1.

Price at which one should buy or sell stocks

2. Expected Risk

3. Expected reward

4. Expected holding period

Technical Analysis is a research technique to identify trading opportunities in the market based on
market participants’ actions. The actions of market participants can be visualized in stock charts. Over
time, patterns form in these charts, and each pattern conveys a certain message. The job of a technical
analyst is to identify these patterns and develop a point of view.

1. Trades – TA is best used to identify short-term trades. Do not use TA to identify long-term
investment opportunities.

2. Return per trade – TA-based trades are usually short-term in nature. Do not expect huge returns
within a short duration of time. The right way to use TA is to identify frequent short-term
trading opportunities that can give you small but consistent profits.

3. Holding Period – Trades based on technical analysis can last between a few minutes to a few
weeks, usually not beyond that

4. Risk – Often, traders initiate a trade for a certain reason; however, in case of an adverse
movement in the stock, the trade starts to lose money. Usually, in such situations, traders hold
on to their loss-making trade with the hope they can recover the loss. Remember, TA-based
trades are short-term; if the trade goes bad, do remember to cut the losses and move on to
identify the next opportunity.

5. The market opened at 9:15 AM and closed at 3:30 PM, during which there were
many trades. It will be practically impossible to track all these different price
points. One needs a summary of the trading action and not the details on all the
different price points.
6. We can summarise the price action by tracking the Open, high, low, and close.
7. Open Price – When the markets open for trading, the first price a trade executes
is called the opening price.
8. The High Price – This represents the highest price at which a trade occurred for
the given day.
9. The Low Price – This represents the lowest price at which a trade occurred for
the given day.
10. The Close Price – This is the most important price because it is the final price at
which the market closes for the day. The close indicates the intraday strength and
a reference price for the next day. If the close is higher than the open, it is
considered a positive day; otherwise negative. Of course, we will deal with this in
greater detail as we progress through the module.
 11. The closing price also shows the market sentiment and serves as a reference
point for the next day’s trading. For these reasons, closing is more important than
the opening, high or low prices.
12. The main data points from the technical analysis perspective are open, high, low,
and close prices. Each of these prices has to be plotted on the chart and analyzed

CHARTS -

13. LINE CHART - When it comes to technical analysis, a line chart is formed by
plotting a stock’s closing prices or an index. The line charts can be plotted for
various time frames, namely monthly, weekly, hourly etc. So, if you wish to draw a
weekly line chart, you can use weekly closing prices of securities and other time
frames.
14. he earliest use of candlesticks dates back to the 18th century by a Japanese rice
merchant named Homma Munehisa.
15. Though the candlesticks have been in existence for a long time in Japan, and are
probably the oldest form of price analysis, the western world traders were clueless
about it. It is believed that sometime around 1980’s a trader named Steve Nison
accidentally discovered candlesticks, and he introduced the methodology to the
rest of the world.
16. The candlestick, like a bar chart, is made of 3 components.

The Central real body – The real body, rectangular connects the opening and closing
price.

Upper shadow – Connects the high point to the close.

Lower Shadow – Connects the low point to the open.

17.
18. The data can either be information or noise. As a trader, you need to filter
information from noise. For instance, a long term investor is better off looking at
weekly or monthly charts as this would provide information. While on the other
hand an intraday trader executing 1 or 2 trades per day is better off looking at the
end of the day (EOD) or at best 15 mins charts. Likewise, for a high-frequency
trader, 1-minute charts can convey a lot of information.
 19. So based on your stance as a trader, you need to choose a time frame. This is
extremely crucial for your trading success because a successful trader looks for
information and discards the noise.
20. Key takeaways from this chapter

1. Conventional chart type cannot be used for technical analysis as we need to plot 4 data
points simultaneously.
2. A line chart can be used to interpret trends, but no other information can be derived.
3. Bar charts lack visual appeal, and one cannot identify patterns easily. For this reason,
bar charts are not very popular.
4. There are two types of candlesticks – Bullish candle and Bearish candle. The structure
of the candlestick, however, remains the same.
5. When close > open = It is a Bullish candle. When close < open = It is a Bearish candle.
6. Time frames play a very crucial role in defining trading success. One has to choose this
carefully.
7. The number of candle increases as and when the frequency increases
8. Traders should be in a position to discard noise from relevant information.

candlesticks can be broken down into single candlestick pattern and multiple
candlestick patterns.

Under the single candlestick pattern, we will be learning the following…

1. Marubozu
a. Bullish Marubozu
b. Bearish Marubozu
2. Doji
3. Spinning Tops
4. Paper umbrella
a. Hammer
b. Hanging man
5. Shooting star

Multiple candlestick patterns are a combination of multiple candles. Under the multiple
candlestick patterns, we will learn the following:

1. Engulfing pattern
a. Bullish Engulfing
b. Bearish Engulfing
2. Harami
a. Bullish Harami
b. Bearish Harami
3. Piercing Pattern
4. Dark cloud cover
5. Morning Star
6. Evening Star

I will explain them in greater detail as and when we proceed. However, do keep these
assumptions in the back of your mind:

 Buy strength and sell weakness – Strength is represented by a bullish (blue) candle
and weakness by a bearish (red) candle. Hence whenever you are buying ensure, it is a
blue candle day and whenever you are selling, ensure it’s a red candle day.
 Be flexible with patterns (quantify and verify) – While the textbook definition of a
pattern could state certain criteria, there could be minor variations to the pattern owing
to market conditions. So one needs to be a bit flexible. However, one needs to be
flexible within limits, and hence it is always required to quantify the flexibility.
 Look for a prior trend – If you are looking at a bullish pattern, the prior trend should be
bearish, and likewise, if you are looking for a bearish pattern, the prior trend should be
bullish.
In the next chapter, we will begin by learning about single candlestick patterns.

Key takeaways from this chapter

1. History tends to repeat itself – we modified this assumption by adding the factor angle.
2. Candlestick patterns can be broken down into single and multiple candlestick patterns.
3. There are three important assumptions specific to candlestick patterns.
a. Buy strength and sell weakness.
b. Be flexible – quantify and verify.
c. Look for a prior trend.

MORUBOZU
The textbook defines Marubozu as a candlestick with no upper and lower shadow (therefore
appearing bald)

A spinning top looks like the candle shown below. Take a good look at the candle. What observations do
you make concerning the structure of the candle?

Two things are quite prominent…

 The candles have a small real body.

 The upper and lower shadow is almost equal.

The spinning top candle shows confusion and indecision in the market with an equal probability of
reversal or continuation. Until the situation becomes clear, the traders should be cautious and minimize
their position size.

The Doji’s are very similar to the spinning tops, except that it does not have a real body. This means the
open and close prices are equal. Doji’s provide crucial information about the market sentiments and is
an important candlestick pattern.
The classic definition of a Doji suggests that the open price should be equal to the close price with
virtually a non-existent real body. The upper and lower wicks can be of any length.

However keeping in mind the 2nd rule, i.e. ‘be flexible, verify and quantify’ even if there is a wafer-thin
body, the candle can be considered a Doji.

Obviously, the colour of the candle does not matter in case of a wafer-thin real body. What matters is
the fact that the open and close prices were very close to each other.

The Dojis have similar implications as the spinning top. Whatever we learnt for spinning tops applies to
Dojis as well. In fact, more often than not, the dojis and spinning tops appear in a cluster indicating
indecision in the market.

Key takeaways from this chapter

1. A spinning top has a small real body. The upper and lower shadows are almost equal in length.

2. The colour of the spinning top does not matter. What matters is the fact that the open and close
prices are very close to each other.

3. Spinning tops convey indecision in the market with both bulls and bears being in equal control.

4. Spinning top at the top end of the rally indicates that either the bulls are pausing before they
can resume the uptrend further or the bears are preparing to break the trend. In either case, the
trader’s stance has to be cautious. If the trader intends to buy, he is better off buying only half
the quantity, and he should wait for the markets to move in his direction.

5. Spinning top at the bottom end of the rally indicates that either the bears are pausing before
they can resume the downtrend further or the bulls are preparing to break the trend and take
the markets higher. Either case, the trader’s stance has to be cautious. If the traders intend to
buy, he is better off buying only half the quantity, and he should wait for the markets to make a
move.
6. Doji’s are very similar to spinning tops. Doji also conveys indecision in the market. By definition,
dojis do not have a real body. However, in reality, even if a wafer-thin body appears, it is
acceptable.

7. A trader’s stance based on dojis is similar to the stance taken when a spinning top occurs.