Technical Analysis [Exam Prep - regular]

Capital Market

A segment of the financial market where businesses raise capital by issuing securities.

Financial Market

A broad term encompassing capital markets, money markets, and other financial institutions.

Investment Process

The selection of an asset based on investment objectives, risk tolerance, knowledge, and decision-making skills.

Raising Capital

Companies issue financial instruments (e.g., stocks, bonds) to obtain funds.

Risk Consideration

Investors must evaluate the level of risk they are willing to accept.

Hedging Objective

Investments are made for profit but also to hedge against inflation and economic uncertainty.

Knowledge & Skills

Successful investment requires an understanding of financial instruments and market trends.

Investor’s Personality

Decision-making skills and risk tolerance significantly impact investment choices.

Investment Objective

Why is the investment being made? (e.g., wealth accumulation, retirement, risk hedging).

Risk Tolerance

How much risk is the investor willing to take?

Market Knowledge

Does the investor understand financial instruments and economic conditions?

Decision-Making Style

Some investors are aggressive, while others prefer a conservative approach.

Technical Analysis

Uses historical price and volume data to predict future trends.

Fundamental Analysis

Assesses a company's financial health through economic indicators and financial statements.

Portfolio Analysis

Focuses on asset diversification to optimize returns and minimize risk.

Financial Econometrics

The use of statistical methods to analyze financial data and market trends.

Rate of Return Analysis

Evaluate price changes and investment performance.

Market Interdependencies

Studies relationships between asset prices and economic factors.

Decision Optimization

Enhances investment decisions by analyzing financial patterns.

Market Liquidity

The ease with which securities can be bought or sold without affecting prices.

High Liquidity

Allows for quick transactions at stable prices (e.g., blue-chip stocks).

Low Liquidity

Makes transactions difficult, often causing price fluctuations (e.g., small-cap stocks).

Excessive Risk Can Lead to Bankruptcy

Investors should avoid overly speculative strategies.

Diversification Helps Reduce Risk

A balanced portfolio minimizes losses from market fluctuations.

Charles Dow

Founder of Dow Theory and the first to introduce stock market indices.

Dow Market Index

A weighted average of selected financial instruments at a given time.

Dow Theory

Recognizes the emergence of bull or bear markets, not to predict their direction.

Averages Discount Everything

Market prices reflect all available information, including economic and psychological factors.

The Market Has Three Trends

Primary, secondary, and minor trends indicate market movements.

Major Trends Have Three Phases

Accumulation phase, public participation phase, distribution phase.

Averages Must Confirm Each Other

If one index shows a new trend, another should confirm it.

Volume Must Confirm the Trend

Volume should increase in the direction of the main trend.

Trend is in Effect Until a Definite Reversal Occurs

A trend remains in force until clear signals indicate a reversal.

Closing Prices Are Crucial

Dow focused on closing prices, not intraday fluctuations, to determine trends.

Support and Resistance in Trends

Support levels act as buying zones in an uptrend; resistance levels act as selling zones.

Line (Consolidation) Patterns

A horizontal movement in prices during market corrections indicates indecision.

Criticism of Dow Theory

Includes delayed signals, lack of guidance for individual stocks, and focus on trend recognition.

Line Chart

Connects the closing prices of consecutive days, providing a general trend.

Bar Chart

Displays four price points: opening, closing, high, and low.

Candlestick Chart

Uses the same four price points as the bar chart but visually represents them with candlesticks.

Head and Shoulders

A reversal pattern indicating a shift from bullish to bearish trends.

Double Top

A bearish reversal pattern formed by two peaks at the same price level.

Double Bottom

A bullish reversal pattern with two low points at the same support level.

Triangles

Patterns that indicate potential market continuation or indecision.

Support Level

A price level where demand is strong enough to prevent further decline.

Resistance Level

A price level where selling pressure prevents further price increases.

Breakout

When the price moves beyond a support or resistance level, signaling a potential new trend.

False Breakout

A temporary move beyond support/resistance that quickly reverses.

Trendline

A straight line connecting important price points to determine trend direction.

Uptrend Line

Drawn along successive lows to indicate an upward movement.

Downtrend Line

Drawn along successive highs to indicate a downward movement.

Retracement

A temporary reversal in a prevailing trend before continuing in the original direction.

Trendline Break Confirmation

Closing price above/below trendline is a reliable signal; high volume confirms validity.

Flags and Pennants

Short patterns that indicate a brief consolidation before the trend resumes.

Cup and Handle

A bullish continuation pattern with a U-shape followed by a small downward drift.