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Brain Teasers. You have 8 red and 16 blue socks. There’s no light in your room, so you have to choose your socks in the dark. What’s the minimum # of socks you need to choose to ensure you have at least a matching pair. Answer. Three
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Brain Teasers • You have 8 red and 16 blue socks. There’s no light in your room, so you have to choose your socks in the dark. What’s the minimum # of socks you need to choose to ensure you have at least a matching pair.
Answer • Three • Two socks can be different, but a third must match one of the first two
What is Technical Analysis (TA) • What determines the price of ____? • Fundamental vs. Technical Analysis • Fundamentals = Valuations • Technicals = Market Action • TA is probabilistic • Says that this is “likely” to happen
Assumptions • Prices SOMETIMES move in trends • “Markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal is to identify those periods” –Shcwager • History repeats itself • Because of market psychology • Market efficiency
Charting Patterns • Visualize price movements • Can be simple “eyeballing intuition” or looking for specific patterns • Many charts use Candlesticks
Eyeballing • Trade on up/downtrends • Breaks support/resistance
Head and Shoulders • Target = High/low point -/+ neckline • The more level the neck, the more reliable the pattern
Double Top/Bottom • Have to keep tight stops in case support/resistance is broken
Combination Patterns • Strong signal
Hook Reversal • Most reliable after strong trends
RSI • Momentum indicator • Shows breakouts or trend reversals • Leading indicator • RSI=Avg closes up / Avg closes down • 14,16,9,25 day lookback
MACD • Momentum indicator • Lagging indicator • MACD = difference b/w fast and slow moving averages • Generally 12, 26 period EMA’s • Signal line • 9 period EMA • Can turn into leading indicator • Works best when used with another indicator
Bollinger Bands • Price/Volatility levels over time • Consists of 3 bands • Usually 20 bar SMA, 2 std devs • Gives a relative level of high/low • Multiple ways of trading • Most effective is range trading during low vol periods • Options implications too
When to use TA • “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Buffet • Entry/Exit prices • Algorithmic Traders (computers) • Markets • Currencies = Great • Futures = Great • Stocks = Decent
Algorithmic Trading • All you know is prices • Understandable why algorithms almost always are technicals based • All algos have a thesis behind them (when X happens, Y is likely to happen) • Can be very hard to code ideas sometimes