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Stock Notes

Table of Contents

Technical Analysis

  • Key Assumptions

    • High Liquidity -> Volume. Heavily-traded stocks allow investors to trade quickly and easily. Thinly-traded stocks are more difficult to trade. Low liquidity stocks are often low priced (more open to manipulation by individual investors).
    • News -> Technical analysis cannot predict extreme events

  • Basis

    • Price Discounts Everything -> THe price represents the fair value, and should form the basis for analysis.
    • Price Movements are Not Totally Random ->

Definitions

Trend

The overall direction of a market or an asset's price.

Technicals

Average Directional Index (ADX)

  • https://www.investopedia.com/terms/a/adx.asp

  • Can be used to determine the strength of a trend

  • Trend can be either up or down.

  • -DI and +DI lines used in conjunction. When -DI is above +DI then trend is down

  • +DI above -DI then trend is up or upward price movement is outpacing downward price movement

  • Crossovers can happen, a common trade signal is the -DI cross above the +DI signals a down move price, and therefore a sell signal. A buy signal occurs if the +DI crosses above the -DI line.

    • Typically readings above 20, especially 25 show a strong trend is present.
    • A whipsaw could occur, thus, use other signals to confirm

Bollinger Band

  • https://www.investopedia.com/terms/b/bollingerbands.asp

  • Prices close to the upper band show it is more overbrought, and if closer to the lower band, the more oversold the market is.

    • When they continually touch the lower band, a buy signal may be triggered
    • Prices generally move back up towards the centre moving-average line

  • The Squeeze -> When bands come close together, constricting the MA.

    • Could be a period of low volatility and is considered to be a potential sign of future increase volatility and trading opportunities
    • Not trading signals

  • Breakouts -> ~90% of price action occurs between the bands. Any breakout indicates a major event.

  • Recommended to be used with the MACD, on-balance volume and RSI indicators.

Moving Average Convergence Divergence (MACD)

  • https://www.investopedia.com/terms/m/macd.asp

  • A trend-following momentum indicator

    • Shows relationship between two moving averages of a security's price

  • Signal line -> nine-day EMA of the MACD (26-period EMA subtracted from the 12-period EMA)

  • Traders may buy when MACD crosses above its signal line, sell when MACD crosses below the signal line

  • Histogram graphs distance between the MACD and its signal line

  • Combined with the RSI to show when it has been overbought or oversold

  • MACD is a lagging indicator

Moving Average (MA)

On-Balance Volume (OBV)

Relative Strength Index (RSI)

Candlesticks

Aroon Indicator

  • Lower the Aroon up, the weaker the uptrend and stronger the downtrend and vice versa