September 25, 2023

Technical Analysis (quick notes)

There are two type of analysis:

  1. Technical Analysis => Study of past price behaviour and the repetition of the market participants
  2. Fundamental Analysis => Is the study of economic factors and involves evaluating the potential effect which they may have on the markets

There are four types of factors:

  1. Economic factors
  2. Political factors
  3. Financial factors
  4. Crisis factors

Core elements of technical analysis:

  1. Price
  2. Time
  3. Volume
  4. Momentum

Bull/Bear markets => is a market that is at its peak at the top or at its minimum at the bottom and it will take a considerable amount of time for it to go the other way.

Charles Dow => Provided real rule based technical analylsis techniques => Dow Jones

Dow Theory:

All information – past, present, and future, is discounted into the markets and reflected in the prices of stocks and indices.

Dow theory is mainly focused on price

Trend Analysis:

There are three main types of trends:

  1. Short term
  2. Intermediate term
  3. Long term

Trough = Low

Peak = High

A rally is a peak and a trough consecutively

There are three ways to display information on a chart:

  1. Line – only use closing prices (i.e looking at prices over years)
  2. Bar –  Display 4 pieces of info (Open, High, low, Close)
  3. Candle – Also display 4 pieces of information (open, high, low, close) just like a bar chart but they include a colour coding to provide an enhanced visual info display. They visually indicate if the closing price was higher or lower than the opening price

Candle Charts:

Doji – Opening and closing positions are the same

Good website: http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks

All technical analysis assumes the three following things:

  1. Mark action discounts everything – If demand exceeds supply, prices should rise. If supply exceeds demand, prices should fall
  2. Prices move in trends
  3. History repeats itself

Prices always move in trend. This can be:

  • Upwards
  • Sideways
  • Downwards

Computational investing:

Common metrics:

  • Annual Return
  • Risk: standard deviation of return
  • Risk: Draw Down
  • Reward\Risk: Sharpe ratio
  • Reward\Risk: Sortino ratio
  • Jensen’s Alpha

Course text book: http://faculty.washington.edu/ezivot/econ424/econ424.htm

Time value of money:

  1. Future value:
    1. £x invested for n years at simple interest rate R per year
  1. Compound of interest is calculated at the end of the year

Where FVn is the future value after n years. R is the interest rate

The Rule of seven:

If I invest x, how long will it take for my money to double?

Use the Investment Horizon equation to solve this:

0.7 / R = time taken to double your investment (where R is interest rate)

What happens if  your are compounding M times a year – What then is your future value formula?

R / M = Periodic interest rate

If you are continually compounding then what is your future value formula?

(so in other words what happens as M tends to infinity?):

So in other words FVn = Ve(R-N) where e1 = 2.71828