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Technical Analysis of Financial Markets Cheat Sheet (DRAFT) by

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Module 1

Technical Analysis: The process of making prediction about the future by analyzing historical market action. Market action: includes the 4 primary sources of market data are 1) price, 2) time, 3) volume (or open interest for derivative contracts) and 4) breadth.
3 Key Assump­tions of TA: 1. All market influences are discounted (or reflected) in prices. – Focus on price action 2. History repeats itself. – That explains why chart patterns are important 3. Prices move in trends. – inform­ation dissem­inated from informed profes­sionals or insiders to aggr. investors, and then to the general investing public. In addition, techni­cians claim that processing new inform­ation takes time.
Fundam­ental vs. Technical - TA: Focuses on market action; Studies the effect; Tool of foreca­sting and timing FA: Focuses on economic forces of D/S that influence prices; Studies the cause; Tool for foreca­sting only Both: prices acts as a leading indicator of the fundam­entals, since assumption 1 is true than TA includes FA.
Arithmetic Scale (Linear Scale) – Show identical distances for identical point/­price moves – space between 2 to 4 is the same as 20 and 22 – Problem: 100% from 2 to 4 but only 10% return from 20 to 22 (visual distor­tion) – ok for: short-term charts (<=1 yr)
Ratio Scale (Log Scale) – Show identical distances for identical percentage moves – space between 2 to 4 is the same as 4 and 8 – Applic­ation: long-term charts (> 1 yr)

Module 2

Trend: direction of the market action
6 Tenets of Dow Theory: 1. The Averages Discount Everyt­hing. 2. The Market Has Three Trends. 3. Major Trends Have Three Phases. 4. The Averages Must Confirm Each Other. 5. Volume Must Confirm The Trend. 6. A Trend Is Assumed To Be In Effect Until It Gives Definite Signals That It Has Reversed.
Trading Rule for Dow: When the yield on DJIA falls to 3% or below => sell signal (market tops) • When the yield on DJIA increases to 6% or above => buy signal (market bottoms)

Support and Resistance

Return­-Risk Ratio = (next resistance – current price)­/(c­urrent price – next support)
Make sure RRR is greater than 3
buy above a key support
sell just below a key resistance
Autoco­rre­lation: correl­ation between members of series of observ­ations ordered in time. Math.:­Cor­rel­ation measures the linear relati­onship between two random variables • -1 ≤ correl­ation ≤ +1
Negative Autoco­rre­lation: for perfor­mance means higher risk. for trading means market is ranging, oscill­ating.
Rule for breakout: Penetrated by more than 3% and for more than 2 consec­utive days
Tim Fong’s 3-Step Price Action Analysis: 1. Touching down or up 2. Fighting 3. Departing – Reversing the trend if you win the battle in step 2 – Continuing the trend if you lose the battle in step 2

Module 3

Market Order: a buy or sell order to be executed by the broker immedi­­ately at current market prices. • Limit Order – A limit order is an order to buy a security at no more or sell at no less) than a specific price.
Stop Order: A stop order is an order to buy (or sell) a security once the price of the security has climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order will become a market order.
Trailing Stop Order: entered with a stop parameter that creates a moving or trailing activation price – This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price – Key advantage of setting a trailing stop sell orders are used to maximize and protect profit as a stock's price rises and limit losses when it's price falls
Reversal pattern( reversal in trend is pending): H&S tops and bottoms; Double tops and bottoms; Rounde­d/s­aucer tops and bottoms; Key reversal day; Island reversal day
Contin­uation pattern: Triangles; Wedges; Flags and Pennants; Broadening Tops; Rectangles

Module 3 (cont.)

Pattern Formation and Its Trading Applic­ation: 1.Clas­sif­ication of reversal vs. contin­uation pattern; 2. Determ­ination of bullis­hness or bearis­hness.; 3. Confir­mation of pattern and breakout; 4. Measur­ement of minimum price objectives
Bid 1.21 Ask 1.25 Bid Size 5: the market is willing to buy 500 shares at 1.21 and to sell at 1.25
Tops vs. Bottoms: 1)The bottom formation usually takes longer to form.; 2)Volume confir­mations are generally more important for bottom formation.
Flag vs. Pennant: pennant consol­idation is formed by two converging trendl­ines. volume tends to contract even more during formation of a pennant. both have similar measuring implic­ation, take similar time to develop

Module 3 (cont. 2)

VIX: Measure of the implied volatility of at-the­-money S&P 500 index options with 30-day maturity


sample mean: x_bar = ( Σ xi ) / n financial interp­ret­ation: expected return
Standard Deviation: s = sqrt [ Σ ( xi – x_bar )2 / ( n – 1 ) ] Financial Interp­ret­ation: Volatility (Risk or Deviation from the Expect­ation)
Skewness: Biasedness towards upside potential or downward risk (i.e. positive skewness = long right tail of the return distri­bution)
Kurtosis: Stability or Surprise Index (Excess Kurtosis > 0 means that it has more peakedness than normal distri­bution)
Correl­ation: Effect­iveness of hedge (Ex.: USD & Gold)


Trend-­fol­lowing Indica­tors: 1) SMA, WMA and EMA; 2) MA Envelopes; 3) Bollinger Bands
Momentum Indicators (Oscil­lat­ors): 1) ROC; 2) RSI; 3) MACD; 4) Stochastic

Momentum Indicators

Momentum: measures the speed of price change and provides a leading indicator of changes in trend.
Momentum signals: 1) Zero crossover; 2) Divergence (or trend analysis of momentum vs. price) 3)Extreme values (overb­ought vs. oversold)
A divergence occurs when price and momentum indicator fail to confirm one another.
Momentum signals should always be used in conjun­ction with a trend-­rev­ersal signal by the actual price

Mom. Indic. (cont.)

ROCt =(Pt – Pt-n)/ Pt-n
ROC = [(Current Price / Price n periods ago) – 1] x 100
MACDt = EMAt, 12 – EMAt, 26
RSI = 100 – 100/(1+RS) where RS = (total gain / n days) / total loss / n days)
RSI = 0 if falls all days; RSI = 100 if up all days; RSI = 50 if flat
RSI thresholds: – Use 20/80 when the stock is “trend­ing”; – Use 30/70 when “oscil­lating”

More Indicators

DMI made of ADX, +DI and -DI
ADX > 20 => trending; • Long when DI+ crosses over DI- • Short when DI+ crosses below DI-
TR = max(Ht - Lt, Ht - Ct-1, Ct-1 – Lt)
Keltner Channel vs. MA envelopes: KC uses ema by defini­tion; ATR is used to calculate the bands for KC
KC made up of 2 bands plotted around an EMA