Technical Analysis of Financial Markets - Learn by Gaming the Markets - Part 1 - Basic Principles | Mikesh Shah | Skillshare

Technical Analysis of Financial Markets - Learn by Gaming the Markets - Part 1 - Basic Principles

Mikesh Shah, Director - AltGmX Technology Pvt Ltd

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4 Lessons (21m)
    • 1. The Complete Forex Course Introduction

    • 2. Introduction to Technical Analysis

    • 3. Dow Theory

    • 4. Various Chart Types


About This Class

Technical Analysis of Financial Markets is a comprehensive and practical course aimed to teach the best practices of using technical analysis in the foreign exchange markets. This course applies general principles that can be used in any financial markets. This course is created from the perspective of an investment banker or interbank trader. Start trading the markets in a FX Simulator, make losses and profits to treat them with the same indifference. No finance knowledge is required. Traders are from all walks of life - philosophy, arts, medicine etc. Trading using technical analysis is an ART not science.

This course is part of a broader course in investment banking.



1. The Complete Forex Course Introduction: way, - way . 2. Introduction to Technical Analysis: congratulations for making it so far. Before we begin using fundamental analysis for foreign exchange trading, we will look at how technical analysis is used for foreign exchange trading. This is because technical analysis has a shorter learning curve than fundamental analysis, so you can learn the basics and immediately start either mock trading or trading on any retail platform. Now we will look at some theoretical concepts off technical analysis for those who have no knowledge of technical analysis or those who want to brush their foundations. Those who are well versed in technical analysis can skip this introduction. Technical analysis is thes study off market action by a market action. We mean the study of price volumes and open interest on the goal off technical analysis is to forecast future price trends. Now there are three premises off technical analysis, and they are one that prices discount everything. So all known information, whether it's political, economic, psychological, everything is reflected in the prices. So whatever known information is out there is reflected is already reflected in the prices . Therefore, we only need to study price action According to technical analysis. We don't really need to look at anything else political, economic, psychological, social, nothing else, since prices reflect all known information. So the second premise is that prices moving trends as opposed to the random walk theory that claims that prices are serially independent, such as Thebes. Iranian motion simulation Random walk theory is a theory that claims that each prices independent off the previous price, so the future price would be independent off the current price or the prior price. Now, if if we believe that prices are random than technical analysis will not work here now, when we study the market landscape and see how prices are formed, we will see that there is some market psychology behind the prices, as these prices are constantly affected by market makers. Psychology. We will understand the psychology behind the formation off supports. Resistance is trends, etcetera. Now, the third premise off technical analysis is that history repeats itself now. This is an important premise, since we use patterns, formations and indicators to determine future trends. Since these tools have successfully worked in the past for many traders, we will assume that they will work in the future. Now there are two tools which market participants use when trading one is technical analysis and wonders and the other is fundamental analysis. So next we will compare the pros and the cons off using technical versus fundamental analysis. 3. Dow Theory: before we start diving right into drawing trend lines. Discussing supports resistance is look at a theory called the Dow theory, contributed by Charles Dow. Those were studied technical analysis. No, that much of the concepts of technical analysis have been derived from the adultery contributed by a child's doll. The theory is applied to stock markets, but the concepts are applicable to all markets and form the basis off technical analysis. The's six basic tenets off the Dow theory are the 1st 1 is that averages discount everything. Now this is the same principle as what we have already discussed before. That the market action or price action discounts, everything. Political, economic, psychological, information. Everything is discounted in the price action. The second tenet is that market has three trends. The primary trends. Secondary trend On the minor trend, we will see these trends when looking at the foreign exchange charts. Now in brief, the theory considers the major trained to last for more than one year. So you're looking at a long term trend, which is 123 years. The secondary trend represents corrections in the primary trend and usually lasts for three weeks to three months Now these are retrenchments off the primary trend or retraces off. The primary trend on the secondary trend could retrace to 33.33 or 50% or even 66.66%. We will look at this these numbers when we look at Fibonacci numbers, the minor trend usually lasts less than three weeks on represents short term fluctuations in the secondary or intermediate trend. Now the third senators that major trends out three phases. So the three phases in major trends are accumulation, distribution and speculative. The contrary ins accumulate when everyone is selling and everyone is pessimistic about the economy, about the future, about the currency or stocks. That's when contrarians accumulate. Then they start distributing when no one is selling. That is during the speculative phase, when the market is overly optimistic. When it's basically a bubble, that's when the contrary and start selling and the 4th 10 it is that the averages must confirm each other. Now here, Charles Dow meant that no important Bulla baron could take place unless all the averages, which include the industrial and real average, also confirmed with the with the same signal. So if the Dow average is in a bull run, then so must the industrial, and the real average confirmed the same direction, which means that there should be higher peaks during bull runs on lower troughs during barons. The 5th 10 it is that volumes must confirm the trend. The simply states that if the trend is up, it should be back by high volumes in the same direction. If the prices move down in a bull run than the volume should be lower in that direction on the same with the Baron. If the if it's a bear on, the volume should be high when prices fall on lower when prices rise. So when prices rise, it's a correction off the baron on the last 10. It is that a trend is an effect until it has given definite signals off reversal. So this is the basis off technical analysis that we have discussed. Our trend is considered to continue unless a reversal is identified now, identifying reversals are not easy, as we shall see when discussing reversal patterns such as failure swings, non failure swings, head and shoulder reversals, or even when discussing oscillators that warn us off reversals and momentum. So these are the six basic tenets off the Dow theory on day form, much off the theory off technical analysis. And we will look at all these theories in more detail to help us trade in the foreign exchange markets. So next we will look at trends. We will look at support. Resistance is on drawing off channels, speed lines, so on and so forth. This is the starting point off technical analysis. 4. Various Chart Types: great. So this is where we start with the basic foundations of technicals to enable us to form views on the markets. Keep in mind that the concepts you learn here are applicable to any markets that can be charted. We discussed the different types of charts available here, but before we do that, let's take a look at the concept off a tick in the foreign exchange markets and how these sticks are aggregated to create the charts in the stock market's prices are the actual traded prices obtained from the exchange itself, the prices at which stocks are bought and sold. However, since foreign exchange markets are over the counter markets, price information does not pass through an exchange we have seen before that market makers have a Reuters or Bloomberg dealing system as well as a price information system. Now this price information system can be updated by participating dealers at banks. Any dealer who wishes to participate in updating prices can do so on the Reuter system. For example, for the au de, you would have you could have dealer banks in Australia such as Nab, Abyan Amro, Westpac and even foreign banks in Australia. Like Citibank, Wells Fargo, Barclays etcetera as participating banks other than the Australian banks, you could have banks in Hong Kong, Singapore all participating on updating the Australian dollar on the Reuter system. Now these participating banks would have the Australian dollar market makers who would constantly update the Australian dollar against the US dollar whenever convenient as indicated prices. So these prices are indicator just because the trader updates the price, it does not mean that the trader would necessarily coat this price if you called him on the price. Now let's see how this works. It's important to note that these are indicated prices are not the traded prices, although they could be the same. But the intention is to update on indicated price, so assume the Australian dollar is currently at 0.75512 The bid is one and the ask us to and let's assume that a dealer in Australia, Dealer one in Australia coats 10.75534 So the dealer in Australia has updated the price. Let's assume that the dealer is from Wells Fargo, so Dealer one and Wells Fargo updates the price at 34 other dealers in Singapore. Hong Kong can see the coat now. Dealer to in Singapore in Citibank, Singapore is looking to sell the Australian dollar and sees Wells Fargo's update on Reuters as 34 Now if do dealer to If the dealer at Citibank has dealing limits with Wells Fargo Bank in Australia, deal it too could call dealer one for a price. If dealer one codes 34 Dealer to has an option to either hit the dealer at three or past the coat. Let's assume that the dealer two things the prices would go even higher. But at least now the dealer to has confirmed that the Australian dollar has moved a bit higher. Dealer to now wishes to test the market further and updates his price. 256 Now dealer to could see a couple of banks calling for a price in Australian dollar. So dealer three days before deal. If I would be calling dealer, too, if they have limits for dealer, too for a price now dealer too good either onerous goat and code 56 Or maybe he could test the market again and called just about 45 goat somewhere in between 45 to see if there are any takers at five. Since he is already long, he wouldn't mind being taken at five. That would be a better price than selling at three. Now, if he does get taken at five, he knows that the market has moved even higher because there are buyers at five on the next price he would go to the next bank would be maybe 67 pushing the Australian dollar higher. Now, if he gets taken again at seven, which means a Judy has moved even higher, the prices updated accordingly. Now there would be other dealers like Dealer three d Love four Deal 100 who would update the price accordingly. Maybe higher, maybe lower. These prices are updated for every tick. Unfortunately, there are prices that are updated wrongly by dealers to push the markets even higher if they think that the market is overly short to try and take out some stops or bring the markets lower if they think the market is too long. However, Reuters and Bloomberg on other systems have some checks in place toe identify these out flyers on. They are not included in the price data as we've mentioned. Each of thes price updates is called a tick. Therefore, want IQ is one price update and one second could be made up of multiple takes in a volatile market. So with many market makers updating the prices in a volatile market, you could see the beauty updated multiple times in a single second. The sticks are then stored in a database by the information providers like Reuters Bloomberg on then aggregated according to their time stamps for each currency. Once these price sticks are captured, it is very easy to aggregate them to the minute hourly daily, weekly, monthly and yearly charts using the time stamp variable. So now we have understood how these prices are formed. The concept of the tick, how the takes are aggregated to create Minute Ali weekly monthly yearly charts. Next, we will look at the various types of charts commonly used. This is very basic, and those who have already done charting and skip this. Now you have the bar chart, so each price action in the bar chart is represented by a bar, with the highest point being the high off the day and the lowest price being the low off the day. The left IQ is the opening price, and the right tick is the closing price. Next you have the line chart, which is a line that simply connects the closing prices of each bar. You also have the point and figure chart that show alternating prices off X's and O's. The exes show rising prices and the O's show falling prices. And you have Candlestick charting, which is similar to the bar chart, except that the candlestick has a body, which has two different colors white and black or green and red. The body represents the price action between the opening and closing prices for rising prices. When the closing is higher than the opening, the body color is either white or green for falling prices. Where the closing is lower than the opening, the body color is black or red. Price movements above and below the body are called shadows Now, lastly, let's discuss volumes and open interest because we mentioned that when we mentioned price action or market action volumes represent the total amount of trading activity during the day. Open interest is defined as the number of outstanding contracts held by market participants at the closing off the day. Open interest is the number of contracts held by the Longs or Shorts, but not both. However, open interest and volumes are easily available for currency futures and not plain vanilla foreign exchange, as the foreign exchange market, as we know, is an over the counter market, if at all you wish to study open interest and volumes for currency pairs, you could look at the currency futures market, which is obviously correlated to the spot markets.