7. Technical and Fundamental Analysis Flashcards
What is Technical Analysis?
study of securities, FX pairs & the overall market based on supply & demand.
- evaluate FX prices by analysing statistics & historical figures generated by market activity (past prices, trends & volume) — looks at market trend as a value indicator
- use tools like charts to identify patterns that can suggest future activity & trends
What are the common technical analysis trading tools?
simple moving average (‘SMA’), moving average convergence/divergence (‘MACD’) and the relative strength index (‘RSI’).
What is simple moving averages?
- daily average of the last x number of days — commonly 20/50/200 days — shows 3 different levels of time information.
- used to provide support & resistance areas
- crosses between different SMAs = signals to buy, sell, or cover
What to be aware of when using several technical indicators together?
some indicators use similar information, so they are likely to arrive at the same conclusion without adding any additional insights.
What is moving average convergence/divergence (‘MACD’)?
- similar to SMA, but more versatile & lines can be used along with the bars.
- When the fast line crosses over the slow line, it can be treated as an early signal
- If the slope on the crossing line looks sharp = strong signal.
- goal = get fast moving gains — for short-term trading.
- The crossing of the bars from below the baseline to above can be fast moving because it might be a correction/opening of a reversal.
What is relative strength index (‘RSI’)?
- compares gains to losses & charts whichever is greater & the magnitude of that.
- RSI thats climbing up rapidly = FX price gains rapidly outpacing its losses
- good for judging the strength of a price movement, identify a general price trend & signals to buy when the currency is oversold & to sell when it is overbought.
- a momentum oscillator that measures the speed & change of price moments.
- measured on a scale of 0–100 — above 70 = overbought & below 30 = oversold.
- lines are breakout indicators — Breaking into the 70 can signal that the FX price is starting an upward breakout — can also indicate that the FX price is overbought, which seems like a divergent signal so it would be good to use another indicator in conjunction with it.
Weak trends can turn bad at any time. Strong trends generally throw off some signals before turning.
What’s the formula for RSI?
100 - {100/(1+(average gain/average loss))}
What is Fundamental analysis?
- interprets statistical reports & economic indicators.
- analyses changes in interest rates, employment reports & inflation indicators.
- performed on historical & present data to make financial forecasts
- looks at economic & financial factors that influence a business (AFS)
- concerned with the intrinsic value of a security
What are some common fundamental analysis indicators?
• Gross Domestic Product (‘GDP’): measures the total value of goods & services produced by a country
• Consumer Price Index (‘CPI’): inflation indicator — measures the cost to buy a defined basket of goods & services
• Producer Price Index (‘PPI’): inflation indicator, tracks changes in prices that producers incur as input cost (i.e. from their suppliers).
• Employment reports: provide an immediate impact on currencies because employment levels directly affect current & future spending habits.
What are the basic premises of technical analysis?
• Market prices are determined by supply & demand — all info is reflected in price action.
• Supply & demand are influenced by rational & irrational factors — include fundamental & psychological factors.
• FX prices tend to move in persistent trends.
• Shifts in demand & supply can be detected with charts of market action & bring about changes in trends
• The persistence of trend & patterns & analysis of past market data can be used to predict future price behaviours, that history repeats itself.
What is Volume pattern in technical analysis?
- measures how much a given security has been traded
- used to confirm price changes in a trend & to anticipate price changes
- The higher the volume, the more active the given security.
- Short-term trend confirmation:
1. rising of security prices & volume = up-trend (vice versa)
2. Rising of security prices & falling volume = trend weakness (vice versa) - Long-term trend confirmation:
1. higher peaks with higher volume at peaks = up-trend (vice versa)
2. Higher peaks with lower volume at peaks = weakening up-trend (vice versa)
What is support level?
- floor to the price — price level at which there is an adequate demand for a security to stop its downward price movement.
- denoted by multiple touches of price without a breakthrough below the level.
- However, once the price has breached this support level, the price is likely to continue falling until meeting another price level.
What is Resistance level?
- ceiling to the price — price level with significant supply, hence causing a halt in upward price movement.
- denoted by multiple touches of price without a breakthrough of the level.
- but once the price has breached this resistance level, the price is likely to continue rising until meeting another resistance price level.
What are line charts useful for?
useful when making reviews over a long period of time
