Group Member Name ID No.

1. Henok Atrsaw GSE/3677/14

CHAPTER 4 2. Mahlet Debebe GSE/0264/14
3. Mahlet Gashaw GSE/7406/14
GSE/0821/14
GSE/0821/14
4. Metasebia Timothiwos GSE/8311/14
5. Metasebia Tilahun GSE/8867/14
TECHNICAL 6. Tibebe Ayele GSE/4757/14
ANALYSIS 7. Yeelshaday Endale GSE/3154/14
 Chapter Four

i. What is Technical Analysis?

ii. Assumptions of Technical Analysis
iii. Tools of Technical Analysis
 What is Technical Analysis?
According to the market technician association, Technical Analysis it is a method of
evaluating securities by analyzing statistics generated by market activity.
The other definition, Technical analysis is an alternative method of making
investment decision and answering the following questions;
 What securities should an investor buy or sell?
 When should these investment be made?
Technical analysist developed technical trading rules from observation of past price
movement of stock market and individual stocks
 Cont.…
Technical analysis can be applied to any security with historical trading data
such as
 Stocks

Futures
Commodities
 Fixed-income
Currencies
 Assumptions of Technical Analysis
According to Relly & brown and preeti singh;
1. The market value of any good or service is determined solely by the interaction of supply and
demand.
2. Supply and demand are governed by numerous rational and irrational factors. Included in these
factors are those economic variables relied on by the fundamental analyst as well as opinions,
moods, and guesses. The market weighs all these factors continually and automatically.
3. Disregarding minor fluctuations, the prices for individual securities and the overall value of the
market tend to move in trends, which persist for appreciable lengths of time.
4. Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts,
no matter why they occur, can be detected sooner or later in the action of the market itself.
Cont.…

The new information causes a decrease in the

equilibrium price for a security but the price
adjustment is not rapid.
As a trend that persists until the stock reaches
its new equilibrium.
Technical analysts look for the beginning of a
movement from one equilibrium value to a
new equilibrium value but do not attempt to
predict the new equilibrium value.
 Tools of Technical Analysis
Technical tools are frequently used for analyzing technical charts to determine whether the market trend will
continue or reverse. The eight technical analysist tools, let us see in detail;
1. On-balance volume(OBV) 7. Aroon
2. Accumulation/Distribution(A/D) line 8. The Stochastic Oscillator
3. Moving Average convergence/Divergence(MACD)
4. Relative Strength index(RSI)
5. Parabolic SAR
6. Average Directional index
 1. On-balance volume(OBV)
OBV indicates a positive volume or negative volume pressure, that result in an
increase or a decrease in stock prices.
Due to this relation between volume change and price are established.
 Rising of OBV indicates more buyer, creates a positive volume pressure that
results higher prices.
 Falling OBV indicates more sellers, creates a negative volume pressure results in
lower prices.
 Cont.…

At time of calculating OBV, the closing price of the stocks is taken in consideration.

OBV helps predict price trends, if prices are rising while OBV falling it shows the trend lack
strong buyer and is likely to reverse
 2. Accumulation/Distribution(A/D) line
o It is an indicator that uses volume and price to see whether a stock is being accumulated or
distributed.
o Accumulation reflects Demand and Distribution demonstrates the supply of stock.
o A/D measures the Demand and supply of security by overviewing where price has
closed within the period’s range then multiplying it by volume.
o A/D is rising, demonstrates buying pressure as the stock close above the midpoint of
the period’s range which conforms uptrend.
o A/D is line is falling, it indicates selling pressure as the stock closes below midpoint of the
period’s range which confirms a downtrend.
 Cont.….
o A trader shall consider divergence, if A/D line is falling while security price
is rising, it reflect possibility of higher distribution that could signal a fall
in price.
o If A/D is in an uptrend while the security price is downtrend, then this
reflects the possibility of higher accumulation that signal a higher
security price
 3. Moving Average
convergence/Divergence(MACD)
• It is a solution to whether one should use short-term moving average or a long-
term moving average.
• The movement indicates the difference between the short-term and long-term.
The difference highlight the upward or downward movement of price in the
recent past compared to longer movement.
• When MACD is positive, sends a buying signal as price are likely to move up
• When MACD is negative zone, it sends a selling signal as prices are likely to
falls,
 Cont.….
 Buying signals
I. MACD Line is above the moving average line of MACD, and it moves
towards the average line but fails to penetrate it, thus rising upward,
supported by an upward movement of the average line.
II. MACD line is below the moving average line of MACD, it moves towards the
average line, successfully penetrates it, continuing to rise upward, supported
by an upward movement of the average line
III. MACD line is above the moving average line of MACD and continues to
move upward supported by an upward movement of the average line
 Cont.….
Selling signals
I. MACD line is below the moving average line of MACD, and it moves towards the
average line but fails to penetrate it, thus starts declining, supported by down ward
movement of the average line.
II. MACD line is above the moving average line of MACD. It moves towards the average
line, successfully penetrates it, and continue to decline, supported by a down ward
movement of the average line.
III. MACD line is below the moving average line of MACD and continues to move down,
supported by a downward movement of the average line.
 4. Relative Strength index(RSI)
• RSI is a momentum and trend strength indicator whose value can range between 0 to
100. Depending on the value, trader can know if a security is overbought or
oversold.
When RSI is above 70 security is overbought, and RSI is expected to decline.
When RSI is below 30, security is oversold and the RAI is expected to rise.
• The above are at the assumption, trader shall be carefully because when price
and RSI are moving in opposite direction, then the price trend could reverse.
• It also indicates support and resistance levels.
 Cont.….

 During an upward trend RSI holds above 30 and usually reaches 70 or above
 During downward trend, RSI holds below 70 and usually falls to 30 or lower,
 Concluding RSI compare gains to losses and Charts the greater one.
 5. Parabolic SAR
• This is a technical indicator that determines the direction of the price movement.
• Aim to identify the potential reversal in price movement it is also called “STOP and
REVERSE”.

It is a graphical plotted in the chart by placing a series of dots above and below the candle. The below will
be an indicators;

 If dots are placed below the price bars, indicates a bullish trend and taken as a buy signal.

 If the dots are placed above the price bars, indicates a bearish cycle and demonstrates a sell signal.

 If the dot direction is reversed then the trade signal are produced
 6. Average Directional Index(ADX)
ADX is trend indicator used to measure the strength and momentum of a trend.
 It reduces risk and also increases profit potential.
It is used to assess when the price is trending strongly
Trend strength
Values are important for differentiating between trending and non-trending condition.
ADX readings above 25 suggest that the trend is strong enough for trend trading
strategies. By the same token, ADX below 25 suggests avoiding trend trading
strategies.
 7.Aroon
Aroon is an indicator used to measure whether a security is in a trend.
Is used to identify when trend are likely to change direction.
Measure time it takes for the price to reach the highest or lowest
points over a particular time frame.
It is consists of Aroon up line- measure the strength of the uptrend
and Aroon down line- measure the strength if down trend
 8. The Stochastic Oscillator

• It is an indicator that measures the current price relative to

the price range over a number of periods.
• The indicator was developed by George Lane.
• It is used to compare where security’s prices close over a
selected period. Commonly used 14 periods
THANK YOU