TA-Seminar-Handbook-V7.Odt Printed: 14/08/2012 (Pages 1-3 Are Blank) Robert Brain's Technical Analysis Overview

Share Market Price Charts Unlocking the Secrets

One of the tools in Brainy's Share Market Toolbox Visit: www.robertbrain.com

The study of share price charts to anticipate future price action. Also called Technical Analysis.

This handbook is designed to accompany the seminar of the same name.

But it can easily be read independently.

Robert Brain Edition 7 August 2012

Filename: Brainy:...TA-seminar-handbook-v7.odt Printed: 14/08/2012 (pages 1-3 are blank) Robert Brain's Technical Analysis Overview

ABOUT THIS HANDBOOK AND SEMINAR This reference handbook was originally compiled by Robert Brain to accompany his “Share Market Price Charts – Unlocking the Secrets” seminar (formerly known as the Technical Analysis Introduction seminar). It is intended for those people who already have some understanding of the share market, and who want to learn more about how to “read” share market price charts to interpret market mood and sentiment. This also allows the future direction of share prices to be interpreted with some degree of confidence. This handbook is designed to be very useful for ongoing reference. But the sad news is that there are some key bits of information not included here. It is best that the reader also attends the live seminar. The seminar delivery closely follows the material in the handbook – the numbers on the presentation slides match the section numbers in the handbook. If you are using the handbook in the seminar, then feel free to follow the seminar in the book and make notes in it for your own future reference. There are references in this handbook to various handout notes. These are also available in Brainy's Share Market Toolbox, and available to Toolbox Members. Visit the web site for details. One final comment about shares versus other financial instruments (eg. CFDs, warrants and options), and investing long versus investing short. In this handbook we focus on the very broad field of technical analysis, and reference to financial instruments only relates to shares, and on buying long. This is for simplicity for the early investor and trader. For more information about Brainy's seminars and workshops, including registration details for upcoming events, feel free to visit Brainy's Share Market Toolbox web site:: www.robertbrain.com

Important Notice (and disclaimer) This handbook and seminar do not promote any financial products. There are no recommendations to purchase any financial products. There is no intention to provide any investment advice of any sort. None of the information presented takes into account the investment objectives, financial situation and/or particular needs of any person or class of persons. The information is strictly for education only. To this end, it has to be said here that any product that is mentioned or referred to in this workshop or handbook is not explicitly recommended by the author. The reader should seek professional advice to this end. This handbook does not contain any advice. Acknowledgements All share price charts shown herein are produced using the Australian BullCharts charting software, made in Sydney, Australia. Robert is an authorised BullCharts reseller. More details available at: www.robertbrain.com/bullcharts/

NOTE: This document does NOT contain any advice. Page 4 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

ABOUT THE AUTHOR Robert has a tertiary qualification in Engineering, and 30+ years experience in various industries (including: automotive design and manufacture, cigarette manufacture, food manufacture, retail, and consulting), using specialist skills and knowledge in the ICT field — Information and Communications Technology. He is a computer power user, and very proficient in a variety of desktop software products (including BullCharts charting software). Robert became seriously interested in the stock market at about the time of the tech crash (2000- 2001), and he has been studying and applying Technical Analysis since then. He helped to set up the Melbourne BullCharts User Group in 2006 (now known as the Australian BullCharts User Group), and has been the Group's convenor since inception. With the computer background, he is very knowledgeable in both the BullCharts software and technical analysis. Armed with the useful skills and knowledge described above, Robert originally set up his web site some years ago to remind himself of key information as well as to help other people understand more about two topics — the share market, and the use of computers at home and in business (following on from the self-publishing of the text book “Computers in Business and at Home” in 1989). Robert now maintains his Share Market Toolbox web-based business, to provide ongoing support and tuition to share market investors and traders, and specialising in supporting BullCharts software users. Robert's seminars include: the Share Market 101 seminar (formerly the Boot Camp seminar) and the Share Market Price Charts seminar (formerly the Introduction to Technical Analysis). And more recently, Robert is an authorised BullCharts reseller. Robert also offers useful information on three topics by monthly email to his Toolbox Member subscribers: technical analysis, share investing/trading and BullCharts charting software How-To documents. These eBook (PDF-format) Articles are included in the membership of Brainy's Share Market Toolbox. Robert's core business activities include: Maintaining Brainy's Share Market Toolbox web site for the benefit of the Toolbox Members, continually updating it with new and updated useful information. BullCharts software reseller (with free tuition) — www.robertbrain.com/bullcharts/. Robert's Weekly Watch List (like a list of Hot Stocks, but different) — www.robertbrain.com/weekly-watchlist/ Weekly Market Analysis and update — www.robertbrain.com/weekly/. Preparing and running training sessions, seminars and public presentations to do with stock market investing, technology, and software usage — www.robertbrain.com/shareseminar/. eBook Articles for Toolbox Members, writing under the nom de plume of Brainy (an old high school nickname) to differentiate his products and services from others in this field — www.robertbrain.com/articles/. Running the Australian BullCharts User Group, and convening the monthly Melbourne chapter meetings, and monthly webinar sessions for remote users. Assisting people with the use of technology, in particular investors and traders using contemporary PCs and PC software. Why does Robert do all this? Well, for a successful trader to live on the proceeds of share market investing or trading requires a capital base of at least a quarter of a million dollars. Until you have this much, you have to work for a living while you build it up.

NOTE: This document does NOT contain any advice. Page 5 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

Table of Contents

1 Introduction...... 10 1.1 Terminology — technical analysis? or charting?...... 10 1.2 What is technical analysis?...... 10 1.3 Price charts and charting software...... 12 1.4 Pause to reflect...... 13 1.5 The seminar series...... 13 1.6 Seminar outcomes...... 13 1.7 This reference handbook...... 13 1.8 Further references...... 14 1.9 Your own notes...... 14 2 Technical Analysis — overview...... 15 2.1 What is Technical Analysis, really?...... 15 2.2 Is technical analysis useful?...... 16 2.3 The Holy Grail — the perfect indicator...... 17 2.4 Dow Theory — A brief introduction...... 17 2.5 EMH — Efficient Market Hypothesis...... 17 2.6 Market psychology and emotions...... 18 2.7 Concepts...... 18 2.7.1 Price data...... 18 2.7.2 Fair value and market worth...... 18 2.7.3 Market cycles / phases / stages...... 18 2.7.4 Overbought / Oversold...... 19 2.7.5 Bulls and bears...... 19 2.7.6 The market auction process...... 19 2.7.7 Trends — the trend is your friend...... 20 2.7.8 Long versus short...... 20 2.7.9 Equities versus other instruments...... 20 2.8 Sample uses and applications...... 20 2.8.1 How do people use price charts for stock selection?...... 21 2.8.2 Superannuation investments...... 21 2.8.3 Switching superannuation asset classes...... 21 2.8.4 How to do this?...... 21 2.9 Fundamental or Technical analysis?...... 23 2.10 Funda-Technical Analysis...... 23 3 Primary Analysis ...... 24 3.1 Price charts — crash course/revision...... 24 3.1.1 Price charts — introduction...... 24 3.1.2 Chart types – Line, Candlestick, OHLC, and Volume charts...... 24 3.1.3 Time frames – Daily, Weekly, Monthly, Quarterly price charts...... 28 3.1.4 Intraday — another time frame...... 29 3.1.5 Other chart types...... 30 3.1.5.1 Point & Figure chart...... 30 3.1.5.2 Gann Swing chart...... 30 3.1.5.3 Kagi chart...... 31 3.1.5.4 Renko chart...... 31 3.1.5.5 Three Line Break chart...... 31 3.1.5.6 EquiVolume chart...... 32 3.1.5.7 Candlevolume chart...... 32 3.1.5.8 Stepped chart...... 32 NOTE: This document does NOT contain any advice. Page 6 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 3.1.5.9 Points chart...... 33 3.1.5.10 Pretzel chart...... 33 3.2 Trends and trend lines...... 34 3.2.1 Up-trends, down-trends and no-trends...... 34 3.2.2 “The trend is your friend”...... 34 3.2.3 Defining a trend...... 34 3.2.4 The Up Trend — “Higher Highs” and “Lower Lows”...... 34 3.2.4.1 The up trend trendline...... 35 3.2.4.2 Up trend interpretation...... 35 3.2.4.3 Reposition the line...... 35 3.2.5 Trend strength...... 36 3.2.6 Down trend...... 36 3.2.6.1 Down trend interpretation...... 36 3.2.7 The “3Ways Rule (in 3Times)”...... 37 3.2.7.1 The 3Ways Rule says...... 37 3.2.7.2 The 3Ways logo — the elements...... 37 3.2.7.3 The up trend in detail...... 37 3.2.7.4 The down trend in detail...... 38 3.2.7.5 Range trading — no trend...... 39 3.2.7.6 Chart patterns...... 39 3.2.8 Primary and Secondary trends...... 40 3.2.8.1 Primary trends...... 40 3.2.8.2 Secondary reactions...... 41 3.2.8.3 Daily fluctuations...... 42 3.2.9 Trends — in summary...... 42 3.3 Stage Analysis...... 43 3.4 Support and resistance...... 44 3.5 Volume — it is important...... 45 3.5.1 Volume — what is it?...... 45 3.5.2 Value...... 45 3.5.3 Trades...... 45 3.6 Chart patterns (triangles, pennants, wedges)...... 46 3.6.1 Triangles...... 46 3.6.2 Measure rule...... 47 3.6.3 Pennants, flags, wedges...... 47 3.6.4 Megaphone pattern...... 48 3.7 Other chart patterns — head and shoulders, double top/bottom...... 49 3.7.1 Double top/bottom...... 49 3.7.2 Head and shoulders pattern...... 50 3.7.3 Rounding tops and bottoms...... 50 3.8 Candlestick patterns (single and multiple patterns)...... 52 3.8.1 Candlestick origins...... 52 3.8.2 Candlestick basics...... 53 3.8.3 Length of the candle body...... 53 3.8.4 Candle tails (wicks, shadows)...... 53 3.8.5 Doji candlestick...... 54 3.8.6 Harami candle pattern...... 54 3.8.7 Candle patterns — small bodies with/without gap...... 55 3.8.7.1 Hanging Man candle pattern (and Hammer)...... 55 3.8.7.2 Shooting Star candle pattern...... 55 3.8.7.3 Evening Star candle pattern...... 56 3.8.7.4 Doji Star candle pattern...... 56 3.8.7.5 Hammer candle pattern (and Hanging Man)...... 56 3.8.7.6 Inverted Hammer candle pattern...... 56 3.8.7.7 Morning Star candle pattern...... 57 3.8.8 Candle patterns — engulfing and piercing in uptrends...... 57 3.8.8.1 Engulfing Bearish candle pattern...... 57

NOTE: This document does NOT contain any advice. Page 7 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 3.8.8.2 Dark Cloud candle pattern...... 57 3.8.8.3 Harami Bearish candle pattern...... 57 3.8.9 Candle patterns — engulfing and piercing in downtrends...... 58 3.8.9.1 Piercing Line candle pattern...... 58 3.8.9.2 Engulfing Bullish candle pattern...... 58 3.8.9.3 Harami Bullish candle pattern...... 58 3.8.9.4 Harami Cross candle pattern...... 58 3.8.10 Three-candle patterns...... 59 3.8.10.1 Three Black Crows candle pattern...... 59 3.8.10.2 Three White Soldiers candle pattern...... 59 3.8.11 Multi-candle continuation patterns...... 60 3.8.11.1 Rising Three Methods candle pattern...... 60 3.8.11.2 Falling Three Methods candle pattern...... 60 4 Secondary Analysis...... 61 4.1 Choosing indicator parameters...... 61 4.2 Trend indicators (MA, MMA, GMMA, ADX/DMI, P-SAR)...... 62 4.2.1 Linear regression...... 62 4.2.2 Simple Moving Average (MA)...... 63 4.2.2.1 What is a Moving Average (MA)?...... 63 4.2.2.2 Observations...... 64 4.2.2.3 Buy/Sell Signals...... 64 4.2.2.4 Which period should we use?...... 64 4.2.2.5 MA types — Simple, Exponential, Weighted...... 64 4.2.2.6 Filtering the Buy/Sell Signals...... 64 4.2.3 MMA — Multiple Moving Average...... 65 4.2.4 GMMA — Guppy Multiple Moving Average...... 66 4.2.5 Brainy's MMA indicator ...... 67 4.2.6 Moving Average High and Low...... 68 4.2.7 MACD — Moving Average Convergence Divergence...... 69 4.2.8 P-SAR — Parabolic SAR...... 73 4.2.9 ADX/DMI — Directional Movement...... 74 4.3 Volatility indicators (BB, ATR)...... 76 4.3.1 Bollinger Bands...... 76 4.3.2 ATR — Average True Range...... 78 4.4 Momentum Indicators (Momentum, OBV, A/D, RSI, TMF, ROC...)...... 80 4.4.1 Momentum...... 80 4.4.2 OBV — On Balance Volume...... 81 4.4.3 Accumulation/Distribution (A/D)...... 82 4.4.4 RSI — Relative Strength Index...... 83 4.4.5 Money Flow and Twiggs Money Flow (TMF)...... 84 4.4.6 Price Rate of Change (ROC)...... 85 4.4.7 Coppock indicator...... 86 4.4.8 Stochastic indicator ...... 87 4.5 Volume indicators...... 88 4.5.1 Volume + Moving Average and EquiVolume...... 88 4.5.2 Volume Rate of Change...... 88 4.5.3 Volume oscillator...... 88 5 Additional Topics...... 89 5.1 Quantitative Methods...... 89 5.2 Cycle analysis...... 90 5.3 Fibonacci...... 90 5.3.1 The Fibonacci numbers and percentages...... 90 5.3.2 Fibonacci extensions...... 91 5.3.3 Fibonacci retracements...... 91 5.4 Elliott Wave...... 93

NOTE: This document does NOT contain any advice. Page 8 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 5.5 W.D.Gann...... 95 5.6 Hindenburg Omen...... 96 6 Share Trading & Investing — a very brief introduction...... 97 6.1 Trading / investing styles — introduction...... 97 6.2 Trading / investing plans & strategies— introduction...... 98 6.3 Money and risk management...... 98 6.3.1 Amount to put “at risk”...... 99 6.3.2 Position size...... 99 6.3.3 Stop loss basics...... 99 6.4 Stop loss details...... 101 6.4.1 Stop loss at support...... 102 6.4.2 Past resistance which is now support ...... 102 6.4.3 Sloping support line (trend line)...... 103 6.4.4 30 week SMA (Weinstein)...... 103 6.4.5 Parabolic-SAR (P-SAR)...... 103 6.4.6 Long CBL Stop...... 104 6.4.7 A multiple of Average True Range (ATR)...... 104 6.4.8 Stops in summary...... 105 6.5 Back testing for success ...... 107 6.6 Paper trading...... 107 6.7 Trading strategies...... 108 6.7.1 Sample trading strategies...... 108 6.7.1.1 Long term bull market strategy...... 108 6.7.1.2 Shorter term bull market strategy...... 109 6.7.1.3 Momentum + MA-of-Momentum...... 109 6.7.1.4 Use ADX for entry (Chuck le Beau)...... 110 6.7.1.5 Use Parabolic SAR for exits...... 110 6.7.1.6 Price Breakout...... 110 6.7.1.7 Moving average cross-over...... 111 6.7.2 Some specific supposedly successful strategies...... 112 6.7.3 Trading strategy summary — How do people use all this?...... 112 6.8 Trading — Is this for me?...... 113 6.8.1 Some home truths about share trading...... 113 6.8.2 Attributes of a successful share trader...... 113 6.8.3 How much time does it take?...... 113 6.8.4 How much money do I need?...... 114 6.8.5 Isn't this gambling?...... 114 6.8.6 Investing / trading — Final tips...... 114 6.8.7 Final words...... 114 7 Charting software...... 115 7.1 “Black Box” software...... 115 7.2 Web-based charting options...... 115 7.3 Real charting software...... 115 7.3.1 Charting software – samples...... 115 7.3.2 What do they do? — Key features...... 116 7.4 What are the costs?...... 116 7.5 End-of-Day (EOD) versus real-time live intraday data...... 116 7.6 Where do you get the up to date share price data?...... 116 7.7 Trading platforms...... 116 8 Basic glossary...... 117 9 Further references...... 118

NOTE: This document does NOT contain any advice. Page 9 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

1 Introduction This seminar and accompanying handbook has come about because of a couple of reasons: The share market in Australia experienced a fantastic bull run from 2003 until late 2007, during which many people easily made a lot of money. They did this trading in shares, or CFDs, or other financial instruments. With a severe market correction taking place over the many months following October 2007, many people lost a significant amount of money. Many people saw their superannuation holdings lose significant value due to this bear market. Many now feel that they need to be better informed about the share market, and the players in the market. So they are looking for help to better understand the share market, and to improve their chances of minimising risk and losses for future investing. Using technical analysis is certainly a good way to go about addressing this. Anybody who is relatively new to technical analysis (or charting, or studying price charts) might take quite some time to come to grips with exactly what it is about, and to understand at least a little of all of the aspects that it encompasses. It is easy to wish that a newcomer could have a crash course to assist their progress with this challenge. Hence this seminar and handbook. 1.1 Terminology — technical analysis? or charting? This handbook and seminar takes a good look at the secrets that are hidden away inside share price charts. It is basically a study of the broad field of technical analysis. Let's take just a moment to explain some terminology. In its first incarnation in 2008 the seminar that accompanies this handbook was entitled the “Technical Analysis Introduction” seminar, and this supporting handbook was named likewise. But then it dawned that the term technical analysis just doesn't mean anything to many people. So it has been renamed a couple of times to something more meaningful — Share Market Price Charts Unlocking the Secrets. That is, it is to do with the secrets that are tied up within the share price charts of any stock or commodity; but with special focus on the charts of stocks. This makes it more relevant to the majority of people who most need to be aware of this topic. So, throughout these notes there will be reference to technical analysis, because at the end of the day, that is the specific name of the subject matter being covered, and that is the term that readers will be able to research further.

1.2 What is technical analysis? For you, the reader of this handbook and possibly a participant at the seminar, you might be wondering what it is that is referred to as “Technical Analysis”. You have probably picked up this handbook (or enrolled for the seminar) because you want to understand more about the share market, and perhaps understand more about the share market price charts, and how to interpret all those lines and things. You might already know that technical analysis includes the following topics: Price charts — including the common line chart, and candlestick charts. Charts over different time frames — intraday, several days, several weeks, or several months or even years. Chart indicators like the Moving Average. Elliott Wave analysis. Fibonacci studies. W.D.Gann.

NOTE: This document does NOT contain any advice. Page 10 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

The diagram below helps explain that the entire subject of technical analysis is somewhat like a jig saw puzzle. This is because as soon as we think we are mastering the subject, something else that we didn't know pops up to surprise us.

Figure 1: The subject of technical analysis is akin to a jigsaw puzzle

NOTE: This document does NOT contain any advice. Page 11 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

1.3 Price charts and charting software Throughout this handbook, the Australian BullCharts software has been used to create all the price charts. For more information on BullCharts, visit Robert's web site: www.robertbrain.com/bullcharts/ or contact the author directly. Why does the author like and use BullCharts? General information: Australian designed and developed software. Company based in Sydney (Australia). User support is available by email or phone. User Group (based in Melbourne), with monthly meetings, and monthly user group webinars for remote users. Online information available for users at the BullCharts Yahoo Forum. Software features: The charting tools are great — to annotate the price charts with lines, comments, price and time measurements, Fibonacci studies and more. Easy set up of Watchlists, and quick viewing of price charts for the stocks in watchlists. Alert lines — can be set as horizontal triggers on price or volume, or sloping alert trend lines to trigger on breaks of the line. Many chart indicators (more than 250). Easy Scan of the market. That is, create and run a special set of selection criteria and search through a selected group of stocks to find those that match your criteria. The resulting list of stocks is available for you to research further for share purchase consideration. Many scans are already supplied with the software (more than 100). Scans are very easy to modify, or to create your own. Uses drop-down boxes and selection lists — no programming required. (Much easier to use than competitive products — without mentioning any names.) If you have very unique or special requirements, you can use the supplied programming language (BullScript) to customise Scans or Indicators, or to write your own. Author Strategies — The trading strategies of many famous authors are implemented in both the scans and the available indicators (including: Alan Hull, Jim Berg, Leon Wilson, and more). Back-testing features are available using the TradeSim software (from CompuVision Australia Pty. Ltd. — http://www.compuvision.com.au ) with good integration with BullCharts. Printing of price charts is clear and crisp. Support is available: User group support in Melbourne with monthly meetings. User support via the Bulls and Bears Network in Sydney — http://www.bullsandbearsnetwork.com.au/ Training is available — contact the User Groups for details or Robert Brain directly — http://www.robertbrain.com/ . BullCharts "How-To" information documents available via Brainy's monthly e-Newsletters from Robert's web site. Tuition is provided in Melbourne by Robert Brain, either one-on-one, or in small groups.

NOTE: This document does NOT contain any advice. Page 12 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

1.4 Pause to reflect... Before progressing to far, it might be worth pausing for a minute to think about what we might hope to achieve by working through this handbook (and seminar). Feel free to jot down some thoughts here: ......

1.5 The seminar series This seminar is just one seminar in Robert's series of seminars that run from time to time. Readers are encouraged to visit Brainy's Share Market Toolbox web site to see information about other seminars and workshops — www.robertbrain.com/shareseminar/

1.6 Seminar outcomes At the end of this seminar, or by the time the reader of this handbook has completed reading through the book, the following outcomes should be achieved: 1. Be able to talk to others about technical analysis with a degree of confidence. 2. Be able to describe the difference between fundamental analysis and technical analysis, and understand the topic of Funda-Technical Analysis. 3. Be able to recognise uptrends and downtrends in a price chart. 4. Be able to describe the various types of price charts, as well as chart time frames. 5. Be able to recognise the key features of share price charts, including a variety of chart patterns, and candlestick patterns. 6. Be able to recognise key technical chart indicators. 7. Be able to apply key chart indicators to a price chart. 8. Be able to describe some of the aspects of share trading/investing. 9. Be able to describe the key characteristics of different charting software tools.

1.7 This reference handbook This handbook is a close reflection of the seminar content and presentation slides; but it is designed and structured so as to be easy to refer to later. It has very a detailed Table of Contents in the front, and a good Index in the back, to help find information easily. It is in loose-leaf format with tab inserts, and you can add your own loose sheets of notes, or portfolio statements, and so on. By the way, this document has been prepared using the Open Office software called Writer (Open Source software that directly competes with Microsoft's software; but which is free to buy and is just as good, if not better).

NOTE: This document does NOT contain any advice. Page 13 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 1.8 Further references The subject of technical analysis is very broad. It is common for a technical analyst to pursue a specific branch, and ignore others. That is quite all right, because the amount of material that is available is very extensive and wide-ranging. If someone set out to learn most of what technical analysis is about, it would require several (or many) text books, plus perhaps some training courses, and a lot of time. The reader of this book, and the seminar participant, are encouraged to seek out further details on this subject. There are many information sources available. Unfortunately, not all of them should be accepted at face value. Some should be used with caution. Most of the available resources tend to focus on specific aspects of technical analysis, making it difficult to maintain the perspective on the total subject. Some of the readily available resources include various web sites and companies as follows (but this is not a recommendation or endorsement of any): The author's own Share Market Toolbox web site: www.robertbrain.com The “Lotsa Web Sites” (or “Supplementary Resources”) hand-out available at the seminar and from Robert's web site. Specialist text books from specialist book shops such as The Educated Investor bookshop in Collins Street, Melbourne can be endorsed and recommended – tell the shop staff that Robert Brain sent you, and ask for the special discount and visit the store online: www.educatedinvestor.com.au . 1.9 Your own notes At various places through this handbook there are places where you can make your own notes. Of course, you can make notes anywhere you like on your own copy of the handbook. That would make it more useful for future reference. But the following lines are a prompt to remind you that this is encouraged. Your own notes and comments: ......

*** CAUTION *** Investing in the share market can result in loss of funds. There is no guarantee that any particular trading strategy might work or not work. Success in the share market does rely on an appropriate attitude and psychology.

NOTE: This document does NOT contain any advice. Page 14 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

2 Technical Analysis — overview How about a definition for the term technical analysis? Well, there are a few variations getting around; but following is one reasonable definition to work with: A definition: Technical analysis is based on the belief that the value (or worth) of a company's shares is already reflected in the share price. This can be determined by viewing and analysing the share price chart. Within the field of technical analysis there are many, many aspects that can be considered, including the following (most of which are covered in more detail in subsequent sections): Price charts on different time frames (eg. intraday, daily, weekly, monthly, quarterly). The volume (number of shares bought/sold) in each period. The number of trades in a period (eg. day, week, etc.). “Patterns” on the share price chart. Candlestick patterns — both single candle patterns and multiple candle patterns. Technical chart indicators — eg. Moving Average (MA), MACD, Momentum, RSI, P-SAR, Stochastic, RSC, MMA, and many more. Quantitative analysis, cycle analysis, Elliott Wave, Fibonacci, W.D.Gann. The down side is that technical analysis is such a very broad field that it is not possible to cover all aspects in detail within this volume. For instance, there are many more chart indicators than we have space available.

2.1 What is Technical Analysis, really? Right from the start, let's not kid ourselves — the subject of technical analysis is a very broad and complex one. The field of technical analysis covers a lot of things, and there are varying definitions, but technical analysis basically centres on the study of the share price chart, and includes: (a) Identifying a trend (either up trend, or down trend, or even a “non” trend). (b) Identifying specific patterns that have occurred in the past and which might occur again with a somewhat predictable outcome (eg. Support and Resistance – see below). When studying technical analysis, because the topic is so broad and complex, it is a little difficult to work out how to structure and present the information. The major headings in this study are structured as follows: Technical Analysis — a brief overview, including concepts and terminology Primary analysis: price charts and chart types trends and trendlines — including Brainy's “3Ways Rule (in 3Times)” support and resistance volume chart patterns candle patterns Secondary analysis and indicators: trend indicators (moving average, regression line, Parabolic SAR) volatility indicators (Bollinger Bands, Average True Range) momentum indicators (RSI, MACD, ADX/DMI, Coppock) volume indicators (rate of change, volume oscillator)

NOTE: This document does NOT contain any advice. Page 15 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

Advanced topics: Quantitative analysis Cycles Fibonacci Elliott Wave Gann. Share trading — a very brief introduction to related aspects sample strategies using technical analysis The thinking behind this structure is as follows. Because the technical analysis subject is so broad, it is important to provide some sort of introduction in the early stages to help put all the bits into context, before they are elaborated on in the later sections. Leon Wilson, in his book “The Business of Share Trading”, talks at length about primary and secondary analysis. He describes primary analysis tools as those directly derived from, or based directly on, price action or liquidity. This is basically the raw price chart. On the other hand, secondary analysis tools are derived from the raw price data. Most indicators are derived by some sort of calculation or manipulation of the share price. This distinction is a good one to make, and helps to group together the material in this Technical Analysis Introduction handbook and seminar.

BUT NOTE: When properly applied, technical analysis can give an indication of the likely future price action. But, there is no guarantee. It is not 100% reliable (otherwise everybody would do it). If you follow “the rules”, and if you manage your money and risk properly, and if you minimise your losses, and if you enforce stops, then you might be able to have a success rate of roughly 30% to 70% (ie. winning trades), and you might be able to have only small losses, and large profits. If you can do all this, AND test your strategy by back testing and/or paper trading before you do it for real, then you might be able to be successful.

2.2 Is technical analysis useful? Many people ask if technical analysis is useful, and how it compares to fundamental analysis. Let me answer this with the following: If you want to trade shares for profit, then there are advantages in using both fundamental analysis and technical analysis. Many people use fundamental analysis to select a list of quality companies, and then use technical analysis to time their entry and exit. This way they reduce the chances of buying a stock with poor management, or poor fundamentals. Technical analysis is not 100% perfect (and neither is fundamental analysis). If used wisely, with proper and sound trading rules and methods, technical analysis can result in a successful trade (ie. a win) in at least 40% of the time, and often much more. And technical analysis can be used to identify a potentially losing trade and cut it short to minimise losses. By minimising losses and letting profits run, even with just a win/loss ratio of 40%, profits can be made.

NOTE: This document does NOT contain any advice. Page 16 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 2.3 The Holy Grail — the perfect indicator Many people start out with technical analysis searching for the perfect indicator — the one that is 100% reliable. And they experiment with different trading strategies searching for a 100% win rate. Unfortunately, they are wasting their time. Technical analysis is not a precise science. There is no such thing as the perfect indicator. And a 100% win rate is not achievable. Some people use some aspects of technical analysis (eg. chart patterns and support and resistance), and no indicators. Some people like to use a couple of indicators. There are many variations, and many people will claim to have success over time using a very different set of technical analysis tools. It is best to aim for no more than 2 or 3 indicators (even though some experts claim to use many more than this). And don't rely just on the indicators, seek out some way to get “confirmation”.

2.4 Dow Theory — A brief introduction. Dow Theory is the term that is used to refer to a body of knowledge compiled by several people, but based on the editorial writings of Charles H. Dow (1851-1902, journalist, founder of the Wall Street Journal, and co-founder of Dow Jones and Company). The Dow Theory comprises several basic tenets. It is beyond the scope of this book to detail Dow Theory, except to summarise the principles as follows (refer http://www.Wikipedia.org): 1. The averages discount everything (ie. the US major indices). That is, the stock market discounts all news, and stock prices quickly factor in all news as it becomes available. 2. The market has three main movements — a Primary Trend, a Secondary Reaction (or Secondary Trend, or "medium swing"), and the daily fluctuations (also known as the "short swing"). 3. Trends (Primary Movements) have three phases — in an uptrend these are: accumulation with little price change (phase 1), strong price change (phase 2), and rampant speculation with distribution (phase 3); and in a down trend there are: complacency, concern and capitulation. [NOTE!] 4. Stock market averages must confirm each other (a reference to the two major US market indices of the day — the Dow Jones Industrial index and the Dow Jones Transport index). 5. Trends are confirmed in Volume. [NOTE!] 6. Trends exist until definitive signals prove that they have ended. [NOTE!] It should be said here that some of these ideas are fundamental to much of the study of technical analysis and will crop up through our discussions. They are referred to later in section 3.2.7 , The “3Ways Rule (in 3Times)”.

2.5 EMH — Efficient Market Hypothesis Efficient Market Hypothesis basically says that financial markets are "informationally efficient". That is, the price of stocks already reflect absolutely all known information. The EMH states that it is impossible to consistently outperform the market using any information that the market already knows (except by good luck). (EMH was developed by Professor Eugene Fama at the University of Chicago Graduate School of Business in the early 1960s). Refer to Wikipedia for a definition and discussion of EMH 1. Without going into a lot of detail, it should be said that many technical analysts basically do not agree with the assertions that money cannot be made due to the EMH principles. It is mentioned here only so that the reader has a more complete view of the world of the share

1 Wikipedia — http://en.wikipedia.org/wiki/Efficient-market_hypothesis NOTE: This document does NOT contain any advice. Page 17 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview markets. Whether the reader chooses to subscribe totally to this theory or not is your own call. Some people totally disregard this view of the market.

2.6 Market psychology and emotions Some people believe that share trading, and the share market, can easily be devoid of emotion; but this is farthest from the truth. In reality, there is a lot of emotion and psychology at play in the market. For one to be a successful trader, one needs to be very aware of their own emotions, and in control of their emotions. And the market itself is mostly driven by three basic emotions — fear, greed and hope. But this is more complex than it sounds. This subject is so detailed and complex that we won't even try to cover it here. But it is important that any potential share trader be aware that this is important, and they should endeavour to understand more about it.

2.7 Concepts There are some important concepts that are assumed throughout the rest of this material. So it is important to introduce them here.

2.7.1 Price data Typically in charting software, the following end-of-day values are available to display, and available to be used in chart indicators: Open price, High, Low and Closing price for the day; Volume — the number of shares transacted in the day; Trades — the number of buy/sell transactions in the day. Because the End-of-Day (EOD) values are available, the end of week and end of month values can be readily calculated.

2.7.2 Fair value and market worth How much are the shares of a company really worth? Firstly, fundamental analysis can be used to determine the theoretical share price value (or intrinsic value). (Refer to any notes on fundamental analysis for further explanation of this.) But, on the share market, the actual share price might be very different to the calculated theoretical share price value. The actual share price on the market is closer to what we call “fair value”. Strictly, by definition, “fair value” is said to be the price that would be received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants. Another definition of fair value is the rational and unbiased estimate of the potential market price. For a company's share prices where the shares are trading frequently on good volume, we could say the following. If the price is fluctuating widely in any period, then what we call “fair value” is probably some where within the actual “range” of recent share prices. If the price has moved very little, then the share price could be very close to “fair value”. The important point here is that the share price being paid might be very different to the theoretical price that is calculated using fundamental analysis.

2.7.3 Market cycles / phases / stages The market tends to move in both cycles, where extremes are observed, and within the cycles there can usually be found phases or stages.

NOTE: This document does NOT contain any advice. Page 18 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview In terms of market cycles, these are easily observed as bull markets — when the market is rising strongly — and bear markets — when the market is falling. The duration of these bull/bear cycles varies, and the amount of rise and fall in the market in these cycles can vary. But having said that, some technical analysts believe they can readily confirm changes in market cycles utilising some special technical analysis techniques. Regarding stages, Stan Weinstein talks in his book in Chapter 2 about the four stages of the market (and stocks) and stage analysis — the basing area (accumulation phase), the advancing phase (rising market), the top area (distribution), and the declining phase. This is covered in detail in section 3.3 “Stage Analysis“ below. In the ideal situation, the amount of rise and fall in these periods would be minimal. However, because human nature is what it is, and the market is what it is, the rises and falls can be quite significant, and can overshoot the ideal position.

2.7.4 Overbought / Oversold Because markets and stocks exhibit cycles, and stages (as briefly explained above) then it is natural for the cyclic swings to overshoot the so called ideal position. For example, a stock's share price should perhaps stay close to fair value; but they tend not to do this. At times the share price might fluctuate wildly above or below fair value. When a stock is trading at a very different value to its fair value, it can be said to be either overbought or oversold. If the price is perceived to be too high, then it is said to be overbought. Likewise, if it is perceived to be too low, then it is said to be oversold. Some of the technical analysis indicators are oscillators that fluctuate up and down and indicate overbought and oversold conditions. These are possible buying opportunities.

2.7.5 Bulls and bears In talking about the share market, there is often reference to the bulls and bears, and to bullish and bearish conditions. A bullish market is one where there are more buyers than sellers. The existence of more buyers than sellers means that there is a bidding process by the buyers, not unlike a house auction. Where there are many buyers who want to make a purchase, then the price can be bid upwards in the auction process. In this situation, the bulls are said to be in control, and winning in the market, and the share price rises. Conversely, if there are more sellers than buyers, the sellers might find that if they really want to sell, they will need to drop their offered price in order to tempt the buyers. This condition is considered bearish, and the sellers (or bears) are in control, and the bulls are considered to be losing, and the share price falls.

2.7.6 The market auction process It is important to remember that the share market is little more than an ongoing auction process. For any one listed company, there might be people who want to buy shares in the company, and there might be current owners of shares who are willing to sell for a particular price. Some potential buyers might want to buy the shares at any price, whilst others might have an upper limit for what they believe is a fair price to pay. Likewise, some potential sellers might want to sell the shares at any price (for whatever reason), whilst others might have a lower limit beyond which they would rather hold the shares. During market opening hours (usually 10am to 4pm Australian EST for the Australian market), there is essentially a separate auction process under way for every listed stock in the market (unless the company is suspended from trading for whatever reason). During this auction process, potential buyers nominate their intended purchase price (a bid) and the potential sellers nominate their intended selling price (the offer). If there is a match NOTE: This document does NOT contain any advice. Page 19 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview between a buyer and seller, then a trade is made. This process is visible on screen in the Market Depth screens. If there a no buyers waiting in the market, then a seller will not be able to sell their stock. The shares in some companies might trade as little as 2 or 3 times each day (number of “trades”), with maybe only hundreds or thousands of shares (“volume”) trading hands. These are considered “lightly traded”, or “thinly traded”. Basically, the share market is like a tug of war between the bears and the bulls, resulting in the share prices being tugged lower or higher, depending on which group has the most influence. Figure 2: Tug of war. 2.7.7 Trends — the trend is your friend One of the most basic principles with share trading is to follow the trend. Once a stock is in a confirmed trend (either up or down), there is a greater chance of the trend continuing, than of it not continuing (research shows the chances are roughly about 70%). Once a trend is confirmed, then that trend continues until it is confirmed to no longer be trending (this is Dow Theory). The simplest of trading strategies relies on (and in fact many trading strategies rely on) the confirmed presence of an up trend, in conjunction with other criteria. If a stock is not in a confirmed trend, then it is “ranging”. The trend can be your friend, and this is covered in more detail later.

2.7.8 Long versus short In the field of share trading, it is possible to “short sell” stocks. You could do this if you believe the share price is going to fall (it is the converse of going long due to rising share prices.) That is, you “borrow” some shares from someone (eg. a broker), and then you sell them to someone on the market. At some future point, you buy the shares back, hopefully at a lower price, and then you give them back to the broker. You make a profit by: selling them at a high price, and buying them back at a low price. In this handbook (and seminar) we will keep it simple, and we won't consider the short selling strategy.

2.7.9 Equities versus other instruments In the big stock market world there are “things” other than just plain shares that you can buy and sell. In this handbook (and seminar) we will keep it simple, and we will only consider shares. Just for the record, though, let it be said that the value of many of the other financial instruments is derived from the real value of specific shares, or an index of a group of shares. These are called derivatives (eg. CFDs, options, warrants, futures). Other instruments that can be traded include: various commodities (eg. metals, grains, and various other products). Technical Analysis can be applied to the price studies of just about all of these instruments. But in this seminar and hand book we will only consider shares.

2.8 Sample uses and applications Why should we get involved with technical analysis? What are some real practical applications? Later in this book after we cover off the technical analysis stuff, there is a section on sample trading strategies which gives an insight into practical uses. Until then, the material below provides some clues.

NOTE: This document does NOT contain any advice. Page 20 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 2.8.1 How do people use price charts for stock selection? Without trying to pre-empt the detailed content of this handbook, the following are some aspects of technical analysis that many people make use of on share price charts: Trends, and the up trend Moving Average Support and Resistance Price Breakout. These chart features are just some of a very large range of features that can be used to determine what the price action might do in the near future. Traders use some of these sorts of features to: identify a stock that might be worth buying; and identify a reasonable price point at which to make the purchase. There are many more chart features.

2.8.2 Superannuation investments It is common with superannuation funds to invest monies into one or more asset classes. The average super fund will invest money across a few different asset classes in varying proportions. eg. A “Balanced” portfolio might have about 70% of the fund in shares and about 30% invested in some form of cash (in a bank account, or bonds). Other asset classes that are available for investment typically include: bonds, cash, heavily geared shares, lightly geared shares, information technology companies, biotechnology companies, health care companies, etc., etc. Many people in Australia have their superannuation invested in a Balanced portfolio. During a stock market downtime, it is possible for any managed fund or superannuation fund to lose value by as much as 20% or more. In many cases this can be avoidable by clever asset switching by the alert and trained investor.

2.8.3 Switching superannuation asset classes Many contemporary superannuation funds allow the fund member (ie. you) to “switch” some or all of the superannuation money from one asset class to another, or from one investment type to another. During a time of share market weakness (eg. a bear market), it might be possible to switch your money out of any share-related investment type, and into cash or bonds. When the bear market is confirmed to have finished, the funds can be switched back again into the shares investment type. Some experts advise that this is not wise. They say it is “time in the market, not timing the market” that is important. Everybody should investigate this themselves, and decide for themselves which way to go. To suffer something like a 20% fall over many months? or to protect the capital and invest it elsewhere.

2.8.4 How to do this? It is possible to study a chart of the superannuation returns over time using spreadsheet software (either the OpenOffice calc, or Microsoft Excel, etc.). To do this, login to your superannuation account online (if possible), and download the superannuation returns for your chosen fund. Import the data into the spreadsheet software. In the spreadsheet software, use the chart wizard to display a chart of the data.

NOTE: This document does NOT contain any advice. Page 21 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview If you decide to “switch” some funds, then login to your superannuation account online, and carefully follow the links. BUT, whether you do this or not is your decision. CAUTION: There might be fees involved when you switch. Advice: You should consult a licensed financial advisor before making the switch to determine if this approach is right for you.

Your own notes and comments: ......

NOTE: This document does NOT contain any advice. Page 22 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

2.9 Fundamental or Technical analysis? Question:- Should I go with fundamental analysis or technical analysis? Or a combination of both? Some people are convinced that the only way to select a stock for purchase, or even to try to forecast future price action, is to review the state of health of the company using fundamental analysis. They just can't believe that the price chart can help provide an insight into future price action. Whereas some other people believe that the "market" is fairly well informed, and that the price chart factors in nearly all of the relevant news and information. So the current price is generally not too far away from where it really belongs. And that the price will tend to move in relatively small amounts. That is, unless there is some new news that will tend to move the price. Or perhaps there is information available that only few people know about. So, should you go with fundamental or technical analysis? Or a combination of both? Answer:- This is purely a personal thing. Regarding a combination of both types, it is important to realise that there is a large range of possible variations. Here is one possibility: There is some benefit in looking at some fundamental details (eg. PE ratio, etc.). There is some benefit in studying the price chart. Many professional traders will trade based on little more than just the basic price chart (eg. support and resistance lines). So it could be a good idea to not ignore the price chart. Some people believe they can maximise their chances of successful share trading by using fundamental analysis to limit their purchases to "quality" companies, and then to use technical analysis to buy the stock at a good price. The remainder of this seminar and handbook will only consider Technical Analysis.

2.10 Funda-Technical Analysis Having described both analysis methods above, the author's own preference is to use Funda-Technical Analysis — a combination of both analysis styles. This approach is based on the following: Use some amount of fundamental analysis to identify the quality companies in which you would feel comfortable investing at some stage. Put these stocks onto a Watch List, so that it is easy to monitor their performance. Your watchlist might be written on paper, or listed in a computer spreadsheet (eg. Excel or open Office Calc), or in a good charting package (eg. BullCharts). Then monitor the stocks in your watch list on a routine basis, which might be weekly. Use technical analysis to determine when the share price is showing weakness in the market, and to help with timing both the buying and selling of the stock. There is a lot of merit in using the FundaTechnical approach to maximise chances of successful share market investing or trading. Refer to separate materials for more information, such as: www.robertbrain.com/fundatechnical/ Your own notes and comments: ......

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3 Primary Analysis In his book2, Leon Wilson talks at length about primary and secondary analysis. He describes primary analysis tools as those directly derived from, or based directly on, price action or liquidity. This is basically the price data we can see in the raw price chart. And on the other hand, secondary analysis tools are derived from the raw price data. Most indicators are derived by some sort of calculation or manipulation of the share price. This distinction is a good one to make, and helps to group together the material in this volume.

3.1 Price charts — crash course/revision In this section we briefly look at the following, assuming that the reader is already somewhat familiar with the topic: Chart types (line, candlestick, OHLC) Time frames (daily, weekly, monthly); also intraday At the end of the section there are sample displays of the following additional chart types: Point & Figure EquiVolume Gann Swing Candlevolume Kagi Stepped Renko Points Three Line Break Pretzel

3.1.1 Price charts — introduction An introduction to share price charts, what they mean, and how to interpret them. Firstly, understand that for each day's share trades, the following share price details are captured: Open price — the first price for the day High — the highest price for the day Low — the lowest price for the day Closing price at the end of the day (ie. the last price). Volume — the number of shares traded on the day. Trades — the number of buy/sell transactions that are executed (for some stocks there are no trades on some days, and for others there are thousands).

3.1.2 Chart types – Line, Candlestick, OHLC, and Volume charts A share price chart can show some or all of the share price details. (a) Line chart Refer to the Daily price chart at right, of ANN (Ansell Limited), from 12 to 18 August 2008 (16 and 17 August were non-trading days on the weekend). The chart is a simple Line graph — the price is indicated along the vertical scale, in this case ranging from about $10.90 to Figure 3: Sample Line chart $11.50, and the dates across the bottom of this chart are 12 to 15 August 2008.

2 Wilson, Leon (2006); “The Business of Share Trading”; pp 167-172; Wrightbooks. NOTE: This document does NOT contain any advice. Page 24 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Only shows the Closing Price for each day with a straight line joining up each day's closing price. Gives no indication of the day's volatility (the range up/down during the day). (b) OHLC Bar chart A simple vertical bar indicating the Highest, and Lowest prices for the day. Has a small tick on the left side to indicate the Opening price. Has a small tick on the right side to indicate the Closing price. The sample chart at right is the same stock and the same time period (and same scale) Figure 4: Sample OHLC Bar chart as the Line Chart sample above. (c) Candle chart The candle can generally comprise (Figure 5): the body (a simple rectangle); an upper wick (or tail, or shadow); a lower wick (or tail, or shadow). The body can be fairly long, or extremely short (as in a doji candle — see below). The upper or lower wick might not be present at all. The total candle from the top of the upper wick to Figure 5: Candle basics the bottom of the lower wick indicates the total range of price. The top of the candle body = either the Opening price or Closing price. The bottom of the candle body = either the Open or the Close. The candle body is either filled in, or empty. If the body is white (as in Figure 6 below), then the bottom of the candle is the Open, and the top is the Close. That is, it closed higher on the day. If the body is filled in (as in Figure 7 below), then the top of the body is the Open, and the bottom of the body is the Close. That is, it closed lower on the day. Colours can be used — eg. green in place of the white candle, and red in place of the black candle.

Figure 6: White Candle Figure 7: Black Candle

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(d) Sample candle chart Note the sample candle chart at right. Two black candles — indicating closing price lower than the open. Then three white candles indicating closing prices higher than the open. The first white candle (14th) has a long upper wick, indicating that the days trading had the bulls bidding the price much higher; but falling away from the high on the close. The white candle on the 15th has a very short body indicating a close agreement between buyers and sellers on the price; but the very long lower wick indicates buyers Figure 8: Sample Candle chart losing interest during the session and allowing the sellers to be in control.

(e) Volume chart The sample candle chart in Figure 9 at right includes a standard Volume bar chart at the bottom. Note the following: The volume is shown as a simple bar chart showing the total number of shares traded in the period. On this Daily chart, the volume bar represents the total volume traded during the one day. Note the Volume bars for 12th to 15th August are all about 0.5Million (ie. 500,000), but the next bar on the right edge of the pane is more than double this value at about 1.3Million. (Tip: this much higher volume is worth noting.) Figure 9: Sample Candle chart with Volume

Your own notes and comments: ......

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(f) Semi-log price chart The vertical scale on a price chart is often shown in linear form (see sample chart below left), but can be shown in logarithmic form (as in the sample below right). Hence the title semi-log chart. The two charts shown below are the same stock and same time frame. Beneficial because a price chart that is somewhat exponential on a standard chart (linear scale), can be relatively straight on a semi-log chart, and vice versa. On a semi-log chart, it is easier to see the "same percentage amount increase". In the sample, note the price doubling from 0.5 to 1.0, and then to 1.0 and to 2.0. These increases of 100% each time are the same vertical distance on the chart. If viewing a stock with very low prices that increase significantly, the semi-log chart can show the detail at lower prices that is otherwise hidden. This is partially demonstrated in Figure 10 below.

Figure 10: Linear vertical scale compared to logarithmic vertical scale.

Figure 11: Semi-log price chart readily shows the "same percentage increase".

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3.1.3 Time frames – Daily, Weekly, Monthly, Quarterly price charts. (a) Daily chart (eg. 3-6 months) — is a common time frame. The sample at right is over 5 days only, and shows a line chart superimposed on the candle chart. Each candle represents the range of prices over the day. (b) Weekly chart — can be used by longer term investors to eliminate the "noise" of the daily charts. (c) Monthly chart — is good for a longer term perspective of the price action. (d) Quarterly chart — eliminates a lot of the noise of the shorter term period charts. Figure 12: Candle chart with (e) Volatility Line chart superimposed Some stocks exhibit greater volatility than others. Different time frames can hide the volatility. There are chart indicators that show the amount of volatility in a stock. Note: It can be very useful to study at least two time frames for stock selection.

Remember: The share market is like an elephant. One of Brainy's Share Market GEMs — www.robertbrain.com/gems

NOTE: This document does NOT contain any advice. Page 28 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.1.4 Intraday — another time frame “Investors” tend not to be interested in intraday charts. They are more for the day trader (who trades intra-day) who is keen to buy/sell for a more exact share price, or to buy and then sell within the single day. Can display lines or bars or candles. Can generally display: hourly, half-hourly; quarter hour; or 10, 5, 2 or 1 minutes Can potentially show every “tic” (each transaction). But you need a data feed to supply the data. In the chart sample below, note the horizontal time scale from 19th August, until end of 25th August, and the vertical dotted lines indicating the end/start of each day (the trading day runs from 10am to 4pm). In this sample line chart, the chart is a 10-minute chart (it says this in the top left hand corner of the chart screen). That is, the line along the chart joins up specific price values that each represent the “closing price” at the end of every 10-minute interval. If the chart was a candle chart, then every candle would represent the time action within each 10 minute interval. On this chart it is clear to see the generally up trending price action of these 4 days. This is harder to see on a Daily chart (compare to the Daily price chart shown above with the Line and Candle charts superimposed).

Figure 13: Intraday chart - 10-minute chart of BHP Note: It is said that the retail investors open the market, and the professional investors close the market. That is, the smaller investors seem to trade within the first 30 to 60 minutes of the trading day, and the big guys in the last 30 to 60 minutes. It is also said that it is the closing price for the day which is the most important, because this is the price at which the big boys are happy to stay with the stock over night. The day's closing price is the most important. For one, it is this price that is used to settle margin loans. This observation can sometime explain a large share price rise, or fall on the open (within the first 30 minutes or so), as in the intraday chart below. For these same reasons, there can be a lull in market activity somewhere between about 12 noon and 2pm (the lunch period), with activity picking up again from about 2pm onwards.

NOTE: This document does NOT contain any advice. Page 29 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.1.5 Other chart types There are a few other “chart types” that are worthy of a very brief mention. They are listed below with quick examples (but no explanations). All of these are available in the BullCharts software from the Chart Styles toolbar (see the screen shot at right).

Figure 14: BullCharts - Chart Styles toolbar

3.1.5.1 Point & Figure chart

3.1.5.2 Gann Swing chart

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3.1.5.3 Kagi chart

3.1.5.4 Renko chart

3.1.5.5 Three Line Break chart

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3.1.5.6 EquiVolume chart

3.1.5.7 Candlevolume chart

3.1.5.8 Stepped chart

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3.1.5.9 Points chart

3.1.5.10 Pretzel chart

Your own notes and comments: ......

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3.2 Trends and trend lines It is important to spend a little time here on trends, because it is such an important principle.

3.2.1 Up-trends, down-trends and no-trends It can be said that a share price is in one of three “states”: either trending up, or trending down, or it is not trending. And once a trend is confirmed, there is a greater chance of it continuing, as opposed to ending (about 60% to 70% chance of the trend continuing). Once a trend is confirmed, then the stock is considered to be trending up until the trend is confirmed to have ended. This in an important concept.

3.2.2 “The trend is your friend” As stated above in the section on concepts “the trend is your friend”. The simplest of trading strategies relies on (and in fact many trading strategies rely on) the confirmed presence of an up trend, in conjunction with other criteria. If a stock is not in a confirmed trend, then it is “ranging”.

3.2.3 Defining a trend A trend can be confirmed by identifying the peaks and troughs on a chart, and looking for a succession of Higher Peaks and Higher Troughs for an uptrend, or Lower Peaks and Lower Troughs for a downtrend. This is demonstrated in the generic chart at right, with HP designating a Higher Peak and HT designating a Higher Trough.

Figure 15: The uptrend - Higher Peaks and Higher Troughs. 3.2.4 The Up Trend — “Higher Highs” and “Lower Lows” Study the sample share price chart at right of UGL – United Group (a Monthly chart from May 2005 to Aug 2006). Note the points on the chart marked HH (Higher High) and HL (Higher Low). Each successive peak on the chart is considered a “new high” for the share price – hence a “Higher High”. Each successive dip (or trough) on the chart is referred to as a “low”; but in an up trend, each Low is Higher than the previous one – hence a “Higher Low”. This terminology is often interchanged — the words peak and high, and trough and low.

NOTE: This document does NOT contain any advice. Page 34 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 3.2.4.1 The up trend trendline With an up trend, you can place a (straight) trendline on the chart under the price action, and touching at least two but preferably three price Low points on the chart. This line can be projected forwards in time. For as long as the share price honours the trend, the price action will stay above the trendline. If the price ever penetrates downward through the trendline, it is demonstrating weakness, and a possible failure of the trend. It might be time to sell. But keep watching for the lack of a Higher High or Higher Low to confirm failure of the trend. In the next sample price chart Figure 16: Trend line under an up trend. (Figure 16 at right), there is a green straight line added under the price action. It is a “trend line”, and it touches at least two but preferably three Low points on the price chart. In very simplistic terms, if the price starts on the chart in the bottom left hand corner, and leaves the chart in the top right corner, it is most likely an uptrend. If the price eventually penetrates downward through the trend line, it is demonstrating weakness, and a possible failure of the trend. It might be time to sell. Note that trendlines only indicate the speed of a trend, and that over longer time frames, a log scale should be used on the vertical price axis. Also, trendlines should be drawn based on the Close prices for the period, so using a Line chart is preferred to easily spot the peaks and troughs. In a down trend, the converse applies – there are Lower Highs and Lower Lows; and the trend line is applied above the price action, and seems to act as a ceiling to contain prices. 3.2.4.2 Up trend interpretation With an up trend, the price action can often be observed to fall and approach the trendline, and then perhaps touch the line and bounce up away from the line. The trend line appears to act like a “floor” under the price. The up trend is still in place for as long as the price stays above the trendline, and we continue to see Higher Highs and Higher Lows. 3.2.4.3 Reposition the line There might be times as the trend unfolds where the price action is moving up away from the trendline, or has perhaps failed below the trendline but is still exhibiting Higher Highs and Higher Lows. In such cases it can be appropriate to adjust the position of the trendline. In the BullCharts charting software it is easy to grab either the whole line, or one end of the line, and reposition it.

NOTE: This document does NOT contain any advice. Page 35 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.2.5 Trend strength When studying uptrends (and downtrends), it can be very useful to note the “strength” of the trend. Now it is rather difficult to quantify and talk about this characteristic, but there are a number of chart indicators that can be used to help determine trend strength. When eye-balling a chart and noting that a trend is under way, a gently rising trend can be said to be a weak uptrend, whereas a sharply rising trend can be called a strong trend. The ADX indicator is a popular one to indicate trend strength, and the family of Multiple Moving Average indicators are also useful. In addition to this, there are price chart features which can add weight to the view that a trend might be strong — such as the respect that the price shows for support lines on the chart.

3.2.6 Down trend Exactly the same concepts apply to a down trend, except that we look for Lower Highs and Lower Lows, and the trendline is placed above the price action touching at least two Highs on the chart. See the sample chart in Figure 17 below, with the down trend indicated by two successive red coloured lines (I like to use red for down trends and green for up trends — even though it is obvious, it requires a little less thinking if you have other things on the chart).

Figure 17: A down trend.

3.2.6.1 Down trend interpretation With a down trend, the price action can be observed to rise and approach the down trendline, and then perhaps touch the line and bounce down away from the line. The trend line acts like a “ceiling” and contains the price, stopping it from rising higher. The down trend is still in place for as long as the price stays below the trendline, and we continue to see Lower Highs and Lower Lows.

NOTE: This document does NOT contain any advice. Page 36 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.2.7 The “3Ways Rule (in 3Times)”

In the share market, any stock or index will be trading in one of 3 "ways" — in an up trend, or in a down trend, or no trend — and this can apply in 3 time frames. Let's declare from the outset that this rule is not much more than another way to look at Dow Theory; but a way that is easy to remember (simply picture the logo). To keep the rule simple, it refers to share market stocks and indexes. However, this rule also applies equally well to a lot more than this. It can apply to any financial instrument which you can view in a price chart form — including: options, currencies, CFDs, warrants, futures contracts and commodities. In this eBook article, any reference to stocks, or the index, should apply equally to other financial instruments. The simple mono-colour version of the 3Ways Rule logo is shown above. An explanation of the elements in this logo, and a more advanced colour version, are included and discussed in the note below. In basic and simple terms, the key elements of this logo are the three zig-zag lines which each represent the different possible trending scenarios. 3.2.7.2 The 3Ways logo — the elements The individual elements of the basic logo shown above are as follows: The upper zig zag line in the symbol represents the simple uptrend — higher highs and higher lows, often indicated on charts as HH and HL respectively. The lower zig zag line represents the simple downtrend — lower highs and lower lows, often indicated on charts as LH and LL respectively. The middle zig zag line represents the non-trending price chart, where there is not a clear trend in place. These zig-zag line elements are enclosed in a triangular shape (with the tip cut off) to remind us of the various chart patterns that exist, and which also give us clues about the state of the market. 3.2.7.3 The up trend in detail Notice the up trend line in the logo, reproduced alone in the figure at right, along with a vertical price (or value) axis and a horizontal time axis to help give it meaning. Notice in this specific diagram that the trend line comprises five “legs” from start to finish — three upward legs and two shorter downward legs. This is the regular 5-wave form as described by Ralph NOTE: This document does NOT contain any advice. Page 37 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Elliott in the classical Elliott Wave theory. This 5-wave form is often observed (but not always). This 5-wave (Elliott Wave) form can be observed in both upward (ie. bull) trends and in downward (ie. bear) trends. Also see the comments below about Primary Trends. Also in the 3Ways symbol, the upper zig-zag line has an arrow head on the end to remind us that once an up trend is confirmed, it is more than likely going to continue (better than a 50:50 chance). But it will eventually end. Each of the three up-legs in this trend line are progressively steeper and steeper, to remind us of the ever increasing speed with which markets move up through three key phases — accumulation, participation and distribution (the latter also known as rampant speculation). This is another key tenet of Dow Theory — "market trends have three phases". In the price chart shown in Figure 19 of the All Ordinaries index (XAO) from 2003 to 2010, a bull market up trend is shown, with three green up-trend lines drawn under the price action. Each line Figure 19: The All Ordinaries index, 2003-2010. is steeper than the previous line. 3.2.7.4 The down trend in detail Notice the down trend line in the logo, reproduced alone in the figure at right. This zig zag line represents the simple downtrend — lower highs and lower lows. Once again, as per the classical 3-wave Elliott Wave theory for retracements or corrections in stocks and markets. This 3-wave form is often observed; but not always. The 3- wave (Elliott Wave) form can be observed in both falling trends and in rising trends. They tend to be corrections against the primary trend (see the discussion about Primary Trends and Secondary Trends in article TA-3210). Notice in the 3Ways logo that the downtrend line has dropped further than the uptrend line has risen, and in a shorter time. Up by the stairs, down by the elevator. In mathematical terms, this would be described as a steeper gradient. Like the upper zig-zag line in the 3Ways symbol, the lower zig-zag line has an arrow head on the end to remind us that once a down trend is confirmed, it is more than likely going to continue (better than a 50:50 chance). In the price chart shown in Figure 19 above of the All Ordinaries index (XAO) from 2003 to 2010, a bear market down trend is shown with three red down-trend lines drawn above the price action. In this example, each line is steeper than the previous line.

NOTE: This document does NOT contain any advice. Page 38 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.2.7.5 Range trading — no trend It is important to realise that there are times when a stock is not necessarily trending either up or down — it is what we call range trading, or trading within a range. The price chart in Figure 21 at right is just such an example. It is the S&P/ASX 200 (XJO) index on a weekly price chart over the 7-month period from September 2009 to early April 2010. On this chart we can see Higher Highs, and we can see Lower Lows. This does not constitute an up trend, nor a down trend. The middle zig zag line within the 3Ways logo reminds us that this price pattern can exist from time to time. In the coloured version of the logo it is coloured yellow to remind us to be cautious in sideways moving stocks or markets. Figure 21: Range trading - no trend. 3.2.7.6 Chart patterns In the 3Ways logo, the 3 zig-zag lines are enclosed within a triangular shape with the tip cut off (technically it is a trapezoid). On price charts you will from time to time see various triangular shapes, but flipped with the pointy end to the right. The triangle shape as it is shown in the 3Ways logo is more like a megaphone chart pattern, or a broadening wedge. This is a pattern that is not very common on price charts, but which does exist and can be spotted from time to time. The triangle chart pattern is fairly common, and a sample is shown in the Figure at right. The horizontal straight line here is acting as temporary resistance, while the upward sloping trend line indicates a rising support level. Prices typically break upwards from such a pattern well before the tip of the triangle is reached, especially if prices have risen into the triangle (as opposed to fallen down into the triangle).

Figure 22: The basic triangle chart pattern.

NOTE: This document does NOT contain any advice. Page 39 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.2.8 Primary and Secondary trends Dow Theory discusses the notion of Primary trends, Secondary trends and Daily fluctuations. It is useful to understand these notions, but a level of detail that might be too much for the novice technical analyst to take on board until gaining some experience with trend-spotting. 3.2.8.1 Primary trends When considering an investment in the share market, an understanding of whether the Primary Trend is up, down, or sideways, is important. Figure 23 at right shows the All Ordinaries index (XAO) over a 7 year period from 2003. The upward leg over a 4 year period until late 2007 is clearly a bull market, and is the Primary Trend that was in place over that period. The same chart also shows the bear market of 2007-9 in which the index fell heavily (indicated with the dotted line rectangle). This fall is also a Primary Trend movement — to the downside. Note the following key points regarding Primary Trends: In general, these primary Figure 23: The Primary trend - two examples movements can one bull trend and one bear trend. last from less than a year to several years. The Primary Movement (or Primary Trend) can be an up trend (bull market) or a down trend (bear market). And note the following key observations in Figure 23 above: View a chart of 5 to 7 years. The sample chart here is 7 years on a Monthly chart. The bull market up trend in place from 2003 to late 2007 is readily apparent. It corresponds to a "Primary Movement" as described in Dow Theory. Note in this bull market period that the 5-wave concept can be seen. That is, the 5- wave concept as described by Ralph Elliott in the classical Elliott Wave Theory. The dotted-line (red coloured) box drawn on the chart to encompass the bear market period (and labelled "Weekly Long term") helps to indicate the zoomed-in view described in the next section below. The price action within that box is another of these "Primary Movements" and is the bear market of 2007-2009.

NOTE: This document does NOT contain any advice. Page 40 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

The portion of the chart in the figure above that is contained within the inner dotted (red) box is expanded to give us the chart in Figure 24 below. Note the following key points in this price chart: We are viewing about 16 months on a Weekly chart. The dotted line (red) box indicates a bear market Primary Movement (the same dotted-line red box as in the fig above). Within this movement there is a retracement, or Secondary reaction, in March-April 2008. That is, a corrective move against the trend. It is indicated with the much smaller blue box — and Figure 24: Primary trend sample - a bear market. labelled "Weekly Medium Term". 3.2.8.2 Secondary reactions A "Secondary Movement" (or Secondary Reaction) is an important decline in a bull market, or an advance in a bear market. Note the following key points: A Secondary Movement can last from just 3 weeks, to a few months. Weekly chart is often best (monthly chart can sometimes help). Price generally retraces the Primary Movement by some where between one third, and two thirds of the primary movement (but not always). This period can simply be a consolidation period. The chart in Figure 25 below demonstrates this. In the bear market of 2007-9, the bear market had a secondary reaction from March to May 2008. It retraced the downwards fall by rising an amount that was actually close to 50% of the Primary Movement fall from the market peak. The chart in the figure shows this using a Fibonacci Retracement tool which also shows other key Fibonacci levels (23.6%, 38.2% and 61.8% retracement levels). Figure 25: Secondary reaction - a retracement in a Primary Trend.

NOTE: This document does NOT contain any advice. Page 41 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Note the following key observations in this price chart: The Primary Trend from October 2007 is a downward bear trend. The Secondary Reaction from March to May 2008 demonstrates the classic 3-wave corrective movement. Remember it is against the primary trend. When this retracement happened in 2008, it caught many investors and novice traders by surprise, as they thought a new bull market was under way. This upward retracement abruptly stopped after 19 May and the downward bear market trend resumed the next day. 3.2.8.3 Daily fluctuations Observing a Daily chart, and the daily market fluctuations, can be very distracting for longer-term traders and investors, because they are of no importance in determining the Primary Trend - the overall trend in the longer term. Having said that, if the observer does have the time and inclination to do so, it can be useful or just interesting to observe the daily moves. This might actually be to trigger a trade entry, or to just help confirm a market entry. It is possible to time a trade at a sign of temporary weakness. Let's take a look at the 10-day period in mid April 2008 in Figure 26 below. This is also shown in Figure 25 above inside the ellipse, and also in Figure 24 above in the small box and labelled "Weekly Medium Term". The daily price action here clearly shows an up trend in place. But when we zoom out to look at the bigger picture as in the other charts above, we can easily see that it is a Secondary Reaction within the downward bear trend Primary Movement. This is a really good example for investors and longer-term traders to learn from — that the bigger picture is important (remember that the market is like an elephant). Figure 26: Daily fluctuations (are distracting).

that it is dangerous to trade whilst the primary trend is down.

NOTE: This document does NOT contain any advice. Page 42 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.3 Stage Analysis In his infamous book3, Stan Weinstein writes about a concept referred to as Stage Analysis. This principle states that a stock (or index) has to be in one of four market stages, as depicted in the simplified diagram from his book in Figure 27 below. This sort of chart pattern is apparent on the monthly chart of the S&P/ASX 200 index (XJO) from 2003 until at least 2012.

Figure 27: Stan Weinstein's Stage Analysis (acknowledgement:- Secrets for Profiting in Bull and Bear Markets). Note the following key points: The four phases are known as: Stage 1 — the basing area (accumulation phase), Stage 2 — the advancing phase (rising market), Stage 3 — the top area (distribution), and Stage 4 — the declining phase. The position of price relative to the 30 week Simple Moving Average (SMA) is very important. Whether the SMA is heading upwards, or downwards, is also important. It is not necessary for the four stages to run in sequence as shown here. After Stage 2, a stock can revert to Stage 1 again. Likewise, after Stage 3, a stock can revert to a new Stage 2 without entering Stage 4. In order to determine which stage is current for a stock or index at any one point in time, there is no hard and fast rules. Some of the determination is rather subjective.

3 Weinstein, Stan ; “Secrets for Profiting in Bull and Bear Markets”, (1988). McGraw-Hill. NOTE: This document does NOT contain any advice. Page 43 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.4 Support and resistance This is a very “fundamental” principle in technical analysis. It is used by many professional traders. (When reading the text below, refer to the Monthly Candle chart in Figure 28 below of BHP from July 2006 until August 2008.) “Support” is a price level on the chart, above which the price moves up and down, with the price tending to come down and “bounce” up from the support level. It behaves like a "floor" under the price. The price can fall down and bounce up off the floor a number of times before either falling through the floor, or commencing another rise. It is usually a horizontal line drawn across the chart, or it can be a “zone” or small price range. An uptrend line is considered to be a special type of support line, located under the price action and perceived to be supporting the price. “Resistance” is a price level on the chart that behaves like a ceiling, below which the price moves up and down, with the price tending to come up to the ceiling and “bounce” back down below the resistance level. It is usually a horizontal line drawn across the chart. The price level can be a single price value (drawn as a line across the chart), or it can be a “zone” or small price range. A down trend line is considered to be a special Figure 28: Support and Resistance on a monthly chart of BHP. type of resistance line, located above the price action and perceived to be preventing the price action from rising. Once breached, a support level can become a resistance level (and vice versa). Why? It's a long story; but these levels can be psychological in nature. “Overhead resistance” is where a rising share price is likely to meet resistance at a higher price point perhaps due to a number of stock holders who bought at that higher price earlier and are keen to dump it to get their money back.

Your own notes and comments: ......

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3.5 Volume — it is important The volume of stock traded in any period is an important factor to consider. It is basically a measure of the turnover of shares. But there are a couple of other measures that can be observed. These are briefly described in this section below. Remember that one of the tenets of Dow Theory is that “trends are confirmed in volume”. That is, an up trend accompanied by higher volumes suggests that the crowd is supporting the higher prices, and that buyers are piling in.

3.5.1 Volume — what is it? In any one trading day, the “volume” of stock traded for a particular company is the total number of shares traded during that day. For example, there might have been one million BHP shares traded during one day, so the “volume” is one million. That is, one million shares were sold by a number of sellers, to any number of buyers. Likewise, the volume traded in any one week is the total number of shares traded in the week from Monday to Friday. And the monthly volume is the number of shares traded in the calendar month (which might not line up with an exact number of whole weeks). Now, in any one day, the volume for the day (ie. the number of shares traded) is itself of no great significance. However, when you compare the daily volume to the daily volumes of the recent days, then there is significance. If the daily volume is significantly greater than in recent days, then there is a greater number of buyers and sellers trading the shares. If the share price is in an uptrend, then the higher volume is supporting higher prices, and it is said to be bullish. If the stock is in a down trend, then a higher volume is supporting the fall in price and the falling price is likely to continue. Rising prices with a high volume is bullish and indicative of a continuation in rising prices. That is, it is confirmation of an up trend. However, if the volume is relatively low compared to recent days, then the share price might not move up or down much at all. If there is a reasonably high volume in any period, with little price movement, then the closing price for the period is considered a fair consensus view of the price because the buyers and sellers are generally agreed on the price. Hence the price is likely to be representative of the perceived “true value”. To help gauge whether the volume is higher or lower than past days, it can be useful to place a Moving Average indicator on the Volume chart.

3.5.2 Value A variation to considering the volume, is to consider the total “value” of shares that have been traded. This is often used in regard to market indices; but is also considered for individual stocks, where the value is simply the share price multiplied by the volume. For example, in simplistic terms, if there were 1,000 shares of company XYZ traded today at a price of $1.50, then the value traded today is worth $1.50 x 1000 = $1,500. Alan Hull utilises this concept in his trading strategies, as documented in his books, and implemented in some charting software products as both scans and indicators. One key idea is related to stock liquidity, and factored into position size calculations.

3.5.3 Trades Another variation is the number of “trades” that have taken place in the period. This is simply the total number of buy/sell orders that have been processed. That is, when there is a buy/sell transaction of a specific parcel of shares with one seller selling 1000 shares, for example, and a buyer buying those 1000 shares, then that is one trade. Many share traders will not buy shares in a company where the number of trades in a day is less than about 50. Some traders use a different threshold amount (maybe 20 or 30).

NOTE: This document does NOT contain any advice. Page 45 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview The thinking here is that if it is thinly traded, and you hold some stock, then when you want to sell in a hurry there might not be any buyers there to buy them.

3.6 Chart patterns (triangles, pennants, wedges) A basic principle of technical analysis is that security prices move in trends. We also know that trends do not last forever. They eventually change direction and when they do, they rarely do so on a coin. Instead, prices typically decelerate, pause, and then reverse. These phases occur as investors form new expectations and by doing so, shift the security's supply/demand lines. The changing of expectations often causes price patterns to emerge. Although no two markets are identical, their price patterns are often very similar. Predictable price behaviour often follows these price patterns. Some people say that patterns indicate the psychology (or emotion) of the market, and that the patterns help to determine the behaviour of the market. Some people go so far as to suggest that patterns are even a self-fulfilling prophecy. That is, when traders see a particular pattern forming, they anticipate the conclusion and help to make it happen. Chart patterns can last from a few days to many months or even years. Generally speaking, the longer a pattern takes to form, the more dramatic the ensuing price move. The following pages explain just some of the more common price patterns. For more information on chart patterns, that are many text books available — just one of the classics is “Technical Analysis of Stock Trends” by Robert Edwards and John Magee.

3.6.1 Triangles A triangle pattern occurs as the range between peaks and troughs narrows. Triangles typically occur as prices encounter a support or resistance level which constricts the prices. Towards the end of the triangle the price tends to “breakout” from the triangle pattern. This can happen only 2/3 of the way along the triangle.

Symmetrical triangle — occurs when prices are making both lower-highs and higher- lows.

Ascending triangle — occurs when there are higher-lows (as with a symmetrical triangle), but the highs are occurring at the same price level due to resistance. The odds favour an upside breakout from an ascending triangle.

NOTE: This document does NOT contain any advice. Page 46 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

Descending triangle — occurs when there are lower-highs (as with a symmetrical triangle), but the lows are occurring at the same price level due to support. The odds favour a downside breakout from a descending triangle.

Just as pressure increases when water is forced through a narrow opening, the "pressure" of prices increases as the triangle pattern forms. Prices will usually breakout rapidly from a triangle. Breakouts are confirmed when they are accompanied by an increase in volume. The most reliable breakouts occur somewhere between half and three-quarters of the distance between the beginning and end (apex) of the triangle. There are seldom many clues as to the direction prices will break out of a symmetrical triangle. If prices move all the way through the triangle to the apex, a breakout is unlikely.

3.6.2 Measure rule When studying a number of the different chart patterns, it is possible to estimate a price target based on the height of the pattern being studied. For example, with reference to Figure 29, note that the triangle pattern itself can comprise the horizontal resistance line drawn across the top of the price action, and a sloping line drawn under the price action. The height of this triangle can be measured and used to anticipate how high the price will advance above the resistance line once the price breaks to the upside. Experience has shown that if the price does break to the Figure 29: The Measure Rule. upside, then the price should advance at least as high as the Measure Rule indicates. This applies to many chart patterns including: triangles, Head and Shoulders, Flags, Pennants, and Rectangle patterns.

3.6.3 Pennants, flags, wedges Similarly to the triangle chart patterns discussed above, there are many additional chart patterns to be aware of, each with its own likely resultant scenario. It is not possible to include them in this introductory discussion of technical analysis.

NOTE: This document does NOT contain any advice. Page 47 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 3.6.4 Megaphone pattern Just one of many chart patterns is the megaphone, or broadening wedge, pattern as shown in Figure 30 at right. This pattern is characterised by an upper resistance line and the lower support line that are diverging. If the resistance and support lines are both heading in the same direction (ie. both up, or both down), then the pattern is more correctly called a wedge (either a rising wedge or falling wedge). Figure 30: Megaphone chart pattern. This megaphone develops after a strong advance in price and can last several weeks or even a few months. It is formed because the stock makes a series of higher highs and lower lows. It usually consists of three ascending peaks and two descending troughs. This pattern tends to develop because of wild extremes in the market resulting from news announcements, and severe changes in mood. The upswings result from a lack of bad news, and a perceived excess of good news such as company earnings announcements, and commentators calling that the market dips are good buying opportunities.

Your own notes and comments: ......

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3.7 Other chart patterns — head and shoulders, double top/bottom In addition to the chart patterns mentioned above, there are some that indicate potential significant turning points in the market.

3.7.1 Double top/bottom A double top occurs in an up trend and typically results in prices falling away. Note the following points with reference to the daily price chart of CBA below. 1. Prices rise towards a resistance level on significant volume. 2. The resistance level is shown here as a nearly horizontal line. 3. Prices then retreat. 4. Prices subsequently return to test the resistance level but on decreased volume. 5. Note on the Volume chart that the daily volume bars are sitting below the 10 period moving average (this is a handy addition to the Volume pane). 6. Prices then decline marking the beginning of a new down-trend.

The double bottom is the upside down version taking place at the bottom of a down trend.

NOTE: This document does NOT contain any advice. Page 49 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

3.7.2 Head and shoulders pattern The Head-and-Shoulders price pattern is a reliable and fairly well-known reversal chart pattern. It gets its name from the resemblance of a head with two shoulders on either side. The reason this reversal pattern is so common is due to the manner in which trends typically reverse. An up-trend is formed as prices make higher-highs and higher-lows in a stair-step fashion. The trend is broken when this upward climb ends. As you can see in the daily price chart below of BHP, the "left shoulder" and the "head" are the last two higher-highs. The right shoulder is created as the bulls try to push prices higher, but are unable to do so. This signifies the end of the up-trend. Confirmation of a new down-trend occurs when the "neckline" is penetrated. In this case, it was penetrated rather savagely with a severe gap down in price. (Observing the volume might have given extra weight to the interpretation.)

During a healthy up-trend, volume should increase during each rally. A sign that the trend is weakening occurs when the volume accompanying rallies is less than the volume accompanying the preceding rally. In a typical Head-and-Shoulders pattern, volume decreases on the head and is especially light on the right shoulder. Following the downward penetration of the neckline, it is very common for prices to return to the neckline in a last effort to continue the up-trend. If prices are then unable to rise above the neckline, they usually decline rapidly on increased volume. An inverse (or upside-down) Head-and-Shoulders pattern often coincides with market bottoms. As with a normal Head-and-Shoulders pattern, volume usually decreases as the pattern is formed and then increases as prices rise above the neckline.

3.7.3 Rounding tops and bottoms Rounding tops occur as expectations gradually shift from bullish to bearish, as opposed to sudden changes with reversal signals. The gradual, yet steady shift forms a rounded top. See the example in the weekly chart of MAP below. NOTE: This document does NOT contain any advice. Page 50 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

Rounding bottoms occur as expectations gradually shift from bearish to bullish. However, it is more common for bear market bottoms to have a spike low with the final sell-off rush of investor fear and panic. Volume during both rounding tops and rounding bottoms often mirrors the bowl-like shape of prices during a rounding bottom. Volume, which was high during the previous trend, decreases as expectations shift and traders become indecisive. Volume then increases as the new trend is established.

Your own notes and comments: ......

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3.8 Candlestick patterns (single and multiple patterns) Candles on candlestick charts display the open, high, low, and closing prices in a format somewhat similar to a modern-day bar-chart. The individual features of each candle can provide clues to the underlying emotion and psychology of the market. There are clues in the length of the upper or lower tail (or wick) as well as in the height of the candle body, and whether the Open is above the Close, or below it. Further to this, two consecutive candles together can provide an insight into the state of the market, and perhaps the likely future direction of the market. In this situation, the two candles together can form a specific candle pattern that has a specific name. This also applies to some particular combinations of three candles, or sometimes four or five candles. This section, therefore, provides an introduction to this topic of candle patterns. It is by no means extensive or exhaustive. There are several good text books that provide much more detail on this topic. The following topics are discussed: Candle basics — body, tails, wicks. Single-candle patterns — doji, Marubozu, Hanging Man, etc. Multi-candle patterns — piercing, engulfing, Harami, Three Black Crows, etc. When using candle patterns for trading signals, it is important to look for three things: The lead-up to the pattern (ie. the trend); The trigger; and Confirmation of the signal. In addition to the material below, readers should seek more advanced information from text books or web sites like the following: Thomas Bulkowski's web site — http://www.thepatternsite.com Candlesticker — http://www.candlesticker.com/ Online Trading Concepts — http://www.onlinetradingconcepts.com (and many more)

3.8.1 Candlestick origins The candlestick charts are said to have been developed in the 18th century by legendary Japanese rice trader Homma Munehisa from the town of Sakata. He is reputed to have used candlestick charts to record rice trades and predict future rice prices in the developing rice futures exchange. Japanese feudal war-time origins helps explain Japanese names for candle patterns — eg. doji, marabozu (close cropped), hirami (pregnant woman), “advancing soldiers”, etc. Likewise the references to war-like situations — using green and red candles instead of white and black — red is drawn from the red of blood in battle.

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3.8.2 Candlestick basics Regarding the basic construction of a candle, note the earlier discussion on candlestick basics in Section 3.1.2 , “Chart types – Line, Candlestick, OHLC, and Volume charts“ above on page 24. Now note the following with reference to the sample candles in Figure 31 at right, which are depicted as “empty” or up candles; but could also be filled or down candles: A — Hammer — Short body with a long lower shadow in a downtrend. B — Normal candle, with relatively short upper and lower tails. C — The Marubozu candle — No tails at all and a long body implies a strong day.

3.8.3 Length of the candle body Figure 31: Sample candles The length of the body gives some indication as to the strength of a move within a session (a session might be one day, or one week, or one month, etc.). A relatively long body indicates a more aggressive move than a shorter body does. This is both relative to the recent activity and the tails, which indicate the total range on the day.

3.8.4 Candle tails (wicks, shadows) The mere presence of a tail suggests the opposite activity to its location. That is, the existence of an upper tail reveals the presence of sellers and selling activity which has pulled the price down and stopped the price from closing higher. Whereas a lower tail exposes the fact that buyers have been present, and this has stopped the price from closing lower. The length of the tail relative to both the body and the total range gives some indication of the strength of the particular activity being reflected. A longer tail is more definitive than a short tail. A tail, high or low, signals that a move to the extreme for the day (high or low) has been countered by the opposite activity. That is, a relatively long tail in either direction can imply a “rejection of prices” in that direction. For example, a long lower tail can suggest a rejection of lower prices. Another layer of complexity can be added when the tails for the session are examined with respect to the previous session. If the latest candlestick is higher than the previous candlestick, the lower shadow would indicate greater strength than if it were a down day and below the range of the previous session.

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3.8.5 Doji candlestick A Doji candlestick forms when the opening price is the same as, or very close to, the closing price. They usually have a relatively tight range from high to low (ie. short tails); but there are some variations as shown in Figure 32. In the diagram note the following: A — The common symmetrical doji — can occur with short tails , or with long tails . B — Buyers were present. C — Sellers were present. D — Gravestone doji, has a very long upper tail. E — Dragon fly doji. There’s no definitive buy or sell signal to be gleaned from this formation by itself, rather the market is telling Figure 32: Doji variations us that it is in balance. Or to put it another way, the buyers and sellers are albeit temporarily in agreement concerning the price — especially with shorter tails. The doji can reveal more information when considered along with the preceding candle(s). If it occurs at the end of a trend we could say that it is a sign of weakness for that trend. It might also occur at the end of a congestion phase. There is something to be suggested from the length of the tails. A long upper tail or any upper tail reveals the presence of buyers. Any subsequent price move higher appears to have attracted sellers as a result. One could say that the stronger group were the buyers as they initiated the move higher while the sellers are merely responding to higher prices. Conversely a lower tail suggests the sellers were initially active and once they had dried up or as a reaction to some other force the buyers actually won out on the session after the close regained all the losses on the day. They were also the last group to be active. The lack of one tail, as in the case of the Gravestone and Dragonfly Doji, help to reinforce the thinking outlined above. In the case of a trending market it could hint at a possible reversal. In a sideways market it could suggest a new move, probably in the direction in which there is no tail. That is, if a trend is in place, a possible reversal might take place.

3.8.6 Harami candle pattern The Harami is a 2-candle pattern. Harami means pregnant in Japanese and refers to the shape of the formation. The Harami pattern occurs when the body of the second candle is completely engulfed by body of the first candle. The signal issued by the Harami is a possible change in trend. Note the following: The direction or colour of the second candle is not important. The size of the real body of both candles is indicative of the strength of the signal. The first candle should have a rather large real body. Figure 33: The smaller the real body in the second candle the stronger the Harami candle signal. pattern The second real body is usually a different colour to the first candle, but doesn’t have to be.

NOTE: This document does NOT contain any advice. Page 54 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Even though it’s not a requirement it is preferable for the shadows of the second candle to also be engulfed, if not by the whole of the first candle at least engulfed by the previous range, high to low.

3.8.7 Candle patterns — small bodies with/without gap There are several candle patterns in this category. Only a few are introduced here. 3.8.7.1 Hanging Man candle pattern (and Hammer) A small body and a long tail implies indecision in the market about the trend. at a top in an up trend (similar to the Hammer at bottom of a downtrend) bearish small body body at higher side of range up OR down day bottom tail is at least twice the size of the body (the long tail creates the signal) upper tail is small. 3.8.7.2 Shooting Star candle pattern This pattern suggests a minor reversal when it appears after a rally. Like the Inverted Hammer, a change is pending: (a) in trend, or in phase (b) from trend to congestion, or (c) from congestion to trend. Compare Inverted Hammer. Bearish signal. smallish body at low end long upper shadow and little or no lower shadow. up OR down day (a black candle is more bearish) generally preceded by up day with long body opening and closing prices are close together implies indecision; or agreement on price in up trend implies a test and rejection of higher prices. in Down trend implies a test against the trend. First candle is down day; second is up day. Confirmation in the next candle = gap up or down.

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3.8.7.3 Evening Star candle pattern The "star" indicates a possible market top and a reversal and the bearish (filled-in) candle confirms this. 3 candle pattern bearish Signifying a potential top. Inverse of Morning Star First candle is strong - long real body Second candle is short and gaps up - colour is not relevant (can be a Doji implies stronger signal) Third candle closes at least half way down the first. 3.8.7.4 Doji Star candle pattern A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g. as in the evening star illustration) before trading a doji star. possible change in direction (down in this case); OR start of a new up trend. 3.8.7.5 Hammer candle pattern (and Hanging Man) Possible Bottom Reversal. Rejection of lower prices – bullish. Confirmation in the next candle, especially with a gap up. in Down trend - is bullish (similar to Hanging Man in uptrends) small body body at higher side of range up OR down day bottom tail at least twice the size of the body (the length of the tail relative to the body that creates the signal) small upper tail small body and long tail implies indecision in the market about the trend. 3.8.7.6 Inverted Hammer candle pattern This seems to be a test of higher prices. Bullish signal. Like the Shooting Star (compare) it implies a change is pending: (a) in trend, or in phase (b) from trend to congestion, or (c) from congestion to trend. opening and closing prices are close together => indecision in the market; or agreement on price smallish body real body at lower end of range colour is not important (ie. up or down day) long tail on high side at least twice as long as body.

NOTE: This document does NOT contain any advice. Page 56 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 3.8.7.7 Morning Star candle pattern Bullish pattern signifying a potential bottom and potential trend reversal. Inverse of Evening Star 3 candle pattern. 3 candle formation First candle is strong down - long real body Second candle is short and gaps down - colour not relevant (can be a Doji => stronger signal) Third candle closes at least half way up the first.

3.8.8 Candle patterns — engulfing and piercing in uptrends 3.8.8.1 Engulfing Bearish candle pattern 2 candle pattern - bearish occurs in uptrend second last candle is Up and smallish last candle is Down The real body of second candle (a Down day) engulfs the real body of first candle (ie. ignore the tails) — an “outside day”.

3.8.8.2 Dark Cloud candle pattern Bearish similar to Engulfing Bearish; but not as bad. 2 candle pattern bearish - signals a reversal First candle is strong Up Second candle is Down inverse of Piercing Line

3.8.8.3 Harami Bearish candle pattern Bearish - resistance to higher prices.

2 candle pattern This formation happens only after a clear up trend. The last candle is engulfed by the second last.

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3.8.9 Candle patterns — engulfing and piercing in downtrends 3.8.9.1 Piercing Line candle pattern Bullish signal.

2 candle pattern. First Candle is strong Down. Second Candle is strong Up. Second Candle opens below first candle's Low. Close of second candle is above half way of real body of the first candle. Inverse of Dark Cloud.

3.8.9.2 Engulfing Bullish candle pattern Bullish reversal pattern. 2 candle pattern occurs in Down trend Second last candle is Down Last candle is Up Last candle engulfs the previous one.

3.8.9.3 Harami Bullish candle pattern A 2-candle pattern. The isolated Harami formation is a bullish formation and therefore it should occur at the end of a down trend. In fact, it requires a trend to issue a signal and would be just as applicable if it occurred at the end of an uptrend, although one would expect the candles to be opposite in colour.

3.8.9.4 Harami Cross candle pattern 2 candle pattern. The market has paused with a balance of buyers and sellers. suggesting a possible change in trend - ie. rejection of downward pressures. The larger the body of the first candle the stronger the signal. The Harami cross in the diagram occurs at the end of a down trend. Second last candle has a long body. The Doji occurs after a long body down candle and therefore issues a strong bullish signal.

NOTE: This document does NOT contain any advice. Page 58 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 3.8.10 Three-candle patterns 3.8.10.1 Three Black Crows candle pattern The bull market might be reversing. Note: 3 candle pattern the three candles all have Lower Lows and Lower Highs. also Lower closes each Open is within the real body of the previous day. Inverse of the Three White Soldiers.

3.8.10.2 Three White Soldiers candle pattern The bear market might be reversing. 3 candle pattern the three candles all have Higher Highs and Higher Lows also Higher Closes each Open is within the real body of the previous day. Inverse of the Three Black Crows.

Your own notes and comments: ......

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3.8.11 Multi-candle continuation patterns There are a number of candle patterns comprising 3 or more candles that actually signal a continuation of the trend. 3.8.11.1 Rising Three Methods candle pattern Bullish continuation pattern. First candle is quite strong UP, in fact too strong implying the market is ahead of itself. Then 3 shorter candles are reversed, and engulfed by the first, to re-trace the over- buying of the first. The fourth candle picks up the up trend with a Higher Close than the first. Bullish continuation Opposite of Falling Three Methods (below).

3.8.11.2 Falling Three Methods candle pattern Bearish continuation pattern. Opposite of Rising Three Methods First candle in pattern is quite strong DOWN, in fact too strong implies market is ahead of itself then 3 shorter candles are reversed upwards, and engulfed by first candle, to re-trace the over-selling of the first one. Last candle picks up the down trend with a Lower Close than the first one.

Your own notes and comments: ......

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4 Secondary Analysis In his book4, Leon Wilson talks at length about primary and secondary analysis. He describes primary analysis tools as those directly derived from, or based directly on, price action or liquidity. This is basically the raw price chart, using raw price data that has not been manipulated. And on the other hand, secondary analysis tools are derived from the raw price data. Most indicators are derived by some sort of calculation or manipulation of the share price. In this section on secondary analysis, we will look at indicators grouped under the following headings: Trend indicators; Volatility indicators; Momentum indicators; Volume indicators. If you want to use several indicators to assist you with a trading decision, it is important to use indicators from each of these groups. If you use two or three trend indicators, which will probably all give a similar signal, then you are missing out on the clues that indicators in the other groups could give. In some circumstances, you will find that indicators in each of these groups might conflict (ie. some might give a buy signal, while the others do not). This is for good reason. But when different indicator types concur, the signal might be more reliable. One thing to watch with indicators is that some tend to be lagging indicators, while only some are leading indicators. The lagging indicators basically move after the price action, and confirm a price movement, whereas the leading indicators change before the price changes.

4.1 Choosing indicator parameters One of the keys to successful use of indicators is to find the right parameters. Most indicators can be fine tuned by changing the parameters. The simplest example is the moving average indicator, which can be applied using any number of periods. The 3-period moving average is about the shortest that we might use, with perhaps the 13 period MA, or the 20 or 30 period MA being popular. But so too is the 150 and 200 period MA. It depends what you are using it for. But with the moving average indicator we can also change the type of moving average — Simple, Exponential, Weighted, Triangular, Variable, Volume-adjusted, etc. In addition to plotting the moving average on the Closing prices, we can choose to plot it on: the Open, High, Low, Volume, Trades, or Value. As if that is not enough, we can also plot multiple moving averages on the one price chart, or plot other different indicators on top of the moving average. So, choose the indicator parameters carefully.

Your own notes and comments: ......

4 Wilson, Leon (2006); “The Business of Share Trading”; pp 167-172; Wrightbooks. NOTE: This document does NOT contain any advice. Page 61 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

4.2 Trend indicators (MA, MMA, GMMA, ADX/DMI, P-SAR) A number of chart indicators are based on the concept of a “trend”, and are used to help confirm the presence of a trend, and perhaps the strength of the trend. It is also useful to be able to annotate your price chart with various tools to assist with your technical analysis (eg. the linear regression tool).

4.2.1 Linear regression The simple linear regression tool is often the easiest and quickest way to indicate whether a trend “appears” to be in place. I say “appears”, because remember there are technical definitions that clearly state the criteria for a trend. And also remembering from the definition that once a trend is in place, it is said to remain in place until it is demonstrated that the trend is not in place. In the sample price chart below, the linear regression tool (in the BullCharts software) automatically snaps to the “mid-point” position along the prices within the date range. The software user only indicates the first date and last date, and the software places the line in the “line of best fit” position.

Figure 34: Linear Regression tool.

BullCharts also includes other regression tools (eg. Raff Regression).

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4.2.2 Simple Moving Average (MA) The Moving Average (MA) curve is very important in Technical Analysis. Why use a Moving Average? Helps eliminate volatility/noise from the chart. Can help to more easily identify a trend. Can be used to help give “buy” and “sell” signals. What is a “Moving Average”? For example, a 21 “bar” (or 21 “period”) MA is the average of all prices for the last 21 price “bars” (ignoring non-trading days – weekends, holidays). It can be shown on a Daily chart, or Weekly, etc. The reference here to “bars” means the price action for one day, or for one week, or for one month, depending on which chart timeframe you are looking at. The sample chart at right is a Weekly Line chart of BHP from Jan to August 2007. During this time, the price was trending up (HH and HL). The 21- Figure 35: Moving Average indicator. week MA shown in the chart (blue line) was falling at the start of the chart; but then turns up (confirming an up trend), and keeps rising off the chart to the right. Note: Usually based on the Closing price. Shorter term traders tend to use a smaller number of bars to calculate the MA. Longer term investors tend to use a larger number of bars to calculate the MA. EMA and WMA gives more importance to recent prices. MA can be used as a buy/sell signal. Fine tune by adjusting the number of 8.5 bars. 8 88 Increasing the number of bars can 7.67 7.67 make the MA slower and give delayed 7.5 signals. 7 7 7 7 7

4.2.2.1 What is a Moving Average (MA)? 6.5 The following key points help to describe the 6 6 6 6

moving average (refer to Figure 36): 5.5 A 3 “bar” MA (for example) is the Pr ic e 5 5 5 average of all prices for the last 3 price 3-period MA bars (ignores non-trading days – 4.5 weekends, holidays). Can be Daily, 4 Weekly, etc. 12345678 Usually based on the Closing price. Figure 36: Depiction of 3-period MA.

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4.2.2.2 Observations The following observations might help you with usage of a moving average: Shorter term traders tend to use a smaller number of bars to calculate the MA. Longer term investors tend to use a larger number of bars to calculate the MA. You can fine tune by adjusting the number of bars. Increasing the number of bars can make the MA slower and give delayed signals. 4.2.2.3 Buy/Sell Signals Under some circumstances, the following ideas can be used to assist with buy or sell signals: Buy when the share price action is above, and stays above, a MA line. Sell when the share price action falls below a MA line. But, this raises some questions as follows: Which moving average type should we use? (ie. Simple, Exponential, Weighted, etc.). Which period should we use? (ie. 13 period, 21, 24, 30, 32, etc.)? That is your call. You need to experiment. See notes below. 4.2.2.4 Which period should we use? There is no hard and fast rule as to which period of moving average to use. It depends on a few things such as what you want to use it for. Following are some tips: Stan Weinstein (Secrets for Profiting in Bull and Bear Markets), likes to use a 30- week MA to indicate whether a stock is trending up or not. Some people like to use a 100-day MA, and some people a 200-day MA. A simple trading rule is to buy and hold the stock for as long as the MA stays above your chosen MA line. The 200 period MA is considered to be a major support (or resistance) level. 4.2.2.5 MA types — Simple, Exponential, Weighted At this stage, all you need to understand is that the two most common moving averages are the Simple and Exponential. The Simple MA is calculated on the share price without further manipulation. The Exponential MA is calculated by placing greater emphasis on the more recent prices, to give a faster signal. 4.2.2.6 Filtering the Buy/Sell Signals Another question that comes to mind is this: What if the share price falls below the MA line intra-day, but then closes above the MA? This is up to the individual, and can be experimented with. You can apply a “filter” to fine tune the stock selection. Note the following possibilities: Act on a signal only if the Close confirms it (ie. the Close is below the MA in an uptrend), and ignore it if the Close is above even if the bar dips below the MA. Act on a signal only if the Close confirms it for 2 (or maybe 3) consecutive bars.

Your own notes and comments: ......

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4.2.3 MMA — Multiple Moving Average There can be a number of advantages to inserting a Multiple Moving Average (MMA) indicator on a price chart. It can help to provide greater insight into the market mood and sentiment, as well as the presence and strength of any trend. Any point on the chart where several of the MA curves come together is considered a very bullish signal in upward moves (as in the price chart below), and bearish on downward moves. The Moving Average Cross-over is a special variation utilising just two moving averages, and for giving buy and sell signals. Refer to the Sample Trading Strategies section for more details. This is normally plotted using Closing prices.

Figure 37: Multiple Moving Average indicator showing 15, 30, 60, 90 day Exponential Moving Averages.

Your own notes and comments: ......

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4.2.4 GMMA — Guppy Multiple Moving Average The GMMA indicator was developed by Daryl Guppy, and is a special version of the regular Multiple Moving Average, with specific time periods of Exponential Moving Averages in two groupings — short-term: 3, 5, 8, 10, 12, 15, and long-term: 30, 35, 40, 45, 50, 60.

Figure 38: Guppy MMA indicator.

There are a great number of possible interpretations available from this indicator. Just a few of these follow (with more details in Daryl Guppy's own text books). Trend is stable with the six lines of the short-term MAs equally spaced and remaining roughly parallel. Same for the six lines of the long-term group. Trend is stable when the distance between the short-term group and the long-term group is roughly constant. This is normally plotted using Closing prices.

Your own notes and comments: ......

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4.2.5 Brainy's MMA indicator Robert Brain has prepared a variation of the Multiple Moving Average (MMA) indicator with the following useful periods (as depicted in Figure 39 below): 15 and 30 periods 60 and 90 periods 150 and 200 periods.

Figure 39: Brainy's MMA indicator. The thinking behind choosing these time periods is as follows. Many analysts and finance commentators refer to each of these six different time period Moving Averages. They draw some significance depending on whether the price action is above or below each of these values. The price action above the MA is considered somewhat bullish, whereas the price action below is considered somewhat bearish. It is not possible to say that one of these approaches is right, or wrong. So to help us get a handle on the degree of bullishness or bearishness, it can be useful to plot all six of them. The 15 and 30 period MAs could be useful for shorter term traders/investors. The 60 and 90 period MAs are reported in various places (eg. the AFR newspaper uses 60 for selected stock charts each day). The 150 period MA is very close to Stan Weinstein's 30-week MA, except that he uses a Simple MA (SMA), and not an Exponential MA (EMA). The 200 period MA is in common use today by many media commentators. If you have a preference for different time periods, then it should be easy enough to set this up in better charting software packages.

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4.2.6 Moving Average High and Low The Moving Average High/Low (or High-Low Moving Average) indicator involves plotting two moving averages, essentially resulting in a “channel”. This is a feature that has been available in charting software, but not commonly discussed. It is a variation of the standard Multiple Moving Average indicator; but it uses the High prices and Low prices for the stock, instead of the Closing price. (Refer to various sources for more details.) In good charting software, it is possible to plot a moving average based on any of the Closing price, or on the High price, or Low price. And you should also be able to place several different moving averages on the same chart. In the daily price chart below of the Australian All Ordinaries index as at 3 Nov 2008, notice that there are three moving averages that are all 14 day EMA, but one is based on Highs, one on Closing prices, and one on the Opening prices. The Closing price EMA is shown for comparison. (You might notice that the EMA on Highs is always above the EMA on Closes, even when the stock is trending down. Is this right? Well, remember that one is based on the “high” price of the day, and one on the “low” price for the day, so we would expect one to always remain above the other.) Depending on your entry/exit criteria, you might want to experiment with the periods (eg. try 10 day Highs and 8 day Lows). That is, for example, buy when the ....does this...., and sell when .... happens.

Figure 40: Moving Average High-Low indicator.

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4.2.7 MACD — Moving Average Convergence Divergence A trend following lagging indicator, the MACD is commonly used. It was developed by Gerald Appel, and is useful in trending markets, not ranging markets. Note that some people consider the MACD a momentum indicator (oscillator). The MACD indicator is basically a special combination of two moving averages. It comprises two lines that appear to be moving averages (in reality they are). The exact make-up of the MACD is described in detail in Brainy's Technical Analysis Article TA-4230. Note the following with reference to the numbers in the screen shot in Figure 41 below of the Weekly chart of BHP: 1. Fast MACD Line — Often just referred to as the MACD line, it is the solid line marked as (1) in the Figure below and is actually derived from two exponential moving average values (typically 12 and 26 periods). It is the difference between them. Because the difference between these two moving averages is sometimes positive and sometimes negative, this indicator oscillates above and below zero (marked 3 on the chart). 2. Signal (or trigger) Line — The line marked as (2) is itself an exponential moving average of the fast line (usually a 9 period moving average). 3. The zero line across the middle about which the indicator oscillates. 4. The “Above” label — a potential buy signal — where the fast line crosses to Above the signal line. 5. The “Below” label — a potential sell signal — where the fast line crosses to Below the signal line. 6. Note in the lower price pane that in the uptrending stock shown, there was a price increase of some 34% in 22 weeks.

Figure 41: MACD indicator.

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Consider changing the default chart parameters from 12,26,9 to 13,34,8 to smooth it out and remove some false signals. Basic signals: Go long when MACD crosses its signal line from below Go short when MACD crosses its signal line from above. The signals are stronger under some circumstances: If there is divergence of the two lines of the MACD indicator (the lines moving further apart indicating an accelerating market move — a developing trend); or There is a large swing above or below the zero line. A variation of the MACD is the MACD Histogram shown in the screen shot below. Note: The MACD is shown, with green and pink shading. The MACD Histogram is the bar chart shown on the same chart. The histogram is the difference between the solid fast MACD line and the dotted slow signal line. It can be plotted on top of the MACD indicator as shown, or on its own. When the two MACD lines cross each other, the histogram crosses the horizontal zero line. Histogram is positive if fast line is above, or negative if fast line is below. When the fast and slow lines are further apart, the histogram bars are longer.

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Further signal details: Ideally the Buy signal will occur when the lines are below the histogram/zero. Ideally the Sell signal will occur when the lines are above the histogram/zero. BUT, watch out for false signals.

Note: Both MACD lines stay above the zero line implies the trend is strong and likely to continue (but not guaranteed). See figure below.

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Note MACD divergence (in figure below):

Your own notes and comments: ......

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4.2.8 P-SAR — Parabolic SAR The Parabolic SAR (Stop And Reverse) indicator was developed by J. Welles Wilder and is used to indicate the Stop-Loss price point for tomorrow's trading.

Figure 42: Parabolic SAR indicator. With reference to the price chart, note the following: The P-SAR dots are placed on the chart either below or above each candle. For most of the chart portion displayed here, the P-SAR are positioned below the candles. This confirms the up trend. As the stock rises from candle to candle, the next P-SAR value usually rises also. At a point of price weakness (eg. 23 July), the P-SAR has crossed to above the share price for that week. On this weekly chart, for the week of trading from 7 to 11 May 2007, the P-SAR point is below the candle at the value of $28.15. This P-SAR point says: “if the price falls to $28.15 any time next week, then sell. P-SAR could be considered for use for entry as well. When the P-SAR has crossed from above the price to below, this confirms the possible entry.

Your own notes and comments: ......

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4.2.9 ADX/DMI — Directional Movement This trend following indicator was developed by J. Welles Wilder, and is known as the ADX (Averaged Directional movement Index), or DMI (Directional Movement Indicator). It measures trendiness (Chuck le Beau), or the strength of a trend. [In BullCharts, the ADX indicator is implemented with several variations and options under the heading of “Directional Movement”.] Some people consider this a momentum indicator. The indicator compares the current price with the previous price range. It can be said to be roughly the largest part of the current price range outside the previous range, and if it's higher then it is positive, and if it's lower it is negative. If the day is an inside day, then there is no DI for the day. The actual calculations are rather complex. This single indicator actually comprises three lines, and is generally plotted in its own window (not directly on the price chart). It can be used on daily and weekly charts. The three components are: +DI (or +DMI, Positive Direction Indicator) — summarises the upward trend movement and is typically plotted on a chart in green; -DI (or -DMI, Negative Direction Indicator) — summarises the downward trend movement and is typically plotted on a chart in red; ADX — indicates whether the market is trending or ranging. Refer to the price chart below and the key points that follow:

Figure 43: ADX Directional Movement indicator.

The +DI (Plus DI) indicates the amount of upward directional movement in the share price. The -DI indicates the amount of downward directional movement. In general, when +DI is above -DI, the market is moving upwards. When the +DI is below the -DI, the market is moving downwards. If ADX is rising (sloping upward), then the strength of the trend is increasing.

NOTE: This document does NOT contain any advice. Page 74 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview If ADX is falling, the trend is weakening. A steep ADX line indicates a stronger trend than a shallow ADX which indicates a relatively weak trend. The actual value of the ADX is not important.

According to Chuck le Beau, if the change in ADX from one bar to the next is 0.25 or greater is significant and that a trend is under way. If the change is 0.50 or more, it indicates an even stronger trend. A change in ADX of 1.00 or more from one bar to the next is possible and indicates a very strong trend. Note that for proper interpretation, your charting software needs to show the ADX value to at least 2 decimal places (some don't do this). Possible buy/sell signals: Possible buy — When the ADX is rising and +DI is greater than -DI. Possible buy — When ADX is rising from a low level (especially from around 15 or less), provided +DI is greater than -DI. The steeper the ADX, the better. When ADX is high, and above either the +DI or -DI, a trend reversal is possible. Especially if the ADX is as high as 35. (Can use the Parabolic SAR to time an entry). Take profits when ADX turns downwards from above both the +DI and -DI. Take care when ADX is falling. A good combination is when ADX is rising strongly from a low value, and +DI is greater than -DI and the two DI lines are moving apart. Possible buy — when +DI and ADX are above -DI and ADX rises. Possible buy — when +DI is above -DI and ADX turns up from below both +DI and -DI. Exit when +DI crosses below -DI.

Your own notes and comments: ......

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4.3 Volatility indicators (BB, ATR) Volatility is an important concept to understand. It is basically a measure of the amount that a share price fluctuates up and down over time. There are times in the market when stocks exhibit high volatility, and there are times when they exhibit low volatility. It is also important to consider trading volume when looking at volatility. There are a few indicators that show us the degree of volatility. Two of the more common ones are introduced here — Bollinger Bands and ATR (Average True Range). Other volatility indicators include: Chaikin's Volatility indicator, Historical Volatility Ratio, Wilder's Volatility Index, plus others.

4.3.1 Bollinger Bands Bollinger Bands were developed by John Bollinger, and look a little similar to moving average envelopes. As you can see in the sample price chart below, Bollinger Bands are comprised of three curves (the green ones in this sample) — the middle curve is basically a Moving Average (typically a 20 period Simple MA), while the upper and lower “bands” are a distance away from the middle curve by an amount that is based on the volatility of the price. That is, the more volatile the price (that is, the greater the range in price in a bar or candle), the further apart the bands are spaced. The amount of volatility used is commonly referred to as two standard deviations of the average share price. So the resulting plot is actually “moving standard-deviations” plotted as bands around a moving average of the share price.

Figure 44: Bollinger Bands indicator.

Note the following feature in the sample price chart above. In late Oct 2003 (about the time of the start of a bull market) the Bollinger Bands had narrowed over a 9 week period, indicating a reduction in volatility. This is followed by an expansion of the bands coinciding with the Big White candle in early December, and signalling the start of a trend. This was confirmed with higher volume in the week of the Big White, and also in the following week. In the Volume pane of the price chart above (the lower section of the chart) the squiggly line running across the chart is a Moving Average of Volume. Any significant increases in

NOTE: This document does NOT contain any advice. Page 76 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Volume above this Moving Average are worth noting. Remember that a rise in Volume accompanied by a rise in share price is bullish. Bollinger Bands are usually overlaid on the Closing share prices, but they can be displayed on other values (eg. open , high or low share prices, or on the volume chart or maybe on a chart of the Trades). The difference between Bollinger Bands and moving average envelopes is that envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at “standard deviation” levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting — widening during volatile times and contracting during calmer periods. That is, the greater the range of price over a few bars/candles, then the further apart are the Bollinger Bands. As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e. high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e. low volatility), the bands narrow to contain prices. It is possible to interpret Bollinger Bands with a great degree of detail. The creator John Bollinger notes the following characteristics of Bollinger Bands:- Sharp price changes tend to occur after the bands tighten, as volatility lessens. When prices move outside the bands, a continuation of the current trend is implied. Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets. There are many more characteristics and apparent behaviours for the advanced technical analyst.

Your own notes and comments: ......

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4.3.2 ATR — Average True Range It is more important to understand the concept of Average True Range, than the ATR indicator itself. The ATR is a comparison of the variation in share price between the high price, low price and close price, over a given period of time. Something like a 14-period comparison is common. In the weekly price chart shown here in Figure 45, note the points below:

Figure 45: Average True Range (ATR) indicator. The ATR is calculated over a period of time, in this case over the previous 14 bars. Early on the chart with mostly shorter candles, the ATR value on the upper pane is about $3.00. Towards the middle of the chart, a number of the candles seem to be longer, and the ATR value directly above (in July) is closer to $3.25. In September and October, the candles are much longer, due to greater price volatility, and the ATR is showing a value in the range of $3.50 to more than $4.00. Note these general observations: High values indicate market tops and bottoms, and low values indicate ranging markets. ATR tends to peak before the price bottoms, and before the price tops. A variation of ATR can be used to derive a stop loss value for an exit strategy. For example, some people set a stop loss at something like 2 times the ATR value (or 2.6, or 3, or 3.5 times). In BullCharts software, for example, there are two specific indicators where you can set this value and plot a stop loss indicator across the price chart (“ATR Initial Stop” and “Wilson ATR Trailing Stop”). The price chart shown in Figure 46 on the next page demonstrates this.

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In the weekly price chart below of Woolworths from early 2005 to 2008, note the following key points: The share price is shown as candles. The dots that are positioned below the candles are the (Leon) Wilson ATR Trailing Stop indicator in BullCharts, using the default parameters (including 3 x ATR). Throughout this period, if you held this stock, the indicator says to stay in the stock until the price falls below it in the week of 7-11 Jan 2008 (throughout much of the bull run). Over this period, the triangular “trend ruler” tool shown on the chart shows an 88.15% price increase over 134 weeks, which annualises to 27% pa.

Figure 46: Using ATR to determine a Stop Loss position.

Your own notes and comments: ......

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4.4 Momentum Indicators (Momentum, OBV, A/D, RSI, TMF, ROC...) The most popular momentum indicators include: Momentum, OBV, RSI, Money Flow, Stochastic, Price rate of change, Price oscillator, TRIX Momentum, and Coppock. MACD is sometimes also considered a momentum oscillator.

4.4.1 Momentum The momentum indicator itself is a measure of how far the share price has moved over a specific time period. A stock with a strongly rising Momentum is likely to keep rising. It compares current price to earlier price, and indicates the pace and strength of a trend. It can help to identify trend weakness, and possible trend reversals. High Momentum values (either positive or negative) occur when a trend is at its strongest, while lower values are found near the start and end of a trend. It is commonly plotted using Closing prices, and 14 time periods. To eliminate some of the noise on the chart, another time period (like 28) can be used. Note the following with reference to the screen shot below (momentum is shown in the upper pane and price is shown with candles in the lower pane). Momentum and price normally move in the same direction (shown with the rectangles labelled (1) below). Price and momentum can “diverge”: the two lines labelled (2) below suggest a possible trend change; and likewise the two lines labelled (3) indicate a significant bearish divergence.

Figure 47: Momentum indicator.

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In very simple terms:- Normally, the share price and Momentum will rise together and fall together (except for divergences). When the share price is making a new high, but Momentum is not, this is a suggestion of possible trend change from up trend to either no trend or down trend. Conversely when the share price is making new lows and the Momentum is not. High Momentum values (either high positive or “high negative” values) occur when a trend is at its strongest, while lower values are found near the start and end of a trend. A rising Momentum suggests an increasing trend strength, especially from a very low value (when compared with earlier Momentum values). This could be taken as a buy signal. A falling Momentum suggests a decreasing trend strength (ie. weakening prices), especially from a high value. This could be taken as a sell signal. BUT, it is possible for Momentum to peak at high values, and for the share price to continue higher, even with the Momentum falling away. So, always look for confirmation before taking the trading signal. Consider including a moving average of momentum onto the chart (see the Sample Trading Strategies Section 6.7.1.3 , “Momentum + MA-of-Momentum“, on page 109 below for more details).

4.4.2 OBV — On Balance Volume The OBV indicator was developed by Joseph Granville, and attempts to measure the level of accumulation and distribution by comparing volume to price movement. (It is described in his book “Granville's New Strategy of Daily Stock Market Timing for Maximum Profit”). It works on the premise that larger traders accumulate and distribute stock in higher volumes prior to a corresponding move in share price. It is a measure of underlying strength, and is basically a “running total” of the traded volume, where the day's volume is added to the “running total” if the day's closing price is higher than the previous close. Conversely, if the day's close is less than yesterday's, then the volume is subtracted. Of course, this is for a daily perspective. The same thing applies on a weekly chart — the weekly total value is added to, or subtracted from, the weekly “running total”. The actual value for OBV is not relevant. What is important is the direction, or trend, of the OBV indicator. When it is trending, and trending with the price, it is an indication of the price trend Figure 48: OBV indicator.

NOTE: This document does NOT contain any advice. Page 81 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview continuing. However, if the OBV stops trending, it indicates that the price might stop trending. There is another indication for OBV. If the price is static (perhaps ranging), but OBV is rising, then accumulation is probably taking place (the smart money, or big end of town). When this happens, it is likely that a price rise will follow, and OBV will continue to rise. The price rise might be a break-out. The converse applies for a falling OBV when the share price is static. That is, a falling OBV suggests a possible fall in share price. In the Weekly price chart of ANZ in Figure 48 note that the OBV made Lower Highs in late 2007, while the share price made a new high. Here, OBV was suggesting a developing weakness in price, and a potential price fall. This eventuated in late 2007 and into 2008. Some people use the OBV indicator in their trading decisions. They use it either as confirmation of a continuation in trend, or as confirmation of likely change in price. That is, if OBV is rising with the price, this can indicate confirmation of an uptrend. Likewise, a falling OBV can indicate confirmation of a down trend. Like all indicators, this is not guaranteed, so take it as a guide. Also, if you are looking for a change in trend, then an OBV moving in the opposite direction to price can indicate that a change of trend might take place.

4.4.3 Accumulation/Distribution (A/D) The Accumulation/Distribution indicator is a momentum indicator that associates changes in price and volume. It is based on the premise that the more volume that accompanies a price move, the more significant the price move. It is really a variation of the more popular On Balance Volume (OBV) indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices. When it moves up, it shows that the security is being accumulated as most of the volume is associated with upward price movement. When it moves down, it shows that the security is being distributed as most of the volume is associated with downward price movement. Divergences between the A/D and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.

Your own notes and comments: ......

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4.4.4 RSI — Relative Strength Index The RSI is a momentum oscillator developed by J. Welles Wilder. It compares upward movements of the closing price with downward movements, resulting in a value which ranges between 0 and 100 (hence the oscillator description). In other words, it indicates the strength of a single security, relative to that security's past performance. Note the following key points with reference to the screen shot below: Commonly based on 14 periods; but can be modified. Uses horizontal lines to indicate overbought and oversold. Common values are 70 and 30; but some people use 80 and 20. These can be adjusted to better suit specific stocks. Possible buy signal when crossing Above the 30-level oversold line. Possible sell signal when crossing Below the 70-level overbought line. The RSI can fluctuate in the range of 70-100 over a long period without giving any sell signals. When used in a trending market, a possible signal is to buy when RSI falls below 40 and rises back above 40. Divergence with the share price indicates possible change in trend. This can be used for a possible sell signal.

Figure 49: RSI indicator.

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4.4.5 Money Flow and Twiggs Money Flow (TMF) One of many technical analysis indicators is the Money Flow indicator, and a popular implementation is the Chaikin Money Flow indicator (considered to be momentum indicators). More recently, Colin Twiggs (of Incredible Charts5) has published a variation known as the Twiggs Money Flow. The Money Flow Index (MFI) is a volume-weighted version of the RSI (Relative Strength Index) indicator. That is, it is somewhat similar to RSI except that it factors in the amount of Volume traded. MFI indicates the strength of a trend and is used to warn of trend weakness and likely reversal points. The MFI compares the value traded on up-days to the value traded on down-days. Remembering that value is basically price times volume. The Twiggs Money Flow variation is considered to be a refinement of the original Money Flow as it makes an adjustment for gaps in price. Further details about these money flow indicators are included in Brainy's Technical Analysis Article TA-4630, “Money Flow”. When using the TMF there are three things to watch for: Whether TMF is above or below the zero line. Whether TMF is trending up or down. If there is any “divergence” with price. Note the chart in Figure 50. Over the period from July to October 2009 the All Ordinaries index (XAO) trended up before pausing for consolidation (a consolidation that was still under way at the time of writing this material in March 2010). Note the TMF (middle pane) made a Highest High in late September, with Lower Highs to follow. Because the XAO was making higher highs in September and early October, the TMF was forewarning of pending weakness in the market. Note that CMF gave the same warning a few weeks early, but it can be considered to be too early. Figure 50: The All Ordinaries index (June to Dec 2009) with the TMF and CMF indicators.

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4.4.6 Price Rate of Change (ROC) The Rate of Change (ROC) indicator is often referred to as Price Rate of Change. It is a variation of the Momentum indicator and indicates the rate at which the share price is changing. It compares the difference between the current price and the price of a specified previous period. It is designed for use in ranging markets, to detect trend weakness and likely reversal points. However, when combined with a trend indicator, it can also be used in trending markets. There are a few ways it can be used:- As an overbought/oversold indicator. Buy/sell signals when it crosses the zero line.

Figure 51: Price Rate of Change (ROC) indicator.

Possible signals: In an up trend, buy if the ROC turns upwards from below the zero line.

Your own notes and comments: ......

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4.4.7 Coppock indicator The Coppock indicator was developed by Edwin Sedgwick Coppock in 1962. It was designed to be used on a monthly chart of a market index (such as the Dow Jones, S&P/500 or even the All Ordinaries) to indicate overall market trends. It was originally devised to identify the commencement of a bull market; but additional interpretations have been implemented. It is calculated by adding together the 14 month ROC and 11 month ROC, then taking a 10- period weighted moving average of the sum. Possible buy signal when the Curve turns up from an extreme low. In the monthly chart of the Australian All Ordinaries index below, note the following: Three significant lows on the Coppock are indicated with vertical dashed lines. These Coppock lows lag the index lows (by a month or two). The Coppock “turning up” from the extreme low seems to confirm market bottoms. At the time of writing this (5 Nov 2008), the Coppock is still heading south in a bear market.

Figure 52: Coppock indicator.

Other interpretations of the Coppock include: A possible sell signal when there is a higher peak in the index; but a lower peak in the Coppock — ie. bearish divergence.

Your own notes and comments: ......

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4.4.8 Stochastic indicator The Stochastic indicator is a momentum oscillator developed by George Lane. It is most effective in broad trading ranges, or in slow moving trends. With an up trend there is a tendency that the Close price for the day will be close to that day's High. Conversely, during a downtrend there is a tendency that the Close price will be close to that day's Low price. The Stochastic Indicator can help to find a trend reversal. It does this by looking at where the Close price falls relative to the range of recent prices. The Stochastic indicator has two output values: the %K - Simple Stochastic Indicator and the %D - Smoothed Stochastic Indicator (a Moving Average of %K). The %D is the %K smoothed over several days. The Stochastic indicator comes in two variations — a slow version, and a fast version (used mostly by short-term traders). The inputs to calculate the Stochastic are: today's Close, Lowest Low for n days, Highest High for “n” days, and the number of days (n, usually 5).

Figure 53: Stochastic indicator. The Stochastic is an oscillator that can range between zero and 100%. Usually, overbought and oversold levels are consider to be at either 70 or 80 and 30 or 20 respectively. Hence the two horizontal lines on the chart above. In BullCharts the faster %K line is a solid line, and the slower moving %D line is the dashed line. Note that some people and some texts swap the solid and dashed lines over. Just remember that the the %K line will dart back and forth across the slower %D line. The most important use for the Stochastic is with divergences (assessed using the %D line). George Lane's original intent was to use divergence followed by a crossover as the signal to trade. The detail of this set-up is too complex to consider in this forum, so the reader is encouraged to seek out more advanced materials. For more information refer to “Lane's Stochastics” by George C. Lane, M.D.Stocks & Commodities March 1994.

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4.5 Volume indicators It is important not to ignore volume when looking at a chart of either an index or a stock. A lot of useful information can be gleaned.

4.5.1 Volume + Moving Average and EquiVolume Volume is important. It can be easier to determine whether volume is increasing or not by plotting something like a 10-period Moving Average on the volume chart. Note: If a trend appears to have started (or a price breakout above resistance), then there needs to be an increase in volume as well. Otherwise, the price increase is considered to be weak, and might fail. In the days before a price breakout, there is often an increase in Volume of sometimes two or three times the 10-period MA of the recent volume. Increased volume on a falling share price tends to confirm a down trend. One way to view this is to use EquiVolume bars on the price chart (this is available in BullCharts — see screen shot of Chart Style Toolbar options at right).

4.5.2 Volume Rate of Change Also known as Volume-ROC (VROC). It is calculated in much the same way as the Price ROC indicator. It tends to produce sharp spikes to reflect increases in volume, and which often occur with significant changes in price.

4.5.3 Volume oscillator The Volume oscillator is derived from two moving averages of volume (somewhat similar to MACD and Stochastic) to result in a single curve that oscillates above and below a horizontal zero line. Possible signals: Possible buy when the oscillator is rising (more positive, suggests strong trend); but look for confirmation with another indicator. Possible sell when the oscillator is falling (indicating trend weakness).

Your own notes and comments: ......

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5 Additional Topics There are a number of aspects of technical analysis that do not readily fit under any of the previous headings. The following topics are briefly covered in this section, and the reader is encouraged to seek more advanced details from specialist sources:- Cycle analysis Fibonacci number sequence Elliott Wave Analysis W.D.Gann Hindenburg Omen 5.1 Quantitative Methods Traditional Technical Analysis revolves around the study of price and volume depicted on graphical price charts with the object of understanding human behaviour. In the now distant past, price charts were drawn by hand; but with the availability of computers, analysis charts are now almost universally prepared using a computer. With the use of computers many more complex chart indicators have been developed and are available to analysts for inclusion on price charts. When a technical analyst becomes a financial market trader there are more considerations — areas such as risk management (incorporating stop losses and position sizing) and psychology. All of these aspects of analysis and trading can be incorporated with price charts along with ancillary rules and calculation methods to construct a “system”. However, some market participants still want to take it further. The question can be asked: “What selection of technical analysis approaches and ancillary techniques will produce the best results on a particular market at a particular time?” This is a difficult question to answer as the markets are ever changing and there are a large number of professional and private traders seeking to remove “inefficiencies” from the market. Answering the question often leads to methods of testing, or further developing, technical analysis based on competing “propositions” or “systems” using computers, mathematics and statistics to see if a particular approach can be a good fit to the current or expected market. This field of study is often given the name “Quantitative Methods” and is a relatively new. It relies on computing power and developing methodologies. Some quantitative methods are solidly based on technical analysis principles while others are not. Quantitative method texts and practitioners in the mainstream will discuss back-testing, optimisation, walk-forward back-testing, in-sample results, out-of-sample results, risk- reward ratios, statistical tests of significance, drawdown, intra-trade drawdown, equity curves, monte-carlo analysis, optimum position sizing, etc., etc. All of these are beyond the scope of this introductory text (and this relatively short seminar). Quantitative Methods can also encompass financial modelling, quantitative finance, computational finance and a variety of other names for similar activities and branches of the techniques. Some of this activity is based on fundamental analysis data, technical analysis data, or even pure mathematical analysis. Development in these areas has lead to mechanical systems, high speed “flash trading” systems (sometimes based on arbitrage between different exchanges or markets) and trading “robots” of various types. For more information on this topic, readers are encouraged to search for relevant texts. [Ack: This section text contributed by Robert Grigg, ATAA.]

NOTE: This document does NOT contain any advice. Page 89 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 5.2 Cycle analysis We have already said that stocks and markets and indices tend to move in cycles of some form. There are many hypotheses about how to apply cycle analysis to the markets, many of which are a little subjective. It is difficult to summarise cycle analysis, and to describe what is involved. Some people can see cyclic patterns in charts easier than what other people can. Here are just some types of cycles that are worthy of study: Property Cycles (17-21 years) US Presidential cycle — 4-years 30-year commodity price cycle decennial cycle (ten years) seasonal cycles 40-year generational spending cycles 80-year New Economy cycle Kondratieff cycle (58-60 years). The important point to understand here is that this field of study does exist, and the reader should seek out more information from specialised sources.

5.3 Fibonacci The Fibonacci ratios are said to occur widely throughout nature in many ways, and in the stock market with regard to both share price (or index value), and in time. The Fibonacci number sequence is a mathematical number series attributed to the 13th century Italian mathematician Leonardo Fibonacci. He actually rediscovered this number series because it had already been in wide use centuries before by ancient Greeks and Egyptians. The basis of the Fibonacci sequence of numbers is that the sum of any two consecutive numbers in the series is the next number in the series, commencing with: 0 and 1. So, the sequence goes: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ... The ratio of one number in the sequence to the next number in the sequence is about 1.618. This is only approximate for the first few numbers in the series (the single-digit numbers); but the higher double-digit numbers conform to this closely. That is, for example, 144/89 = 1.618 Likewise, the inverse of this gives the result 0.618. For example, 89/144 = 0.618. In other words, the number 89 is equal to 61.8% of 144. This ratio repeats throughout the number series. Various other combinations of Fibonacci numbers produce other ratio levels. For example, 21/55 = 34/89 = 38.2%. Also, 13/55 = 21/89 = 23.6%. Over the years, many people have found that the basic ratio of 1 to 1.618, and its inverse of 1 to 0.618, represents distances between planetary orbits, aspects of the great pyramids, the proportions of the human body, and other naturally occurring proportions. And it is very uncanny how often share price movements fit into these same ratios — not all of the time, but more often that one might expect. As a result, these ratios can be used to attempt to forecast turning points in the market.

5.3.1 The Fibonacci numbers and percentages In summary, the Fibonacci numbers are: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ... The related key percentages that are used by traders include: 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, 423.6%

NOTE: This document does NOT contain any advice. Page 90 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview In addition to these, the value of 50% is often included in this list as it happens to often be a natural turning point on a price chart.

5.3.2 Fibonacci extensions This is the extending of price action to forecast possible price targets. It might be within a major trend, or a pending breakout from a chart pattern. In the screen shot below of the monthly chart of Telstra in 2006-2007, we can see an ascending triangle forming from January until at least November 2006. With the repeated price action retesting the resistance level at about $4.00 from April to November, we could anticipate a possible breakout above $4.00. If this were to happen, then what might the price target be? Consider the following: Put a Fibonacci extension tool onto the chart as shown, where the 0% level is the lowest point in the triangle ($3.43), and the 100% level is at the top of the triangle ($4.00). Now many traders would expect the target price level to be either 161.8% ($4.36), or 261.8% ($4.94), or an even higher value. Note that in the months of April to June 2007, the price hit resistance at about $4.94 which is the Fibonacci 261.8% level. Many traders would have been ready to take profits at any sign of weakness at any of these levels.

Figure 54: Fibonacci extension example.

5.3.3 Fibonacci retracements This is the study of a retracing price action to determine where the retracement might end before resuming the major trend. In the screen shot below of the weekly chart of the All Ordinaries index for late 2007 and into 2008, note the following key points: By early 2008, the index had obviously peaked in late October 2007 at point (1). By April/May 2008, we could see with hindsight that the index had bottomed in March 2008 at point (2). Into April and May, we could have put a Fibonacci Retracement tool onto the chart as shown in the figure.

NOTE: This document does NOT contain any advice. Page 91 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Some analysts would have expected that the index could stop its upward retracement and resume a down trend at any of the 23.6% level, or 38.2% level, or 50% level, or 61.8% level. It won't always happen; but it does happen too often to be a coincidence. In fact, the index climbed up to about the 50% retracement level at point (3) then fell away to resume the down trend.

Figure 55: Fibonacci retracement.

Your own notes and comments: ......

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5.4 Elliott Wave In the 1920s and 30s, Ralph Nelson Elliott (1871-1948) was studying stock market charts, and started to form his theory of Wave Principles. By the 1940s he had linked the Fibonacci number sequence with his Wave Principle, and eventually integrated the two concepts to arrive at what is today known as “Elliott Wave Theory”. The Elliott Wave theory is based on the observation that the markets are driven and influenced by human psychological behaviour, and that this is cyclic in nature and is therefore somewhat predictable. The principles basically state that markets move in cycles which are predictable patterns, and that the cycles are made up of smaller cycles with similarly predictable patterns. Elliott suggested that the time duration of these cycles varied. The principle includes the concepts of impulsive and corrective waves, in both a rising (bull) market and a falling (bear) market. And that the upward waves (and downward waves) can be counted into fairly predictable patterns. In a quick and simple attempt to explain this, look at the screen shot below of CBA during the bull market from the low of 2003 to the peak in late 2007, and note the following: The Wave Pattern depicted here comprises five legs, numbered here from 1 to 5. Waves 1, 3, 5 are all considered impulsive waves (as they move with the primary trend). Waves 2 and 4 are considered corrective waves (as the “correct” the trend). Whilst the chart is developing it can be a challenge to correctly and accurately identify the waves. To do this there are a number of rules about the relative sizes of these waves, and their permissible start and finish points relative to the others. This wave pattern is only the first “half” of the total 8-wave cycle.

Figure 56: Elliott Wave - Impulse Wave.

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To describe the second “half” of the 8-wave cycle, study the monthly price chart below of Woodside Petroleum from 2001 to 2003 (a recent bear market). Note the following The Wave Pattern depicted here comprises three legs, numbered here as A, B, and C. Waves A and C are considered impulsive waves (as they move with the primary trend). Wave B is considered a corrective wave. Whilst the chart is developing it can be a challenge to correctly and accurately identify the waves. To do this there are a number of rules about the relative sizes of these waves, and their permissible start and finish points relative to the others.

Figure 57: Elliott Wave - Corrective wave.

Elliott Wave theory also includes descriptions of key chart patterns that might appear within corrective, and impulse waves. Tends not to apply to thinly traded stocks/markets. The Elliott Wave Theory, like a lot of the field of technical analysis, is not 100% reliable; but it is surprisingly reliable to be used with confidence by a number of technical analysts. With some training and practice, it is possible to analyse developing wave patterns with some confidence. Of course, it is not possible to be 100% confident until we have hindsight. But with some confidence it can be possible to anticipate market moves. And when also using Fibonacci numbers, and perhaps Gann theory, it is possible to confidently anticipate both price targets and time targets. The Elliott Wave Theory is too involved and complex to try to cover here in detail, so the reader is encouraged to seek out further details if interested.

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5.5 W.D.Gann William Delaware Gann (born in Texas, 1878-1955) traded his own and other people's money (and reportedly made a fortune), and wrote a number of books about his methods. It can be said that the teaching's of W.D.Gann are rather complicated and at first confusing. His work covered a broad range of technical analysis topics, as well as numerology and astrology, and his work is rather extensive. Gann believed that there is a relationship between price and time, with a degree of predictability that might not be 100% accurate and reliable; but which can be used to effect. The three basic concerns of Gann theory are: pattern, price and time. One of the key things that is attributed to Gann is the study of geometric forms, and of time. One of his concepts was of “squaring price and time”. Using his methods, he sought to forecast turning points in the market. He also looked at special angle lines to study trends and measure trend strength. His favoured angle was 45 degrees. Some charting software packages include a range of Gann tools, including: Gann Square, Gann Fan, and Gann Angle. Gann also devised what is referred to as the “Square of Nine” chart. The teachings of Gann, like a lot of the field of technical analysis, are not 100% reliable; but it is surprisingly reliable to be used with confidence by a number of technical analysts. Some other points from Gann's work include: Gann's swing chart. The Gann fan. A chart should be divided up into percentages from one significant top to a significant bottom, placing special emphasis on the 50% portion of that range. The “Law of Vibration”. Certain numbers have significance, including: 7, 16, 25, 36, 49, 64, 12, and 144. Also the numbers 12 and 30. Time has a strong influence because when time is up, the trend changes. That is, time cycles govern price movements. The concept of “balance”, and “overbalance”. Cycles and anniversary dates (climatic seasons, etc.). Volume is important; but it is more important to compare the total volume traded in a period with the total capital on issue. This helps to understand accumulation and distribution better. Gann's preferred charts were weekly, monthly, quarterly and yearly charts, as daily charts contain too much noise, and the longer term charts make it easier to spot the longer term trends. When a market or a stock begins declining, it usually makes two, three or even four movements before it reaches the final bottom (somewhat akin to Elliott Wave Theory). Gann preferred to place stop loss levels 3 points above or below key chart points. Stocks with high volumes are better to trade than stocks with low volumes. Some days of the week, and days in the month, seemed to have repeating price actions. Use spikes in volume along with the total volume between an extreme low and an extreme high to anticipate a likely reversal. Gann's Rule of Three and Rule of Five. You can see from this list that the works of William D. Gann are too exhaustive and rather involved to try to cover here, so the reader is encouraged to seek out further details if interested.

NOTE: This document does NOT contain any advice. Page 95 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 5.6 Hindenburg Omen The Hindenburg Omen is a an indication of the likelihood of a pending stock market crash. It is named after the infamous Hindenburg zeppelin crash in Germany in 1937. Credit for discovery of the Omen is given to Jim Miekka, a friend of Kennedy Gammage. It attempts to quantify the underlying state of health of the share market — in particular the New York Stock Exchange (NYSE). The traditional definition of the Hindenburg Omen has five criteria6: That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day. That the smaller of these numbers is greater than 75. This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues. That the NYSE 10 Week moving average is rising. That the McClellan Oscillator is negative on that same day. That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory. These measures are calculated each evening using Wall Street Journal figures for consistency. There are criteria for whether the signal is a confirmed occurrence, or non- confirmed.

Your own notes and comments: ......

6 Wikipedia — http://en.wikipedia.org/wiki/Hindenburg_Omen (Nov 2009) NOTE: This document does NOT contain any advice. Page 96 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6 Share Trading & Investing — a very brief introduction Whilst the process of trading or investing in shares (or other financial instruments) is not regarded as technical analysis, it is closely related and some of the activities utilise technical analysis principles and methods. So, it is worthy of some mention here. To be a successful share trader, there are several key steps to work through, and each of these has a few activities that need to be undertaken to help minimise the risks. It can be said that there are five key steps as follows: 1. Preparation — Includes: “Why do it?”; the funding; your suitability; the emotions involved; fundamental or technical analysis? and how much news to seek out. 2. Get ready — Trading style, trading plan, trading strategy, software, back-testing, paper trading, broker selection, trading account, and further education. 3. Risk and money management — Make sure to implement sound money and risk management strategies. If investing / trading in stocks, consider preparing a watchlist of only quality companies in order to increase the chances of success — avoiding high-debt companies and those with a history of poor performance. Consider appropriate position sizing, and good use of a Stop Loss approach. 4. Trade! — Pull the trigger — Logon, select the target and trade; keeping good records, and implementing proper money and risk management strategies. 5. Progress reviews — periodically monitor and review open positions, closed positions, and consider refining the strategies or money management. In this section, “Share Trading — a very brief introduction”, we only quickly look at some of the key aspects of share trading, except for the topic of Stop Loss which we study in more detail. Another topic that is covered in more detail in this section is that of sample trading strategies — the practical application of technical analysis. At the end of this section, after the more important material, there are several sample trading strategies that could be winners in the right hands. But in the hands of an unskilled and untrained share trader, these strategies could all be losers.

*** CAUTION *** Investing in the share market can result in loss of funds. There is no guarantee that any particular trading strategy might work or not work.

6.1 Trading / investing styles — introduction Trading styles are something that is really a personal preference. If you get into share trading, then you do need to understand your own preferred comfortable share trading style. Share traders tend to prefer one of the following broad styles (or perhaps a mix of two). Trader versus Investor – There is not a clear distinction between these. But it will help to understand this if we consider the two extremes. A trader buys and sells shares in the short term, and is happy to dispose of the stock within days or weeks if this is appropriate. Whereas the investor prefers to “buy and hold” (and “set and forget”), hanging onto the stock for the longer term (months or years), and riding through the volatility of both bull and bear market conditions. Intra-day trading – buying and selling shares in a company in the same day. This can be exciting, watching the share price movements on the computer screen during the day. But it is also time consuming, and can be very nerve racking.

NOTE: This document does NOT contain any advice. Page 97 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Inter-day trading – buying and holding shares for at least one day, and possibly up to several days. The inter-day trader might buy and sell based on daily price charts, or on weekly or monthly charts. This approach is not as exciting as intra-day trading; but it can consume much less time, leaving more time for other activities (like a full-time job, or other pursuits or interests). 6.2 Trading / investing plans & strategies— introduction When trading, it is very important to start out with a trading plan that is written down. It will describe things like: Your investment objectives, and investment horizon. Your funding arrangements (eg. cash, loan, margin loan, etc.). Your preferred financial instrument, or multiple instruments (eg. equities, CFDs, warrants, options, futures, currencies, etc.). The trading plan describes “what” you want to do and achieve at a high level. The trading strategy described below is more of the “how” you will go about it. In comparison, a trading strategy is the “how” you will go about achieving the goals of the trading plan. The strategy will set out the clear and concise steps to go about the trading / investing activity, and it is perfectly okay to have several strategies to suit different approaches, or for different purposes (eg. one for managing a SMSF, and one for speculation, etc.).

6.3 Money and risk management To help ensure success with share trading, it is important to implement sound money management methods. This section provides just a glimpse of the sorts of things to consider. Sound money management includes the following: Proper trading plan, and strategy (in writing). Adequate testing of your strategy (back-testing, paper trading). The amount of money to put “at risk” — or rather, the percentage of the investment capital to put at risk. Understand the risk and reward aspects — the risk is the maximum probable dollar loss that might result from a trade; and the reward is the maximum possible profit. The reward to risk ratio is important. Position size — There are a number of influencing factors that can determine the size of each trade. Ideally, the position size will factor in the amount of risk in the trade. In order to maximise the returns, the size of each invested position needs to be somewhat “optimised”. An effective exit strategy for each position (defined in the trading strategy). Effective use of stop loss positions. That is, determining useful stop loss values, and then actually acting on them. Trade management — The effective management of an open position requires both monitoring of the position (according to your trading strategy), and taking appropriate action when required. This includes: adjustment of your stop loss position, monitoring for price weakness and potential failure, and exiting the position as per your strategy. Whether you are prepared to add to a position as it progresses. Whether you will liquidate a portion of a winning position, to re-balance the portfolio. As the profit for any one position continues to grow in size, it might be appropriate to sell out a portion of the position.

NOTE: This document does NOT contain any advice. Page 98 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.3.1 Amount to put “at risk” One of the key parameters to consider is the amount of investment capital that we are prepared to put “at risk” on each position. This is exemplified in Figure 58 which is explained as follows. Consider a stock that has traded in the range of $10 to $13, with the last five bars / candles in that range. One approach to risk management in this sample situation is as follows. Consider a possible purchase when the price breaks above the $13 level (the top of the trading range), and set the Initial Stop Loss at the bottom of the trading range at $10. This Figure 58: Amount to put "at risk". means that if we can buy at $13, and if the price fails to rise, and actually falls back into the trading range, and if it falls as far as $10, then we will sell and crystallise a loss of $3 per share. This $3 amount is the amount “at risk”. If the number of shares that we bought in this example, risking $3 per share, is as small as to represent about 2% of our total investment capital, then we can probably “sleep at night”. This amount is so small that it would not greatly impact our capital. And we could afford to have several losses like this before starting to panic.

6.3.2 Position size For someone starting out in share trading with a small amount of capital, make sure to factor in the costs (eg. brokerage fees) because a position of only $500 might be okay to play with, but if the brokerage fees are only $25 in, and $25 out, then the total brokerage will be $50. So if you want your $500 position to make a profit, it needs to improve by 10% (ie. $50) just to cover the brokerage costs. A position size of something like $3000 or $4000 might be better; but it is important to factor in the amount of money that is actually at risk in the trade. This will potentially result in a different position size for each trade. This topic requires some discussion and explanation which can't be offered here, so the reader is encouraged to seek out more details.

6.3.3 Stop loss basics The topic of a stop loss is such an important one that a little more detail is required. Determine an initial stop loss position before you enter the trade. The initial stop loss value will be less than your entry price, so it is really a “limit loss” stop position. After you place your trade and make the purchase, you could implement your stop position as a conditional sell order in the market so that it will be acted on even if you take you eyes off the ball. But, note that the conditional stop-loss sell order is not guaranteed to be acted on. It is possible for a share price to fall past a stop-loss value without a sale taking place. So you do need to have “plan B” ready (eg. SMS text message alert at a particular price). An acceptable alternative to a stop loss conditional sell order is to monitor the market (either daily or weekly, depending on your documented trading strategy), and if the nominal stop loss position is broken, then manually place the sell order in the market.

NOTE: This document does NOT contain any advice. Page 99 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview Periodically review your positions, and raise the stop loss position to protect more profit. Once it is raised to a point above your entry price, and you are in profit, it becomes a trailing stop position. The actual stop loss position can be determined in a number of ways, including: based on a chart pattern (eg. support level); based on the “2% Rule”; using a measure of volatility or Average True Range (eg. a technical indicator that is based on a multiple of ATR); (and some others, see the text below). The bottom line is that if the price falls below your stop loss position, then make sure to act on it. You need to protect your capital, minimise any losses, and maximise any profits. The topic of Stop Loss is covered in a lot more detail on the following pages.

NOTE: This document does NOT contain any advice. Page 100 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.4 Stop loss details Here is a list of just some of the possible ways to determine where to place a stop loss position: At a support level. At past resistance which is now support. On a sloping support line (an uptrend line). On the 30 week SMA (Weinstein). Using the P-SAR indicator. Using the Long CBL Stop. At a multiple of the Average True Range (ATR). There are many more possibilities, some of which are implemented as indicators in the BullCharts charting software package. Even though this topic is more of a share trading topic than a technical analysis topic, some of the stop loss methods rely on technical analysis. So each of these is discussed in the following sections. Consider the price chart in Figure 59 at right. Notice that this is a Daily chart, covering about 6 weeks in September-October 2007. You have spotted a good entry based on the Big Figure 59: Sample price chart - where to place the stop? White candle on 11 October 2007, and you follow the chart and consider an entry on any of the following three days. Notice at the right hand end of the chart that there is a green shaded area with the label “Training Mode”. This is a feature of the BullCharts software. By enabling “Training Mode”, you can hide the price action to the right, and reveal the price chart one bar at a time. This is a useful feature to help you think through likely price action scenarios, before looking to see what actually happened. Now, refer back to Figure 59 again, and consider why this is a good potential entry: The Big White candle is a breakout above the recent trading range. The Big White candle is accompanied with higher Volume. The volume is actually several times higher that the MA of Volume (indicated by the curve that is plotted on the Volume). Now, assuming that you did enter somewhere in those last 3 days, where should you place a stop loss position to protect your capital? There are a number of options as described in the following notes.

NOTE: This document does NOT contain any advice. Page 101 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.4.1 Stop loss at support Remember that Brainy says that the market is like an elephant. And we should always take a step back to look at the bigger picture. So, if we zoom the chart out and view it on a Weekly time frame (over about 17 months) as in Figure 60 at right, we can see that the price has been falling steadily since a peak in June/July 2006. Can you see a confirmed downtrend in the chart? (Remember, lower highs and lower lows.) In Figure 61 below we have drawn a downward sloping line above the price action as a down trend line. This has acted as a ceiling above the price action, and has contained it, until the price broke out above it in September. Figure 60: The same chart zoomed out - where to place the stop? Now, exactly where should we place the downtrend line? Remember that it must touch at least two candles; but should it touch the Highs of the candles or the highest part of the candle body? Some people will argue that the tails (or wicks) of the candles are not that significant, and that the trend line should touch the candle body. Notice also that a horizontal (green) line is drawn under the price action (at $1.225 — ie. one dollar and 22 and a half cents). We can say here that if the price falls back and penetrates the horizontal support line, then the previous down trend could be continuing, and we should exit the trade. So, this horizontal support line makes one Figure 61: Down trend and a support line. possible position for the stop loss.

6.4.2 Past resistance which is now support In some cases, there can be a past horizontal resistance line on the chart which the share price eventually breaks above, resulting in the resistance line becoming a support line. This is known as a change in polarity. In these cases, the support line can then be regarded as a stop loss level as in the previous section above.

NOTE: This document does NOT contain any advice. Page 102 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.4.3 Sloping support line (trend line) Where an uptrend is already in place, with the share price rising and staying above an uptrend line, a stop loss position could be considered at the sloping uptrend line. In this case, the actual stop level will change with each progressive candle. If the rising price falls below the rising trend line, it is considered that the strength of the trend is weakening. Some people take this as a signal to quit the stock and look for a stronger rising trend.

6.4.4 30 week SMA (Weinstein) Stan Weinstein talks at length in his book about the usefulness of the 30-week (Simple) Moving Average — “Over the years, I've found that a 30-week moving average (MA) is the best one for long term investors, while the 10-week MA is best for traders to use.”7 Stan describes how to calculate the (Simple) MA on page 313. Some people will strictly adhere to Stan's teachings about not holding a stock if the price is below the 30- week MA. Likewise, a stop position could be placed at the 30-week MA value. In Figure 62 at right, this is $1.53.

Figure 62: The 30 week Moving Average.

6.4.5 Parabolic-SAR (P-SAR) The Parabolic-SAR indicator was developed to provide a trade exit point. On the chart it is normally shown as a series of dots, with one dot placed either above, or below, each candle. The price value of the P-SAR point indicates the stop position for the next candle. In Figure 63 at right, this value is $1.383 (which you might need to round up or down to a tradeable value.

Figure 63: Parabolic-SAR indicator to suggest a possible stop loss position.

7 Weinstein, Stan; “Secrets for Profiting in Bull and Bear Markets”, page 13. NOTE: This document does NOT contain any advice. Page 103 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.4.6 Long CBL Stop The Count Back Line (CBL) approach can be used to identify a possible stop loss position level, and to help identify trailing stop positions. The Count Back Line approach is depicted in Figure 64 at right. In this forum we can't cover off the theory, nor explain how to derive it manually. In the Figure at right, it can be seen that based on the last most significant High (on 12 October), the value for the Long CBL Stop (as shown in BullCharts) is $1.385.

Figure 64: The Count Back Line (CBL) as a stop position. 6.4.7 A multiple of Average True Range (ATR) Another way to determine a stop loss position is to look at the “average true range” of the share price over recent candles, and place the stop at something like 2 times, or 3 times this distance away. In BullCharts, one indicator that does this is the Wilson ATR Trailing Stop. In Figure 65 at right, the thick dots shown under the candles indicate a suggested stop level for the next day's candle. They are based on an ATR value of 3.6, and they factor in the price range for the last 21 candles. They start at the start of a trend (16 Aug), and continue to rise with the Figure 65: The Wilson ATR indicator price — they do not fall away. In good for a stop loss value. software, you can adjust the ATR factor, and the number of candles (time period). The latest ATR Trailing Stop point shown on this chart is $1.409.

Your own notes and comments: ......

NOTE: This document does NOT contain any advice. Page 104 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.4.8 Stops in summary Now let's summarise the actual price points for all of the stop loss approaches described above, which are only just a few of all the possible approaches. The chart in Figure 66 depicts these. Now, in this particular case, which of these would have been the best in hindsight? Let's take a quick look at the price chart in Figure 67 below, and note the following points.

1. Let's assume that we bought on 15 October (the vertical dashed line) for $1.59. 2. Over the following days, we implemented the trailing stop concept, and raised our stop to follow the price Figure 66: Stop loss - some possible approaches summarised. upwards. Exactly how to do this is not within the scope of this forum.

Figure 67: The trade result, adhering to a Stop Loss position. 3. The P-SAR smallish dots continued to follow the rising price. 4. The Wilson ATR Trailing Stop dots rose in steps. 5. The CBL line was moved onto each new significant High. The figure above shows the CBL on 1 November.

NOTE: This document does NOT contain any advice. Page 105 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview And the result? Consider the following discussion where the manual stop approach is your decision to manually act on sell triggers by manually placing a sell order in the market on the next trading day (requiring analysis every night), whereas the conditional stop order is an automatic sell order placed with the broker. 1. Bought — We said above that we bought for $1.59 on 15 October. 2. P-SAR (conditional stop order) — The P-SAR value on 7 November at $1.788 would have triggered a sell order the next day at that price (or the nearest price that your broker will accept — say $1.79). The gross profit (before brokerage, etc.) would have been $0.20, or 12.6% over 24 calendar days (18 bars). This is a good result. 3. P-SAR (manual stop) — If you were using the P-SAR, notice that on 8 November the P-SAR jumped from below the share price to above the price. This indicates a sell action on the next trading day. The next trading day was a small up (white) candle, where you could have sold for at least $1.78. The gross profit (before brokerage, etc.) would have been $0.19, or 11.9% over 25 calendar days (19 bars). This is a good result. 4. CBL — If you were using the CBL, then the latest significant high at $1.97 on 1 November gives a “Long CBL Stop” position at $1.72. This was reached on 12 November (the big black candle) and would have triggered an immediate conditional sell order at that value, or a manual next day sale for at least $1.66. A gross profit of either $0.13, or $0.07 respectively (ie. either 8.1% or 4% — still not bad over a 28 calendar day period). 5. Wilson ATR Trailing Stop — With the value at $1.651 for a few days, and the price on 12 November (the big black candle) hitting a low of $1.65, a conditional stop order at $1.65 would have triggered a sale at that point. Gross profit = $0.06 (3.8%). 6. 30 week SMA — The 30 week SMA value of $1.52 was a long way below the price at this point, and would have resulted in a loss. This could be a good approach for the initial stop loss position, but can not be used as a trailing stop. 7. Support — With recent support at $1.225, this is a long way below the price, and tells us that this is okay for the initial stop position; but a trailing stop must be pulled up as quickly as possible to protect capital, and to protect any profit. Conclusion? Well, it is your choice, and there is no right or wrong answer. One approach might work better in some cases, whilst another approach might work better at other times, or on other stocks.

Your own notes and comments: ......

NOTE: This document does NOT contain any advice. Page 106 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.5 Back testing for success It is important to test out your trading strategy before putting it into practice. You can do this and gain confidence in your strategy with back testing. Back testing can be done in a number of ways, including: By manually viewing price charts for conditions meeting your trading criteria, and noting the hypothetical results that would have been achieved. By using charting software with “scanning” capability to scan a watchlist or group of stocks for those that meet your criteria within a specific time frame. Charting software like BullCharts can run your favourite scan across your selected group of stocks “as at” a specific date back in time. This process can be repeated for other specific dates. By using special back testing software to quickly work through hypothetical trading scenarios over a specific window in time (eg. TradeSim). One software tool that is available to assist with back testing is TradeSim from CompuVision — http://www.compuvision.com.au/ .

6.6 Paper trading It is very important to practise before diving into the market for real. Even paper trading can be emotionally testing the first time you do it. It is important to experience this, and learn to manage the emotions, as well as to test out your trading strategy. Paper trading — This is where you go through the motions of stock selection using your trading strategy, and make a record of a hypothetical transaction as though you had bought a stock. Then sell the stock according to your strategy, and record the sale transaction. Over a period of time, after a number of transactions, your "paper records" will show whether your strategy is successful or not. ASX Sharemarket Game: Register for MyASX at: www.asx.com.au Play the ASX Game (usually runs twice each year for several weeks).

Your own notes and comments: ......

NOTE: This document does NOT contain any advice. Page 107 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.7 Trading strategies Definition: “a predetermined set of rules for making trading decisions”. Once your trading plan is defined, then it is important to record how you will go about implementing the plan. In its simplest form, a trading strategy comprises a set of rules or decisions that describe the circumstances that will trigger you to place a buy order, and those for a sell order. Once it is written down, a foolproof trading strategy should be able to be executed automatically, and by someone with little skill or knowledge. If you can remove all subjectivity from the decision-making process, and remove all emotion from the trading process, then placing the trade becomes an automatic and mechanical process. Your total trading strategy might include just one set of buy/sell rules, or it might include several. It is essential to have a trading plan and strategy including some key elements: Stock selection method / criteria — A description of how you will find stocks that are candidates for purchase. Entry criteria — A description of the criteria you will use to decide whether to make the purchase or not. Exit criteria — A description of the criteria you will use to decide when to sell the stock (eg. a target price increase, or a specific price point, or a percentage, etc.). Stop loss / profit levels — The point at which you will sell if the stock does not behave as expected. Money management strategy, position sizing and risk management — The various strategies you will use to determine how much money to commit to a particular stock purchase, and how to divide up your available capital across a number of stock positions. Also, the strategies to employ to safeguard your capital and minimise any losses.

6.7.1 Sample trading strategies Following are some sample trading strategies; but do note the following: There is absolutely NO GUARANTEE that any of the sample trading strategies herein might work. Any trading strategy might work well for one person; but not for another. This can be due to a number of reasons. It is imperative that any trading strategy be documented (in writing) and tested before being used with real money. The strategies below are not necessarily complete trading strategies. For example, some of them describe only the stock selection criteria. 6.7.1.1 Long term bull market strategy This might seem obvious, and is a very fundamental approach; but many people ignore some of the finer points and still lose money. In a long term bull market, aim to buy in at the start of the up trend, and ride out any of the minor corrections along the way; but make sure to sell out as soon as the trend has finished. Along the way, the price fluctuations might be high, but if the up trend is sustained over the long term, it might be beneficial with little effort. You can utilise moving averages and other trend indicators to help determine the presence and strength of a trend, and to watch out for possible trend weakness and failure. This approach might take just 2 hours per week. but like all share trading, there is no guarantee of success.

NOTE: This document does NOT contain any advice. Page 108 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.7.1.2 Shorter term bull market strategy Once an up trend is confirmed, there will probably be periods of price weakness (minor corrections), before further upward price movement. Try to buy a stock on the corrections (the price dips), and sell on reasonable weakness (as the stock peaks before dipping). Several technical indicators are useful in this approach. During a sustained long term bull market, this might mean spending more time watching the stock (several hours per week instead of perhaps just 2 hours per week), and it might mean more trades (ie. more buy/sell transactions). But compared with the previous strategy, it should reap greater returns. 6.7.1.3 Momentum + MA-of-Momentum This combination of indicators has been promoted by Jake Bernstein (see his web site here: http://www.trade-futures.com/ ). Use: Momentum, 28 period — the jagged (red) line in the screen shot below. 28-period simple moving average of the Momentum — the smoother (blue) line below (in BullCharts, this indicator is called “Smoothed Momentum”).

Figure 68: Momentum plus MA of Momentum.

Possible buy/sell signals (indicated above with ellipses): Possible buy when the Momentum crosses above the smoother MA. A stronger signal when the smoother MA is NOT falling (ie. it is bottoming and turning up). Possible sell signal when the Momentum crosses below the smoother MA. Possible sell when the Momentum has risen too far.

Your own notes and comments: ......

NOTE: This document does NOT contain any advice. Page 109 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.7.1.4 Use ADX for entry (Chuck le Beau) Renowned technical analyst and book author Chuck le Beau likes to use ADX for entries. 6.7.1.5 Use Parabolic SAR for exits Refer to the earlier section on P-SAR for details. 6.7.1.6 Price Breakout The price “break out” is a chart pattern that can reap good profits for the astute technical analyst. WARNING – It is not guaranteed, and does often fail. It is not 100% predictable. Read on with caution.

Figure 69: Price break-out. With reference to the Weekly Candle chart above of Amadeus Energy from July 2002 until Jan 2004, note the following points: The bottom portion of the chart is the Volume pane – indicating the number of shares sold each in each week. In the price pane (the upper portion of this chart), we can see that the price fluctuated in a range from about 8c to 14c from July 2002 (it actually started in April 2000 – about 2 years earlier). So the price fluctuations in this price range (referred to as “consolidation”) actually took place over a 3 year period. In July 2003, there is one big white candle that breaks above the thick red resistance line drawn in at 14c. There is confirmation of the break out with the extra high volume in the same week (the higher volumes are indicated with the green ellipse). This would give a degree of confidence to buy in during the week following the break out. The purple triangle on the chart indicates the price increase of about 128% over a 16 week period (this is an annualised increase of more than 1000%). The price went on to rise higher to peak at $1.40 in May 2006.

NOTE: This document does NOT contain any advice. Page 110 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.7.1.7 Moving average cross-over Additional uses for the Moving Average are when two are combined on one chart to produce a Moving Average Cross-over. The sample price chart below shows two moving averages overlaid on the same price chart.

Figure 70: Moving Average cross-over.

Note the following: Some experts state that Moving Average Cross-overs are notoriously inaccurate. So make sure to test thoroughly before implementing. Common MA pairs are: 5-period and 21-period (but other pairs can be used). Active traders might use: 5 and 21 days. Investors might use: 5 and 21 weeks. Buy/sell signals are clear where the two MAs cross each other (Gold Cross and Dead/Death Cross). Common to plot the 2 MAs on the price chart, or can “hide” the price plot. Works best on a clearly trending stock. Can convert the MA-pair to an oscillator by subtracting the slower line from the faster line to produce a curve that will oscillate above and below a zero line. Moving Averages tend to produce late entry signals for stock purchase, and late exit signals. So it is wise to use them in conjunction with other tools.

Your own notes and comments: ......

NOTE: This document does NOT contain any advice. Page 111 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.7.2 Some specific supposedly successful strategies The following strategies are reputedly in use by some successful traders (but of course cannot be guaranteed to be successful: Use the MACD indicator and RSI. Look for RSI divergence against the share price. Use Stochastic indicator and Directional Movement (ADX) to give joint signals It should be noted that a successful strategy in the hands of one trader can be horribly unsuccessful in the hands of another trader. This can be due to the vagueries of the specific stock or market, or the precise entry or exit approach.

6.7.3 Trading strategy summary — How do people use all this? It is very important to develop a trading strategy, to write it down clearly, and then test it and follow it. The strategy might be one (or more) of the following: Identify an up trend, and ride the trend. Identify a Moving Average increasing (confirming the trend). Identify Support and Resistance and then set buys, sells and stops. Look out for potential break-outs, then identify, confirm and respond quickly (use a scan feature in charting software). Additional possible strategies; but with no guarantee of success: Takeover target speculation Momentum trading Position trading Swing trading Dividend stripping IPOs Hedging.

NOTE: This document does NOT contain any advice. Page 112 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

6.8 Trading — Is this for me? To wrap up the discussion on share trading, we have a look at some of the key facts and issues that will help the new share trader to get started.

6.8.1 Some home truths about share trading Here are some "home truths" about share trading: Even a good share trader will have some losses. This is part of the game. When you have a loss, you need to realise this quickly, and admit it to yourself, and quit the trade and take the loss. Over the long term, if you can maximise profits (without being greedy), and minimise losses, then you might end up in front. It is claimed that up to about 90% of people who start out share trading end up failing at it — probably due to a lack of proper preparation and training. Unless you work for someone else as a share trader, then share trading can be a lonely existence. Home based share traders who sit by their screen for most of the day find it difficult or inconvenient to mix with other people because they might miss out on a big winning trade. The good news is that by following a tested trading plan, it is possible to invest in the share market with probability on your side. On the other hand, if you are not careful, probability might be playing against you.

6.8.2 Attributes of a successful share trader Research has shown that there are some common attributes that apply to successful share traders. These are documented in several text books on Technical Analysis, and on Share Trading. In summary, these attributes include the following mix of knowledge-related attributes, skills, and personality traits:

● have a trading plan ● open minded ● attitude ● trading strategy ● flexible ● good physical health ● proper money mgt ● confident ● spiritual harmony ● proper position sizing ● commitment ● responsibility ● discipline ● independence ● psychology ● intuition ● willingness to learn ● passion ● relevant experience ● action oriented ● goal setting

6.8.3 How much time does it take? It depends on: your investment horizon your degree of aggressiveness your tolerance to financial risk It can be, for example: 2 hours per week (on the weekend) 40 hours per week

NOTE: This document does NOT contain any advice. Page 113 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 6.8.4 How much money do I need? Some professional traders apparently make about 20% return per annum from their trading. This compares to bank interest of about 2%-8% (depending on the bank interest of the day). To make a living from share trading, you might need as much as $250k in capital. If you had this much, and if you invested most/all of it into the market, and if you made 20% profit like the professional traders, then you would be making $50k profit per year. Is this enough for you to be happy with? Don't forget the variety of costs: brokerage costs, interest on any borrowed funds, tax on any profits, software and data subscription costs, &c.

6.8.5 Isn't this gambling? Some people think that share trading is gambling. Well, consider the farmers who depend on the vagueries of the weather to earn a living. And the tourist industry who also depend on favourable weather and the tourist trade to earn a living. With share trading, you can take educated risks and balance up the probabilities, and invest with confidence — provided you have a tested strategy.

6.8.6 Investing / trading — Final tips Be sure to properly manage the risk. Note the following: Always use a stop loss Look out for low liquidity (either, volume, value or trades) Watch diligently (don't take your eyes off the ball) Retracements will occur Beware of sucker rallies Watch out for the profit takers who will take profits Be mindful of the 3-period pause in a rally.

6.8.7 Final words The lyrics of the famous song “The Gambler” are very appropriate: You got to know when to hold 'em, Know when to fold 'em, Know when to walk away, know when to run. You never count your money, when you're sittin' at the table, There'll be time enough for countin', when the dealin's done. Now every gambler knows, the secret to surviving Is knowin' what to throw away, knowin' what to keep. 'Cause every hands a winner, and every hands a loser, And the best you can hope for is to die in your sleep. (Written by Don Schlitz, sung by Kenny Rogers)

NOTE: This document does NOT contain any advice. Page 114 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview

7 Charting software In the olden days, technical analysts used to draw price charts by hand on chart paper. These days, it is so much easier to use powerful computer software on even a home computer to draw share price charts, and to include technical indicators, and lots more. In this section we have a quick look at some of the charting options.

7.1 “Black Box” software There is some software available where all you need to do is “push the button”, and the software tells you what to buy, and when to sell. It is called “black box” software because what is inside the box (ie. the logic about how it works) is totally secret. You push the button and it spits out an answer. Note: A range of these are available under various product names. The criteria for stock selection is not divulged (it's a secret). The software often sells for much more than AUD$1,000. There is often no guarantee of success. You have no control over what stocks are chosen, or why. You don't need to have any skill or knowledge. The true technical analyst will avoid these products. 7.2 Web-based charting options There are some web sites that provide charting services over the web: They have access to data (but sometimes the data is not “clean” and reliable). They can include some indicators. Charts tend to be a little simplistic and a little rough; but tend to be acceptable. Including: The ASX — http://www.asx.com.au Yahoo — http://au.finance.yahoo.com BigCharts.com — http://www.bigcharts.com Paritech (c/- CommSec, etc.) ADVFN — http://au.advfn.com/ Stock Charts — http://www.stockcharts.com 7.3 Real charting software There are a number of “real” charting software packages available. They have different strengths and weaknesses. They are normally installed onto your computer. They depend on having share price data available. Need to download data from some where periodically (at end-of-day). Intraday (live) data can be available.

7.3.1 Charting software – samples Some of the charting software available in Australia currently includes the following: BullCharts (this is the author's favourite, see: www.robertbrain.com/bullcharts/ ) AmiBroker MetaStock IncredibleCharts Market Analyst.

NOTE: This document does NOT contain any advice. Page 115 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview 7.3.2 What do they do? — Key features What do the good packages provide? Access to download price data. Some software can readily import data from several different data providers. Whereas other software might have proprietary data formats so that only their data source can be imported into the software (not necessarily a bad thing for ensuring data integrity). Price charts – in various time frames (eg. daily, weekly, monthly, quarterly). For some products, intraday data is not available. Indicators – draw various indicators on the chart (one or more indicators). Watchlists – Maintain multiple lists of stocks that you want to keep an eye on over time. Scans – Define and run a “scan” that will search through a specific list of stocks for company share prices that meet certain criteria (eg. “the price has crossed above a 21 day Moving Average, and Volume is higher than recent daily volume”). Line studies and annotations – Draw and place various technical analysis features on the price chart (eg. lines for support or trend, etc.). Also text notes, circles to highlight features. Includes: Gann and Fibonacci tools, rulers to measure price or time change, etc., etc. Alerts — Set an alert on price or volume, to flag when the alert level is reached. Set alerts at either a horizontal level on the chart, or as a sloping line. 7.4 What are the costs? Some of the internet-based charting tools are free to use. The cost to purchase a proper charting package can be as low as $100's or as much as $1,000's. 7.5 End-of-Day (EOD) versus real-time live intraday data. The intraday traders who want to buy and sell within a day probably need to see intraday data. Meaning that they need to see the live data on the screen during the day. Longer term traders, and investors, tend to use only End-of-Day (EOD) data. Depending on the charting software, this is normally available as a part of the bundled software package. 7.6 Where do you get the up to date share price data? Live (ASX) data from many provides for free is generally 20 minute delayed. Real live data is generally available to clients of brokers and data providers. End of Day (EOD) data is available. From a data feed/supplier. 7.7 Trading platforms A trading platform is a collection of software and internet access to web sites that gives you access on your computer screen to a range of information and facilities. You can do things like: view various market data; view price charts; view indicators; place buy/sell orders. The trading platform is typically available from certain brokers or service providers, and comes as a part of the service. For some people, this tool means that they don't need a separate charting package. A very popular trading platform is known as WebIRESS, and is available from a number of brokers. Refer to their web site for details: www.iress.com.au

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8 Basic glossary accumulation — This is when the market is controlled by buyers. It tends to happen at the bottom of a market cycle, where the price does not move much, but the volume is relatively high. One explanation for this is that the large investors are snapping up cheap stock from investors who fell they need to dump it due to falling prices (they are accumulating the stock). In this situation, once all the sellers are “exhausted”, and there are no more sellers willing to sell at these very low prices, then the buyers will eventually outnumber the sellers and the downtrend will reverse. Compare to distribution. distribution — This is when the market is controlled by sellers. It tends to happen at the top of a market cycle, where the price does not move much, but the volume is relatively high. One explanation for this is that the large investors are dumping over-priced stock onto unsuspecting investors in an overheated market. Compare to accumulation. securities — a general name for a range of financial instruments including: stocks, bonds, notes, mortgages, bills of lading and bills of exchange equities — a type of security that represents ownership in a corporation; also called stocks; synonym for shares shares — a stake or share in a company; also known as equities; certificates denoting ownership in a company; also known as stocks stocks — also shares; a type of security that represents ownership in a corporation

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9 Further references Educated Investor bookshop, 525 Little Collins Street, Melbourne, www.educatedinvestor.com.au Some references and recommended reading:- Anderson, Phillip J; “The Secret Life of Real Estate and Banks — How it moves and why”; Shepheard-Walwyn; 2008 (RRP $74.95). Bedford, Louise; “The Secret of Candlestick Charting”; Wrightbooks. + du Plessis, Jeremy; “The Definitive Guide to Point and Figure”; 2005. + Edwards, Robert D. and Magee, John; “Technical Analysis of Stock Trends”, 9th Edition, (2001-2008), John Magee Inc., Chicago Illinois c2001, ISBN 1-57444-292-9. * Guppy, Daryl; “Trend Trading”; Wrightbooks. Hull, Alan; “Active Investing”; Wrightbooks. Lally, Mike; “Mastering Risk”; Wrightbooks. Lane, George C; “Lane's Stochastics”; M.D.Stocks & Commodities March 1994. + Murphy, John J.; “Technical Analysis of the Financial Markets”; New York Institute of Finance, New York, NY, c. 1999, ISBN 0-7352-0066-1. + Nison, Steve; “Japanese Candlestick Charting Techniques”; New York Institute of Finance, Simon & Schuster; 1991. Pring, Martin J.; “Technical Analysis Explained”; 4th Edition, McGraw Hill Book Company, New York, NY, c. 2001, ISBN 0-07-138193-7. + Tharp, Van.K.; “Trade your way to Financial Freedom”; McGraw Hill, 1999. * Watkins, Frank; “Exploding the Myths”; Vocational Education & Training Publications, 2003 (RRP $34.95). Whistler, Mark; “Trade with Passion and Purpose”; Wiley Trading, 2007. Wilder, Welles; “New Concepts in Technical Trading Systems”. * Wilson, Leon; “The Business of Share Trading”; Wrightbooks, 2003. * Weinstein, Stan; “Secrets for Profiting in Bull and Bear Markets”; McGraw-Hill, 1988 (RRP $36).

* — Entries denoted thus are highly recommended reading. + — Entries denoted thus are advanced material.

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Index

3Ways Rule...... 37 computational finance...... 89 accumulation...... 117 Coppock...... 86 Accumulation/Distribution indicator...... 82 Count Back Line...... 104 ADX Directional Movement indicator...... 74 cycle analysis...... 90 ASX Sharemarket Game...... 107 Dark Cloud candle pattern...... 57 ATR - Average True Range...... 78 Directional Movement indicators...... 74 back testing...... 107 distribution...... 117 TradeSim...... 107 Doji candle pattern...... 54 bears...... 19 Doji Star candle pattern...... 56 Bollinger Bands...... 76 double top chart pattern...... 49 break-out ...... 110 Dow Theory...... 17 BullCharts...... Efficient Market Hypothesis...... 17 BullCharts...... 12 Elliott Wave...... 93 charting software...... 115 emotion...... 18 Training Mode...... 101 Engulfing Bearish candle pattern...... 57 bulls and bears...... 19 Engulfing Bullish candle pattern...... 58 candle chart, sample...... 26 EOD data...... 116 candle patterns...... equities...... 117 basics...... 53 EquiVolume chart...... 32 candles...... 25 Evening Star candle pattern...... 56 Dark Cloud...... 57 fair value...... 18 Doji...... 54 Falling Three Methods candle pattern...... 60 Doji Star...... 56 Fibonacci extensions...... 91 Engulfing Bearish...... 57 Fibonacci ratios...... 90 Engulfing Bullish...... 58 Fibonacci retracements...... 91 Evening Star...... 56 financial modelling...... 89 Falling Three Methods...... 60 Funda-Technical Analysis...... 23 Hammer...... 53, 56 fundamental analysis...... 18 Hanging Man...... 55 fundamental versus technical analysis...... 23 Harami...... 54 Gann Swing chart...... 30 Harami Bearish...... 57 Gann, W.D...... 95 Harami Bullish...... 58 GMMA - Guppy Multiple Moving Average...... 66 Harami Cross...... 58 Hammer candle pattern...... 53, 56 Inverted Hammer...... 56 Hanging Man candle pattern...... 55 Marubozu...... 53 Harami Bearish candle pattern...... 57 Morning Star...... 57 Harami Bullish candle pattern...... 58 Piercing Line...... 58 Harami candle pattern...... 54 Rising Three Methods...... 60 Harami Cross candle pattern...... 58 Shooting Star...... 55 head and shoulders chart pattern...... 50 Three Black Crows...... 59 Hindenburg Omen...... 96 Three White Soldiers...... 59 Historical Volatility Ratio...... 76 Three-candle patterns...... 59 indicator parameters...... 61 Candlevolume chart...... 32 indicators...... CBL...... 104, 106 Accumulation/Distribution indicator...... 82 Chaikin Money Flow indicator...... 84 ADX Directional Movement...... 74 Chaikin's Volatility indicator...... 76 ATR - Average True Range...... 78 chart patterns...... 46 Bollinger Bands...... 76 double top...... 49 Coppock...... 86 head and shoulders...... 50 Directional Movement...... 74 pennants, flags, wedges...... 47 GMMA - Guppy Multiple Moving Average...... 66 rounding top...... 50 MACD...... 69 triangles...... 46 momentum indicators...... 80 charting software...... 115 moving average...... 63 AmiBroker...... 115 moving average high/low...... 68 BullCharts...... 115 multiple moving average...... 65 IncredibleCharts...... 115 OBV indicator...... 81 Market Analyst...... 115 Parabolic-SAR...... 73 MetaStock...... 115 Rate of Change (ROC) ...... 85 charts, price...... 24 RSI...... 83

NOTE: This document does NOT contain any advice. Page 119 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting Robert Brain's Technical Analysis Overview trend...... 62 secondary analysis...... 61 volatility ...... 76 securities...... 117 Inter-day trading...... 98 semi-log price chart...... 26 intra-day trading...... 97 shares...... 117 intraday charts...... 29 Shooting Star candle pattern...... 55 Inverted Hammer candle pattern...... 56 short selling...... 20 Investor...... 97 software...... Kagi chart...... 31 See charting software...... 115 linear regression...... 62 Stage Analysis...... 43 log scale for price...... 27 Stepped chart...... 32 MACD...... 69 Stochastic indicator...... 87 market auction...... 19 stocks...... 117 market opening hours...... 19 stop loss...... 99 market worth...... 18 stops...... Marubozu candle...... 53 CBL...... 104, 106 momentum indicators...... 80 Count Back Line...... 104 Money Flow Index...... 84 P-SAR...... 106 Money Flow indicator...... 84 Parabolic-SAR...... 103 money management...... 98 Wilson ATR Trailing Stop...... 104, 106 Morning Star candle pattern...... 57 superannuation...... 21 moving average...... 63 support...... 44, 102 moving average cross-over...... 111 technical analysis...... moving average high/low...... 68 definition...... 15 multiple moving average...... 65 sample uses...... 20 OBV indicator...... 81 Three Black Crows candle pattern...... 59 OHLC Bar chart...... 25 Three Line Break chart...... 31 overbought...... 19 Three White Soldiers candle pattern...... 59 oversold...... 19 Three-candle patterns...... 59 P-SAR...... 106 Trader...... 97 paper trading...... 107 trades...... 45 Parabolic-SAR...... 73, 103 Trades...... 18 pennants chart patterns...... 47 TradeSim...... 107 Piercing Line candle pattern...... 58 trading plan...... 98 Point & Figure chart...... 30 trading platform...... 116 Points chart...... 33 trading strategies...... polarity...... 102 break-out ...... 110 position size...... 99 sample...... 108 Pretzel chart...... 33 trading strategy...... 98, 108 price charts...... trading styles...... 97 basics...... 24 Training Mode...... 101 candle charts...... 25 trend indicators...... 62 intraday charts...... 29 trends...... line chart...... 24 3Ways Rule...... 37 OHLC bar chart...... 25 Daily fluctuations...... 42 semi-log price chart...... 27 Primary Trend...... 40 volume charts...... 26 Secondary Movement...... 41 price data concepts...... 18 trend strength...... 36 Price Rate of Change...... 85 trendlines...... 35 primary analysis...... 24 trends...... 20, 34 psychology...... 18 "The trend is your friend"...... 34 quantitative methods and finance...... 89 triangle pattern...... 46 Raff Regression...... 62 Twiggs Money Flow...... 84 range trading...... 39 value...... 45 Rate of Change (ROC) indicator...... 85 volatility indicators...... 76 Renko chart...... 31 volume...... 45 resistance...... 44 Volume...... 18 Rising Three Methods candle pattern...... 60 volume chart...... 26 risk management...... volume indicators...... 88 amount at risk...... 99 WebIRESS...... 116 and money management...... 98 Wilder's Volatility Index...... 76 rounding top chart pattern...... 50 Wilson ATR Trailing Stop...... 104, 106 RSI...... 83

NOTE: This document does NOT contain any advice. Page 120 This entire document is for education only. There are NO recommendations in this document. © August 2012, R.B.Brain – Consulting