CFA lvl 1 - Reading 13 PDF

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Quantitative Methods Reading 13: Technical Analysis Technical Analysis - Technical analysis is the study of collective market sentiment - It’s based on the idea that prices are determined by the interaction of supply and demand - A key assumption of technical analysis is that market prices reflect both rational and irrational investor behavior - This assumption implies that the efficient markets hypothesis does not hold - Technical analysts primarily use charts of price and volume to analyze asset prices and overall market movement - The time interval chosen reflects the trading horizon of interest to the analyst - Line charts: show closing prices for each period as a continuous line - Bar charts: add the high and low prices for each trading period and often include the opening price as well - Candlestick charts use the same data as bar charts but display a box bounded by the opening and closing prices - Point-and-figure charts are helpful in identifying changes in the direction of price movements Trend, support, resistance lines and change in polarity - A market is said to be in an uptrend if prices are consistently reaching higher highs and retracing to higher lows (et inversement pour un downtrend) - Drawing a trendline on a chart can help to identify whether a trend is continuing or reversing - At a support level, buying is expected to emerge that prevents further price decreases - At a resistance level, selling is expected to emerge that prevents further price increases - Support and resistance levels frequently appear at psychologically important prices such as round-number prices or historical highs and lows - Change in polarity: this refers to a belief that breached resistance levels become support levels and that breached support levels become resistance levels - Reversal patterns occur when a trend approaches a range of prices but fails to continue beyond that range. A well-known example is the head-and-shoulders pattern...