Technical Analysis

Technical Analysis is a method for evaluating securities based on historical data. It involves chart analysis, the use of indicators, and follows principles like the “Market Discounts Everything.” While it offers advantages like quick decision-making, critics point out its subjectivity and limited predictive power. Real-world examples include moving average crossovers and RSI divergence.

Technical AnalysisDescriptionAnalysisImplicationsApplicationsExamples
1. Key Elements (KE)Technical Analysis involves the examination of historical price and volume data for a security, such as a stock or currency, to forecast future price movements. Key elements include price charts, technical indicators, and volume data.– Utilize price charts to visualize historical price patterns, trends, and support/resistance levels. – Apply technical indicators, such as moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), to assess price momentum and overbought/oversold conditions. – Examine trading volume to confirm trends and identify potential reversals.– Provides insights into potential price movements and market sentiment. – Helps traders make informed buy/sell decisions based on historical patterns.– Making short-term trading decisions in stocks, forex, cryptocurrencies. – Timing entry and exit points in the market.Key Elements Example: Using candlestick charts to analyze price patterns and applying the RSI indicator to identify potential overbought or oversold conditions.
2. Trend Analysis (TA)Technical analysts focus on identifying and following trends in price movements. Trends can be categorized as uptrends, downtrends, or sideways (range-bound) trends. Understanding the prevailing trend is crucial for decision-making.– Analyze price charts to identify the direction and strength of the prevailing trend. – Identify key support and resistance levels that provide potential entry or exit points. – Use trendlines, moving averages, or trend-following indicators to confirm and trade in the direction of the trend.– Helps traders align their positions with the dominant market direction. – Provides guidance on setting stop-loss and take-profit levels.– Swing trading by capturing shorter-term trends within larger trends. – Identifying trend reversals for contrarian strategies.Trend Analysis Example: Recognizing a sustained uptrend in a stock’s price by observing higher highs and higher lows on a price chart.
3. Pattern Recognition (PR)Technical analysts look for recurring price patterns that may indicate potential future price movements. Common patterns include head and shoulders, flags, pennants, and double tops/bottoms. Patterns help traders predict reversals or continuations in trends.– Identify and interpret chart patterns, such as triangles, flags, or double bottoms. – Use pattern recognition to predict potential price targets based on the pattern’s breakout direction. – Combine patterns with other technical indicators for confirmation and higher probability trades.– Offers insights into potential price reversals or trend continuations. – Provides specific entry and exit points based on pattern breakout levels.– Identifying reversal patterns for contrarian trading. – Trading breakouts from consolidation patterns.Pattern Recognition Example: Recognizing a “head and shoulders” pattern in a stock’s price chart, signaling a potential trend reversal from bullish to bearish.
4. Oscillators and Indicators (OI)Technical indicators, often oscillators, help traders assess the momentum, overbought/oversold conditions, and potential trend reversals. Common indicators include RSI, MACD, Stochastic Oscillator, and Bollinger Bands. These tools complement price analysis.– Apply oscillators and indicators to assess price momentum and identify divergence between price and indicator signals. – Monitor overbought or oversold conditions to anticipate potential reversals. – Combine multiple indicators for confirmation and more robust signals.– Provides insights into potential trend shifts and reversals. – Helps traders gauge the strength of price movements.– Using RSI to identify potential trend reversals in a stock. – Combining MACD and Stochastic Oscillator to confirm buy/sell signals.Oscillators and Indicators Example: Applying the MACD indicator to assess the convergence or divergence of short-term and long-term moving averages.
5. Volume Analysis (VA)Trading volume represents the number of shares or contracts traded in a security over a specific period. Volume analysis helps confirm the validity of price movements and signals. High volume can validate a trend, while low volume may signal weakness.– Analyze trading volume to confirm price trends. – Look for volume spikes that coincide with significant price movements, as these can indicate strong buying or selling pressure. – Use volume-based indicators, such as On-Balance Volume (OBV), to assess the cumulative flow of volume.– Offers validation for price movements and technical signals. – Helps identify potential trend reversals or the continuation of existing trends.– Confirming trend strength with high-volume breakouts. – Identifying divergence between price and volume.Volume Analysis Example: Observing a surge in trading volume when a stock breaks out of a consolidation range, confirming the breakout’s strength.
6. Sentiment Analysis (SA)Sentiment analysis involves assessing market sentiment, often through indicators like the Put/Call Ratio, VIX (Volatility Index), or sentiment surveys. It helps gauge market optimism or pessimism, which can influence future price movements.– Monitor sentiment indicators to assess market sentiment and investor sentiment extremes. – Consider contrarian strategies when sentiment reaches extreme levels (e.g., high bullish sentiment may precede a market correction). – Combine sentiment analysis with technical and fundamental analysis for comprehensive insights.– Provides insights into potential market reversals or corrections driven by sentiment shifts. – Helps traders adopt contrarian strategies when sentiment reaches extremes.– Using the Put/Call Ratio to assess options market sentiment for potential reversals. – Contrarian trading based on extreme sentiment readings.Sentiment Analysis Example: Noticing an excessively bullish sentiment among traders and considering a contrarian short position due to sentiment extremes.

Introduction to Technical Analysis

Technical analysis is rooted in the belief that historical price and volume data contain valuable information that can be used to forecast future price movements. Unlike fundamental analysis, which focuses on the intrinsic value of assets by examining financial statements, earnings reports, and economic indicators, technical analysis primarily examines market data such as price charts, trading volumes, and historical patterns.

The key principles of technical analysis include:

  1. Price Discounts Everything: Technical analysts believe that all known information, whether public or private, is already reflected in the current market price. This means that past price movements, along with other factors, influence the current and future prices of assets.
  2. Price Moves in Trends: Technical analysis is based on the idea that assets tend to move in trends, which can be classified as bullish (upward), bearish (downward), or sideways (range-bound). Traders aim to identify and follow these trends to profit from price movements.
  3. History Tends to Repeat Itself: Technical analysts argue that historical price patterns and trends often repeat due to human psychology and market behavior. They believe that studying past price movements can provide insights into future movements.

Methods and Techniques of Technical Analysis

Technical analysis employs various methods and techniques to analyze financial markets. Some of the most common tools and concepts include:

1. Price Charts:

Price charts are the foundation of technical analysis. They display historical price data over a specific time period, such as daily, weekly, or monthly. The most common types of price charts are line charts, bar charts, and candlestick charts. Candlestick charts are particularly popular for their ability to convey detailed information about price movements.

2. Support and Resistance Levels:

Support levels represent price levels at which an asset tends to find buying interest and reverse its downward movement. Resistance levels are price levels at which selling interest typically emerges, causing the asset’s price to reverse its upward movement. Identifying these levels helps traders make buy and sell decisions.

3. Trendlines:

Trendlines are lines drawn on price charts to connect consecutive lows in an uptrend or consecutive highs in a downtrend. They help visualize the direction and strength of a trend. Trendlines can also serve as dynamic support or resistance levels.

4. Technical Indicators:

Technical indicators are mathematical calculations applied to price and volume data to generate trading signals. Common indicators include moving averages, relative strength index (RSI), stochastic oscillator, and moving average convergence divergence (MACD). Traders use these indicators to identify overbought or oversold conditions and potential trend reversals.

5. Chart Patterns:

Chart patterns are recognizable formations that appear on price charts. Common patterns include head and shoulders, double tops, double bottoms, triangles, and flags. Analysts use these patterns to predict future price movements based on historical precedents.

6. Volume Analysis:

Volume analysis involves studying trading volumes to gauge the strength of price movements. Increased volume during an uptrend may indicate strong buying interest, while increased volume during a downtrend may signal strong selling pressure.

Key Technical Indicators

Several technical indicators are widely used by traders and analysts. Here are some key indicators and their purposes:

1. Moving Averages:

Moving averages smooth out price data by calculating the average price over a specified time period. The two main types are simple moving averages (SMA) and exponential moving averages (EMA). Moving averages help identify trends and potential trend reversals.

2. Relative Strength Index (RSI):

The RSI measures the speed and change of price movements. It oscillates between 0 and 100 and is used to identify overbought and oversold conditions. An RSI above 70 suggests overbought conditions, while an RSI below 30 suggests oversold conditions.

3. Stochastic Oscillator:

The stochastic oscillator compares the closing price to a range of prices over a specified time period. It generates values between 0 and 100 and helps traders identify potential trend reversals. Readings above 80 indicate overbought conditions, while readings below 20 indicate oversold conditions.

4. Moving Average Convergence Divergence (MACD):

The MACD is a trend-following momentum indicator that calculates the difference between two moving averages (usually 12-period and 26-period EMAs). It also includes a signal line (usually a 9-period EMA). Traders look for crossovers and divergences between the MACD and its signal line to identify buy and sell signals.

5. Bollinger Bands:

Bollinger Bands consist of a middle band (usually a 20-period SMA) and two outer bands that represent standard deviations of price volatility. Bollinger Bands expand and contract based on market volatility, helping traders identify potential reversals and breakouts.

Real-World Applications of Technical Analysis

Technical analysis is applied in various real-world scenarios and trading strategies:

1. Day Trading:

Day traders use technical analysis to make short-term trading decisions. They focus on intraday price movements and use technical indicators to identify entry and exit points for their trades.

2. Swing Trading:

Swing traders aim to capture intermediate-term price swings within a trend. They use technical analysis to identify potential trend reversals and ride price movements over several days to weeks.

3. Position Trading:

Position traders take long-term positions in assets, often based on the analysis of weekly or monthly price charts. They use technical analysis to identify entry points and manage risk.

4. Algorithmic Trading:

Algorithmic trading systems incorporate technical analysis to automate trading decisions. These systems use predefined rules and technical indicators to execute trades at optimal times.

5. Risk Management:

Traders and investors use technical analysis to set stop-loss orders and profit targets. This helps manage risk by defining exit points in advance.

6. Portfolio Management:

Even investors who primarily use fundamental analysis may incorporate technical analysis to time their entries and exits in a portfolio of assets.

The Debate on the Effectiveness of Technical Analysis

While technical analysis has a significant following and has been the basis for many successful trading strategies, it is not without criticism. The debate surrounding the effectiveness of technical analysis centers on several key points:

  1. Efficient Market Hypothesis (EMH): The EMH posits that all available information is already reflected in asset prices, making it impossible to consistently achieve above-average returns through technical analysis.
  2. Subjectivity: Technical analysis involves subjective interpretation of price charts and patterns, which can vary among analysts. Critics argue that this subjectivity can lead to inconsistent results.
  3. Self-Fulfilling Prophecy: Some argue that technical analysis works because many traders use it, making certain patterns and levels self-fulfilling prophecies. However, this doesn’t necessarily validate the predictive power of technical analysis.
  4. Randomness: Critics contend that financial markets are inherently random, making it challenging to identify patterns or trends that can be consistently exploited for profit.
  5. Limited Predictive Power: While technical indicators may provide insights into short-term price movements, they may have limited predictive power for longer-term investment horizons.

Conclusion

Technical analysis is a popular and widely used approach to analyzing financial markets. It is based on the study of historical price and volume data to make trading and investment decisions. While technical analysis has a strong following and has been the basis for successful trading strategies, it is not without controversy. Critics argue that market efficiency, subjectivity, and the random nature of price movements undermine its effectiveness.

Ultimately, whether one chooses to rely on technical analysis, fundamental analysis, or a combination of both depends on individual preferences, trading strategies, and risk tolerance. Many traders and investors find value in incorporating technical analysis as part of their toolkit for navigating the complexities of financial markets. Regardless of the approach taken, it’s essential to remain disciplined, manage risk, and continuously evaluate the effectiveness of one’s strategies in a dynamic and evolving financial landscape.

Support and Resistance Levels:

  • Scenario: Technical analysts identify key support (lower) and resistance (upper) levels on a price chart.
  • Example: If a stock consistently bounces off a specific price level multiple times, that level becomes a strong support level.
  • Implication: Traders use these levels to make decisions, such as buying near support and selling near resistance, anticipating price reversals.

Relative Strength Index (RSI):

  • Scenario: RSI is an oscillator that measures the speed and change of price movements.
  • Example: When RSI moves above 70, it suggests that a security may be overbought and due for a potential pullback.
  • Implication: Traders may consider selling or taking profits when RSI indicates overbought conditions.

Head and Shoulders Pattern:

  • Scenario: This is a reversal pattern that often appears at the end of an uptrend.
  • Example: A head and shoulders pattern consists of three peaks, with the middle one (head) being higher than the others (shoulders).
  • Implication: Traders see this pattern as a potential signal of a trend reversal from bullish to bearish.

Bullish Engulfing Candlestick Pattern:

  • Scenario: Candlestick patterns reveal short-term price movements.
  • Example: A bullish engulfing pattern occurs when the current candle’s body fully engulfs the previous candle’s body.
  • Implication: This pattern suggests a shift from bearish sentiment to bullish sentiment, indicating a potential buying opportunity.

MACD (Moving Average Convergence Divergence):

  • Scenario: MACD is used to identify changes in momentum.
  • Example: When the MACD line crosses above the signal line, it generates a bullish signal.
  • Implication: Traders may consider entering long positions when this crossover occurs, anticipating upward price momentum.

Double Top Pattern:

  • Scenario: This pattern typically occurs at the end of an uptrend and signals a potential reversal.
  • Example: It consists of two peaks at nearly the same price level, separated by a trough.
  • Implication: Traders often interpret a double top as a bearish signal, indicating a possible trend reversal from bullish to bearish.

Moving Average Crossover:

  • Scenario: Traders often use two moving averages, such as a 50-day and a 200-day moving average.
  • Example: When the 50-day moving average crosses above the 200-day moving average, it may be considered a “golden cross,” signaling a potential uptrend and a buy opportunity.
  • Implication: This crossover suggests that recent price movements are stronger, potentially indicating a change in the overall trend.

Support and Resistance Levels:

  • Scenario: Technical analysts identify key support (lower) and resistance (upper) levels on a price chart.
  • Example: If a stock consistently bounces off a specific price level multiple times, that level becomes a strong support level.
  • Implication: Traders use these levels to make decisions, such as buying near support and selling near resistance, anticipating price reversals.

Relative Strength Index (RSI):

  • Scenario: RSI is an oscillator that measures the speed and change of price movements.
  • Example: When RSI moves above 70, it suggests that a security may be overbought and due for a potential pullback.
  • Implication: Traders may consider selling or taking profits when RSI indicates overbought conditions.

Head and Shoulders Pattern:

  • Scenario: This is a reversal pattern that often appears at the end of an uptrend.
  • Example: A head and shoulders pattern consists of three peaks, with the middle one (head) being higher than the others (shoulders).
  • Implication: Traders see this pattern as a potential signal of a trend reversal from bullish to bearish.

Bullish Engulfing Candlestick Pattern:

  • Scenario: Candlestick patterns reveal short-term price movements.
  • Example: A bullish engulfing pattern occurs when the current candle’s body fully engulfs the previous candle’s body.
  • Implication: This pattern suggests a shift from bearish sentiment to bullish sentiment, indicating a potential buying opportunity.

MACD (Moving Average Convergence Divergence):

  • Scenario: MACD is used to identify changes in momentum.
  • Example: When the MACD line crosses above the signal line, it generates a bullish signal.
  • Implication: Traders may consider entering long positions when this crossover occurs, anticipating upward price momentum.

Double Top Pattern:

  • Scenario: This pattern typically occurs at the end of an uptrend and signals a potential reversal.
  • Example: It consists of two peaks at nearly the same price level, separated by a trough.
  • Implication: Traders often interpret a double top as a bearish signal, indicating a possible trend reversal from bullish to bearish.

Key Highlights of Technical Analysis:

  • Method for Evaluation: Technical analysis is a method used to evaluate securities and financial markets by analyzing historical price and volume data.
  • Chart Analysis: It involves chart analysis, studying patterns, trends, and various chart types to make predictions.
  • Indicators: Technical analysts rely on indicators such as moving averages, RSI, and MACD to gain insights into market conditions.
  • Principles: Key principles include the belief that “the market discounts everything” and that prices move in trends.
  • Tools: Common tools include moving averages, candlestick patterns, Bollinger Bands, and oscillators like RSI and MACD.
  • Advantages: Technical analysis offers advantages like quick decision-making and providing visual insights into price patterns.
  • Criticisms: Critics point out its subjectivity, limited predictive power, and the absence of a strong foundation in economic theory.
  • Real-World Examples: Examples include moving average crossovers, support and resistance levels, RSI, candlestick patterns, and more.

Technical Analysis Indicators List

IndicatorTypeDescriptionWhen to UseExample
Moving Average (MA)TrendSmoothed average of past price data used to identify trends. Common types include SMA and EMA.Identify trends and reversals.Using a 50-day SMA and 200-day SMA to spot a golden cross or death cross.
Exponential Moving Average (EMA)TrendA type of moving average that gives more weight to recent price data.Identify trends with faster response to recent prices.Using a 10-period EMA to capture short-term trends.
Simple Moving Average (SMA)TrendA basic moving average that evenly weights all price data in the calculation.Identify longer-term trends.A 50-day SMA used as a support level.
Weighted Moving Average (WMA)TrendAssigns different weights to different data points in the moving average calculation.Customize moving average to emphasize specific periods.Weighting recent data more heavily in the calculation.
Relative Strength Index (RSI)MomentumMeasures the speed and change of price movements. Used to identify overbought or oversold conditions.Identify overbought/oversold conditions and divergence.RSI > 70 indicates overbought, RSI < 30 indicates oversold.
Moving Average Convergence Divergence (MACD)Trend/MomentumCombines two moving averages to identify potential trend reversals and momentum changes.Identify trend changes and divergence.MACD line crossing above signal line indicates bullish signal.
Bollinger BandsVolatilityConsists of a middle band (SMA) and upper/lower bands (standard deviations) to identify volatility.Identify volatility and potential reversal points.Price touching upper band may suggest overbought conditions.
Stochastic OscillatorMomentumMeasures the closing price relative to its price range over a specified period.Identify overbought/oversold conditions and potential reversals.Stochastic above 80 suggests overbought, below 20 suggests oversold.
Fibonacci RetracementTrendUses key Fibonacci ratios to identify potential support and resistance levels.Identify potential reversal or retracement levels.Using Fibonacci levels (38.2%, 50%, 61.8%) as support/resistance.
Ichimoku CloudTrendProvides information about support, resistance, and potential trend direction.Identify trends and potential entry/exit points.Price above cloud suggests bullish trend.
Average True Range (ATR)VolatilityMeasures market volatility by calculating the average range between high and low prices.Determine trade size based on market volatility.ATR of 2 indicates low volatility, ATR of 20 indicates high volatility.
Parabolic SARTrendProvides potential reversal points for price trends.Identify potential trend reversals.SAR dots switching from above to below price suggests bullish reversal.
Relative Vigor Index (RVI)MomentumMeasures the conviction behind a price trend by comparing closing and opening prices.Confirm trend strength or divergence.RVI rising in an uptrend confirms bullish trend.
On-Balance Volume (OBV)VolumeAccumulates volume based on whether the price closes higher or lower and helps identify trends.Confirm price trends with volume analysis.Rising OBV during an uptrend confirms bullish sentiment.
Commodity Channel Index (CCI)MomentumMeasures the deviation of price from its statistical average and helps identify overbought/oversold conditions.Identify extreme price conditions.CCI > 100 indicates overbought, CCI < -100 indicates oversold.
Average Directional Index (ADX)TrendMeasures the strength of a trend and can be used to identify trend direction.Determine the strength of a trend.ADX > 25 suggests a strong trend.
Momentum Indicator (MOM)MomentumShows the change in price over a specified number of periods.Identify trend strength and potential reversals.Momentum increasing in an uptrend signals bullish strength.
Williams %RMomentumMeasures the relative position of the current close to the highest high over a specified period.Identify overbought/oversold conditions.Williams %R below -80 suggests oversold, above -20 suggests overbought.
Rate of Change (ROC)MomentumMeasures the percentage change in price over a specified number of periods.Identify trend strength and potential reversals.ROC rising indicates positive momentum.
Aroon IndicatorTrendConsists of two lines (up and down) that measure time since the highest high or lowest low.Identify trend direction and strength.Aroon up crossing above Aroon down suggests a bullish trend.
Average Directional Movement (ADX/DMI)TrendComprises the ADX, +DI, and -DI indicators to identify trend strength and direction.Determine trend strength and potential trend reversals.+DI crossing above -DI suggests a potential bullish trend.
Accumulation/Distribution (A/D)VolumeMeasures the flow of money into or out of a security based on price and volume.Confirm price trends and potential reversals.A/D line rising suggests buying pressure.
Chaikin OscillatorVolumeCombines the ADL (Accumulation/Distribution Line) with a moving average to identify buying and selling pressure.Confirm trends and potential reversals.Positive Chaikin Oscillator suggests buying pressure.
Money Flow Index (MFI)VolumeCombines price and volume to measure the strength of money flowing in and out of a security.Identify overbought/oversold conditions.MFI above 80 indicates overbought, below 20 indicates oversold.
TrixMomentumTriple exponential moving average of price, used to identify trend reversals.Identify trend reversals.Trix line crossing zero suggests a reversal.
Moving Average RibbonTrendConsists of multiple moving averages of varying periods, displayed as ribbons on a chart.Confirm trends and potential reversals.Ribbons of different MAs aligning indicate a strong trend.
McGinley Dynamic IndicatorTrendAdjusts to market speed and minimizes lag. Used to identify trends and reversals.Smooth trends and identify reversals.Cross of price and McGinley indicator suggests a reversal.
Chande Momentum Oscillator (CMO)MomentumMeasures momentum as a difference between the sum of recent gains and losses.Identify overbought/oversold conditions and divergence.CMO above 50 suggests bullish momentum.
Detrended Price Oscillator (DPO)MomentumMeasures the difference between a past price and a moving average, eliminating trend components.Identify cyclic patterns and potential reversals.DPO crossing above zero indicates a potential bullish reversal.
Ultimate OscillatorMomentumCombines short, intermediate, and long-term price momentum into a single oscillator.Identify trend strength and potential reversals.Crossing above 70 indicates overbought, below 30 indicates oversold.
Chandelier ExitTrendUses ATR to set trailing stop-loss levels to capture trends.Set dynamic stop-loss levels.Chandelier Exit trailing below price in an uptrend protects gains.
Gann FanTrendDraws trendlines at specific angles to identify support and resistance levels.Identify potential price levels and trend direction.Gann Fan lines providing support or resistance.
Gann Swing OscillatorTrendMeasures price swings and helps identify potential trend changes.Identify potential trend reversals.Oscillator changing direction suggests a trend change.
Keltner ChannelsVolatilitySimilar to Bollinger Bands but uses ATR to set channel width.Identify volatility and potential reversal points.Price touching upper channel may suggest overbought conditions.
Pivot PointsSupport/ResistanceUses previous high, low, and close prices to identify potential support and resistance levels.Identify key price levels.Pivot point as a support level.
Standard DeviationVolatilityMeasures price volatility by calculating how much individual prices deviate from the mean price.Assess market volatility.High standard deviation indicates high price variability.
Donchian ChannelsTrendConsists of upper and lower bands based on the highest high and lowest low over a specified period.Identify potential trend direction and breakouts.Price breaking above upper channel suggests a bullish breakout.
Elliott Wave TheoryTrendAnalyzes market cycles and patterns based on the Fibonacci sequence.Identify potential wave patterns and trend direction.Recognizing Elliott Wave patterns like impulsive and corrective waves.
Volume ProfileVolumeDisplays the volume traded at specific price levels, helping identify areas of support and resistance.Confirm support/resistance and price acceptance.High volume at a specific price level as a support/resistance area.
Williams Accumulation/Distribution (WAD)VolumeAccumulates the daily price changes, taking into account the relationship between the close and the range.Confirm trends and potential reversals.Rising WAD line indicates accumulation and bullish sentiment.
Parabolic Time/Price (SAR)TrendUses dots above or below the price chart to indicate potential trend reversals.Identify potential trend reversals.SAR dots switching from above to below price suggests bullish reversal.
Price Rate of Change (PROC)MomentumMeasures the percentage change in price over a specified number of periods.Identify trend strength and potential reversals.PROC increasing indicates positive momentum.
Relative Volatility Index (RVI)VolatilityMeasures the volatility of price changes.Assess market volatility.High RVI indicates high price volatility.
Guppy Multiple Moving Averages (GMMA)TrendCombines short-term and long-term moving averages to identify trend strength and direction.Confirm trends and potential reversals.Short-term MAs crossing above long-term MAs signals a bullish trend.
Mass IndexVolatilityMeasures the range between high and low prices to identify potential trend reversals.Identify potential trend reversals.Mass Index rising suggests potential trend reversal.
McGinley Dynamic RMI (RMI)MomentumA variation of the McGinley Dynamic Indicator that incorporates the RSI.Confirm trend strength and reversals.RMI crossing above 70 indicates bullish momentum.
Zigzag IndicatorTrendPlots lines connecting significant price highs and lows, filtering out minor price movements.Identify major price swings and trends.Zigzag lines connecting highs and lows.
Relative Momentum Index (RMI)MomentumCombines the RSI and ROC to measure price momentum relative to a specific look-back period.Confirm trend strength and potential reversals.RMI above 70 suggests overbought, below 30 suggests oversold.
Elder Ray IndexTrend/MomentumConsists of Bull Power (difference between the high and 13-day EMA) and Bear Power (difference between the low and 13-day EMA).Identify buying and selling pressure.Bull Power above zero indicates bullish pressure.
Schaff Trend Cycle (STC)TrendCombines the MACD and Stochastic Oscillator to identify potential trend reversals.Confirm trends and potential reversals.STC crossing above 25 suggests a potential bullish reversal.
TRIXMomentumTriple exponential moving average of price, used to identify trend reversals.Identify trend reversals.TRIX line crossing zero suggests a reversal.
Klinger Volume OscillatorVolumeCombines volume and price to confirm trends and divergence.Confirm trends and potential reversals.Oscillator crossing above zero suggests bullish sentiment.
Relative Momentum Indicator (RMI)MomentumCombines the RSI and ROC to measure price momentum relative to a specific look-back period.Confirm trend strength and potential reversals.RMI above 70 suggests overbought, below 30 suggests oversold.
Intraday Momentum Index (IMI)MomentumMeasures price changes during intraday trading to identify potential reversals.Identify intraday trend strength and reversals.IMI above 70 suggests intraday overbought, below 30 suggests oversold.
True Strength Index (TSI)MomentumCombines two moving averages of price changes and a smoothing factor to identify trend changes.Confirm trend strength and potential reversals.TSI crossing above signal line indicates a potential bullish reversal.
Donchian Channel WidthVolatilityMeasures the width between the upper and lower Donchian channels to assess market volatility.Assess market volatility.Wider Donchian Channel suggests higher volatility.

Connected Financial Concepts

Circle of Competence

circle-of-competence
The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

moat
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

buffet-indicator
The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Venture Capital

venture-capital
Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.

Foreign Direct Investment

foreign-direct-investment
Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country. 

Micro-Investing

micro-investing
Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.

Meme Investing

meme-investing
Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Retail Investing

retail-investing
Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.

Accredited Investor

accredited-investor
Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.

Startup Valuation

startup-valuation
Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.

Profit vs. Cash Flow

profit-vs-cash-flow
Profit is the total income that a company generates from its operations. This includes money from sales, investments, and other income sources. In contrast, cash flow is the money that flows in and out of a company. This distinction is critical to understand as a profitable company might be short of cash and have liquidity crises.

Double-Entry

double-entry-accounting
Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.

Balance Sheet

balance-sheet
The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

income-statement
The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

cash-flow-statement
The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

capital-structure
The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

capital-expenditure
Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

financial-statements
Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Financial Modeling

financial-modeling
Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Business Valuation

valuation
Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Financial Ratio

financial-ratio-formulas

WACC

weighted-average-cost-of-capital
The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both. 

Financial Option

financial-options
A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.

Profitability Framework

profitability
A profitability framework helps you assess the profitability of any company within a few minutes. It starts by looking at two simple variables (revenues and costs) and it drills down from there. This helps us identify in which part of the organization there is a profitability issue and strategize from there.

Triple Bottom Line

triple-bottom-line
The Triple Bottom Line (TBL) is a theory that seeks to gauge the level of corporate social responsibility in business. Instead of a single bottom line associated with profit, the TBL theory argues that there should be two more: people, and the planet. By balancing people, planet, and profit, it’s possible to build a more sustainable business model and a circular firm.

Behavioral Finance

behavioral-finance
Behavioral finance or economics focuses on understanding how individuals make decisions and how those decisions are affected by psychological factors, such as biases, and how those can affect the collective. Behavioral finance is an expansion of classic finance and economics that assumed that people always rational choices based on optimizing their outcome, void of context.

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Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

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