Chapter - 1
The Basic Principle of
Technical Analysis
CMT LEVEL - I

Learning Objectives
• Trend in Technical Analysis
• Why Trend is Important for Technical Analyst
• Identify Various types of Trend
• Art of Technical Analysis
• Fractal Importance in Describing Price Action

What is Trend?
• A trend is the general direction of a market or an asset's price.
• In technical analysis, trends are identified by price action that highlights:
• Uptrend - when the price is making higher swing highs and higher swing lows,
• Downtrend – When the Price is Making lower swing lows and lower swing
highs .
• A sideways or flat trend occurs when prices trade in a range without
significant underlying upward or downward movement.

Type of Trends
• Time Based/ Fractal
- short, intermediate- and long-term.
• Price Based/Directional
- Uptrend , Down Trend , SideWays Trend

Time Based/ Fractal Trends
•Trends are fractal (According to Dow Theory)
- Major Trend –above one year
- Intermediate Trend -3 weeks to many months
- Minor term Trend – below 3 weeks

What is Trend?

How Does Investor Psychology Impact Trends?
• Power of the buyers or sellers
• Aggressiveness or anxiousness of buyers and sellers
• Emotions of fear or greed propelling their action
• Broad expectations

How Technical Analyst Make Money?
• “The Trend is Your Friend” – Play the Trend
• Don't lose—Control risk of capital loss.
• Manage your money—Avoid ruin.

Major Assumption of Technical Analysis
• The Interaction of Supply & Demand determine price.
• Supply and demand are affected by investors'
emotions and biases, particularly fear and greed.
• Price discounts everything.
• Prices trend.
• Recognizable patterns form within trends.
• Patterns are fractal.

Trend Develop from Supply & Demand
• The Price is Change or Reflect due to change in Demand &
Supply
• If something is in demand and supply begins to shrink,
prices will rise.
• If supply increases beyond current demand, prices will fall.
• If supply is relatively stable, prices can fluctuate higher and
lower as demand increases or decreases.
• These factors can cause both short- and long-term
fluctuations in the market

Price discounts everything
• Dow theory suggests that all information – past, current and
even future – is discounted into the markets and reflected in
the prices of stocks and indexes.
• Technical analysis one need only look at price movements
•The only information excluded is that which is unknowable,
such as a massive earthquake

Price moves in trends.
• The whole purpose of charting the price action of a market
is to identify trends in early stages of their development for
the purpose of trading in the direction of those trends.
• In fact, most of the techniques used in this approach are
trend-following in nature, meaning, that their intent is to
identify and follow existing trends
• Trend in motion will continue in the same direction until it
reverses. The entire trend-following approach is predicated
on riding existing trend until it shows signs of reversing.

Recognizable Patterns (History Repeat Itself)
• When a set of factors that have panned out in the past tends
to repeat itself in the future, we expect the same outcome to
occur, as was observed in the past.
• The repetitive nature of price movements is often attributed
to market psychology, which tends to be very predictable
based on emotions like fear or excitement.
• Technical analysis uses chart patterns to analyze these
emotions and subsequent market movements to understand
trends.

Patterns are fractal
• The trading markets are similar in that any period we look
at—long, medium, or very short—produces trends with the
same characteristics and patterns as each other.
• The trend length of interest is determined solely by the
investor's or trader's period of interest.
• Shorter trends make up longer trends, any analysis of a
period of interest must include analysis of the longer and
shorter trends around it.

Patterns are fractal

How Trends are Identified?
• Trend traders attempt to isolate and extract profit from
trends.
• Trends Identified by various methods:
- Trend lines & Channels
- Averages
- Momentum Indicators
- Chart Patterns