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Investing > Technical Analysis > Flashcards

Technical Analysis Flashcards

1
Q

RSI

A

The Relative Strength Index seeks to measure the internal strength of a security, not the strength of a security relative to other securities. The RSI is considered a “Banded” indicator, in that it can only range between 0 and 100.

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2
Q

What are the most popular moving averages?

A

50 day and 200 day are the most used moving averages. However, shorter averages may be more meaningful when the time horizon is much shorter.

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3
Q

MACD

A

Pronounced MAC-D, is the moving average convergence-divergence

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4
Q

Stochastics

A

The Stochastics oscillator can provide alerts to traders regarding potential trend reversals and/or potential breakouts during sideways trends. Some traders also use Stochastics as a confirmation tool in assessing bullish and bearish trends. In simple terms, Stochastics measure the strength or weakness of a given stock or asset by comparing where it’s current price stands in relation to its overall price range over a given time period.

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5
Q

Momentum Indicator

A

Used to help determine the speed and strength of a security’s price movement, and whether the underlying momentum is strengthening or weakening.

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6
Q

Leading Indicator

A

Indicators that tend to signal a potential change in the trend before the price’s direction actually changes.
Note: Leading indicators are used to warn traders of a potential price reversal, not to confirm them. Warnings provided by leading indicators are not always accurate and should be confirmed using other non-momentum indicators.

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7
Q

How is the RSI used when the security is in a trend?

A

In trending markets the RSI (like all oscillators) can stay at overbought levels in uptrends and at oversold levels in downtrends for extended periods of time. In uptrends the RSI often oscillates between support in a range of 40-50 and resistance in the range of 70-90. In downtrends, the RSI often oscillates between a support range of 20-30 and a resistance range of 55-65.

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8
Q

How is the RSI used when the security is in a range?

A

The RSI can be used to gauge overbought and oversold conditions. Classically, readings below 30 are considered oversold and readings above 70 are considered overbought. Look to buy a range bound market when the RSI is below 30 and then moves back above 30. Look to sell a range bound market when the RSI is above 70 and then drops below 70.

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9
Q

Explain the RSI formula

A

The RSI is basically measuring the average of “up” closes vs. “down” closes over the measurement or lookback period. Popular lookback periods are 9, 14 and 25.

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10
Q

How does the RSI relate to the end of a trend?

A

The RSI may be and early warning signal that a trend might be weakening or even ready to reverse. This may be signaled by divergences or breaks of the support or resistance ranges for uptrending and downtrending markets.

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11
Q

Describe the technique for finding a RSI divergence.

A

For uptrends, if prices are making higher highs but RSI is not making higher highers the uptrend may be weakening.
For downtrends if prices are making lower lows but RSI is not making lower lows, the downtrend may be weakening.

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12
Q

Describe the technique for using RSI support and resistance ranges to signal a trend end.

A

In uptrends the RSI often has a band of support in a range between 40-50. If a pullback in the security pulls the RSI below this level, the uptrend may be ending.
In downtrends, the RSI often peaks in a resistance range of 55-65. If a rally in the security pushes the RSI above this lever, the downtrend may be ending.

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13
Q

What is the Stochastic RSI?

A

The SRSI is an indicator of an indicator. Its main purpose is to ensure that valid signals are generated on a relatively frequent basis. It is derived by applying the stochastic formula to the RSI– in other words, trying to determine where the RSI is in its own recent range.

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14
Q

What are the three parameters for the Stochastic RSI?

A

The lookback period for the RSI, the lookback period for the stochastic formula, a slowing or smoothing factor for the stochastic formula.

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15
Q

How is the Stochastic RSI used?

A

SRSI values range from 0 to 1. Overbought levels are ate either .75 or .8. Oversold levels are at either .25 or .2. Can use the SRSI for overbought/oversold signals or to look for divergences just like with the RSI.

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16
Q

What are 5 things every trader should know about technical analysis?

A
  1. All Information about the Markets is found in Its Price Action
  2. Trading Volume Can Offer Important Information
  3. Markets Are Driven By Psychological Factors In Addition To Fundamental Values
  4. Prices Tend To Move in Trends and Patterns
  5. Work to Build Your Weight of Evidence - Not to Find the Holy Grail
17
Q

What are the Core beliefs of technical Analysis.

A
  1. Prices tend to move in trends
  2. Trends tend to continue
  3. Patterns tend to repeat themselves
18
Q

What defines an uptrend?

A

A series of higher highs and higher lows.

19
Q

What defines a downtrend?

A

A series of lower highs and lower lows.

20
Q

What does a trend represent to a technical analyst?

A

A trend represents an imbalance between supply and demand.

21
Q

Name one main focus of technical analysis?

A

A reversal in a trend.

22
Q

Why do technical analyst look for patterns?

A

Because patterns tend to repeat themselves and a pattern may be the signal of the end of a trend and the beginning of a new one.

23
Q

What does a head and shoulders pattern show?

A

This pattern, known as head and shoulders, is used by technical analysts to help recognize when an uptrend has probably peaked. The first shoulder and the head are a continuation of the pattern of higher highs mentioned earlier. However, the second shoulder does not establish a new high. In fact, it usually only reaches about as high as the first shoulder. Once the price dips below the line drawn between the two lows (as shown above), known by technicians as the “neckline,” the uptrend is considered broken.

24
Q

Describe Support and Resistance.

A

Trend lines can be drawn by connecting the series of lows, forming a line of “support,” or by connecting a series of highs, forming a line of “resistance.”
Support is indicated by the line beneath the trend. Once the price declines to support level, buyers may come back in, creating demand, and start to send the price higher. Once the price reaches resistance, the trend line above the price range, sellers may add pressure through additional supply, sending prices lower.

25
Q

Describe moving averages.

A

SMA captures the average of the last (10, 20, 50, 100, 200) days’ prices and plots them on the chart. The next day, the oldest price is dropped off, the most recent price is added in, and the new average is calculated and plotted. (Any time interval can be used, from months down to minutes.) The moving average smoothes out minor price fluctuations and can make the trend easier to see. For a stock in an uptrend, the moving average appears below the price line. If the stock is in a downtrend, the moving average will move above the price line.

26
Q

How are moving averages used in combination?

A

Moving averages can also be used in combination. For example, a 10-day moving can be used with a 50-day average. If the shorter moving average (10 days) moves above the longer average (50 days), it is considered a bullish sign. These crossovers are potential entry and exit signals that can help confirm your fundamental research.

27
Q

Describe Technical indicators generally.

A

As you grow more comfortable reading stock charts, you can add technical indicators to measure the rate of price change, volatility, and other factors. In a sense, technical indicators amplify a signal that might otherwise be drowned out by market noise. Take for example, the stochastic oscillator, which is used to measure price momentum or to provide “overbought” and “oversold” signals.
The stochastic oscillator measures a stock’s closing price against its trading range. Stocks with upward momentum should be in the higher portion of the range, while stocks with downward momentum should be in the lower range.

28
Q

What is a golden cross?

A

When a shorter moving averages crosses to above a longer moving average. For instance, a 50 day crosses and moves above a 200 day.

29
Q

What is a death cross?

A

When a shorter moving averages crosses to below a longer moving average. For instance, a 50 day crosses and moves below a 200 day.

30
Q

How is volume used?

A

Volume is used as confirmation. A move on low volume may be meaningless whereas the same move with high volume may confirm a break in trend or continuation of a trend.

31
Q

According to IBD, what are the 7 bases (areas of price consolidation) for pinpointing the best time to buy?

A
  1. Cup with handle
  2. Double bottom
  3. Flat base
  4. Saucer with handle
  5. Base on base
  6. Ascending base
  7. High tight flag
32
Q

What is the 7-Point base checklist in IBD for chart patterns?

A
  1. Prior uptrend
  2. Type of base
  3. Length of base
  4. Essential characteristics of base
  5. Volume dry up or shakeout
  6. Identify the buy point
  7. Breakout (>50% volume surge at buy point)
33
Q

What is the 7-point base checklist for the cup with handle?

A
  1. Prior run up of at least 30%.
  2. Correction of 20-30%.
  3. 7 week minimum
  4. Handle forms in upper half of handle
  5. Volume dry up in the handle.
  6. Buy point = top of handle plus 10 cents.
  7. > 50% volume surge at the buy point (look at the weekly chart…May not be 50% if buy point was late in the week)

Never buy a stock extended more than 5% past its buy point.

34
Q

What is the 7-point base checklist for the double bottom?

A
  1. Prior run up of at least 30%
  2. W shaped bottom.
  3. 7 week minimum
  4. Second leg down undercuts first leg down.
  5. Second leg down is the shakeout
  6. Buy point is the top of the middle of the W plus 10 cents.
  7. > 50% volume above its average daily volume.

Never buy a stock extended more than 5% past its buy point.

35
Q

What is the 7-point base checklist for the flat base?

A
  1. Prior run up of at least 30%
  2. Flat trend.
  3. 5 week minimum
  4. Less than 15% correction.
  5. Volume is down during the base.
  6. Buy point is the high of the base plus 10 cents.
  7. Volume up at least 50% above its average daily volume.

Never buy a stock extended more than 5% past its buy point.

Investing (9 decks)

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