCharts This is a site dedicated to technical analysis. The provide free charting along with a lot of information on how to use technical analysis in your charting. Their paid subscription is reasonable and provides more tools like custom scanning, customized charts, and ability to save your charts.ThinkOrSwim This is a free charting solution. It provides end of day data for free. It is one of the few brokers who offer virtual trading which is great for beginners looking to learn how to trade. The free version has many of the same trading tools and features that are available to their fully featured software available to users with live money accounts.

37Approach Trading Like a BusinessFebruary 23, 2014 1:00 PM 3:00 PM

Southeast Regional Library Meeting Room B10599 Deerwood Park Blvd.Jacksonville, FL, 32256

Next MeetupQuestions?http://www.investopedia.com/university/technical/techanalysis7.asp

http://stockcharts.com/help/doku.php?id=chart_school:overview:technical_analysis

http://stockcharts.com/school/doku.php?id=chart_school/References40