Technical Analysis: formula sheet

Key formulas

Three assumptions of technical analysis

Price discounts everything | Prices move in trends | History repeats

Learn the exact trio. Options claiming 'markets are always efficient' or 'earnings drive price' are traps.

Three trends in Dow Theory

Primary (major) > Secondary (intermediate correction) > Minor (short-term)

Secondary moves are corrections against the primary trend. Minor moves are the shortest.

Phases of a primary bull market

Accumulation → Public participation → Excess (distribution)

Smart money buys in phase 1, the public joins in phase 2, and euphoria marks phase 3.

Confirmation principle

Trend signal valid when both averages confirm; volume should support the trend

Dow originally used the Industrial and Rail averages.

Technical vs fundamental

Technical: price and volume, charts, timing | Fundamental: intrinsic value, financials, long-term

Know which approach answers 'when' and which answers 'what and why'.

Line chart

Plots only the closing price of each period

No open, high or low is shown.

Bar chart (OHLC)

Left tick = open; right tick = close; top = high; bottom = low

Four prices per period.

Candlestick body

Real body = range between open and close; shadows = range to high and low

Close above open is a rising candle; close below open is a falling candle.

Point and figure

X = rising prices; O = falling prices; new column on reversal of at least the reversal amount

Time is not on the axis. Box size and reversal amount are chosen by the analyst.

Arithmetic scale

Equal vertical distance = equal absolute price change

Suits short periods and small price ranges.

Logarithmic scale

Equal vertical distance = equal percentage change

Suits long periods and large price moves.

Uptrend

Higher highs + higher lows

Trendline is drawn below the lows and acts as support.

Downtrend

Lower highs + lower lows

Trendline is drawn above the highs and acts as resistance.

Sideways trend

Price oscillates between support and resistance

No clear higher or lower swing sequence.

Trendline points

Minimum 2 points to draw; 3rd touch confirms

More touches and longer duration give greater significance.

Role reversal

Broken support → new resistance; broken resistance → new support

Applies when the break is decisive, ideally with high volume.

Channel

Trendline + parallel line through opposite swing points

A break of either line signals a change in momentum or trend.

Head and shoulders

Left shoulder → Head (highest) → Right shoulder; neckline joins the two troughs

Bearish reversal after an uptrend. Confirmed when price closes below the neckline.

Inverse head and shoulders

Three troughs, middle one lowest; neckline joins the two peaks

Bullish reversal after a downtrend. Confirmed on a break above the neckline.

Price target from a head and shoulders (common rule of thumb)

Target ≈ Neckline − (Head − Neckline)

A measuring guide, not a guarantee. For the inverse pattern, add the distance to the neckline.

Double top / double bottom

Double top: two peaks at similar levels (bearish). Double bottom: two troughs at similar levels (bullish)

Confirmed by a break of the intervening trough (top) or peak (bottom).

Triangles

Ascending: flat top, rising lows (bullish). Descending: flat bottom, falling highs (bearish). Symmetrical: converging lines, usually continuation

Trade in the direction of the breakout.

Gap types

Common, breakaway, runaway (continuation), exhaustion

Breakaway starts a move, runaway occurs mid-trend, exhaustion appears near the end.

Single candlestick signals

Doji = indecision; Hammer = bullish after downtrend; Hanging man and shooting star = bearish after uptrend

Context decides the meaning, not the shape alone.

Engulfing and star patterns

Bullish engulfing, morning star = bullish. Bearish engulfing, evening star = bearish

Engulfing is a two-candle pattern; stars are three-candle patterns.

Simple moving average

SMA = (P1 + P2 + ... + Pn) ÷ n

Usually uses closing prices. Every day has equal weight.

EMA smoothing factor

k = 2 ÷ (n + 1)

For a 10-day EMA, k = 2 ÷ 11 ≈ 0.1818.

EMA

EMA today = (Price today × k) + (EMA yesterday × (1 − k))

The first EMA value is usually seeded with an SMA.

WMA

WMA = Σ(weight × price) ÷ Σ(weights)

For a 3-day WMA with weights 3, 2, 1, the latest price gets 3.

MACD line

MACD = 12-period EMA − 26-period EMA

Standard default settings.

Signal line and histogram

Signal = 9-period EMA of MACD; Histogram = MACD − Signal

MACD crossing above signal is bullish; below is bearish.

Bollinger Bands

Middle = 20-period SMA; Upper = Middle + 2σ; Lower = Middle − 2σ

σ is the standard deviation of the same 20 prices. Defaults can be changed.

Crossover signals

Golden cross = short MA above long MA (bullish); Death cross = short MA below long MA (bearish)

Commonly 50-day and 200-day.

RSI

RSI = 100 − [100 ÷ (1 + RS)]

RS = average gain ÷ average loss over the period (usually 14). Range 0 to 100. Above 70 overbought, below 30 oversold by convention.

Stochastic %K

%K = (Close − Lowest low) ÷ (Highest high − Lowest low) × 100

Lowest low and highest high are over the look-back period (commonly 14). Overbought above 80, oversold below 20 by convention.

Stochastic %D

%D = moving average of %K (commonly 3 periods)

The signal line. A %K crossing %D is read as a signal.

Rate of change

ROC = [(Current close − Close n periods ago) ÷ Close n periods ago] × 100

Zero line is the centre. Positive means price is above its level n periods ago.

On-balance volume

OBV today = OBV yesterday + volume (close up); − volume (close down); + 0 (close unchanged)

Only the direction of the close matters. The full day's volume is added or subtracted.

Open interest and price reading

Price up + OI up = strong; Price up + OI down = weak (short covering); Price down + OI up = weak market; Price down + OI down = downtrend losing strength

A common textbook reading. Rising OI means new positions are being added.

Elliott full cycle

5 impulse waves (1-5) + 3 corrective waves (A-B-C) = 8 waves

Impulse moves with the trend. Corrective moves against it.

Elliott wave rules

Wave 2 ≤ 100% retracement of wave 1; wave 3 is never the shortest; wave 4 does not overlap wave 1

If a rule is broken, the wave count is considered wrong.

Fibonacci retracement levels

23.6%, 38.2%, 50%, 61.8%, 78.6%

50% is a traditional level, not a true Fibonacci ratio.

Retracement price in an uptrend

Level = High − (High − Low) × ratio

Use the swing low to swing high of the move.

Advance-decline line

A-D line = previous value + (advances − declines)

Cumulative total. Divergence from the index is the signal.

Put-call ratio

PCR = put volume (or OI) ÷ call volume (or OI)

High values suggest bearish sentiment, low values bullish. Often used as a contrarian indicator at extremes.

Quick revision

• Technical analysis studies price and volume history to judge trend and timing; it does not value a business.
• Dow Theory sees the market discounting all information and moving in primary, secondary and minor trends.
• Candlestick charts show open, high, low and close for each period.
• Support is a price zone where buying tends to halt a fall; resistance is where selling tends to halt a rise.
• A broken support level often turns into resistance, and a broken resistance into support.
• A simple moving average is the sum of closing prices over N periods divided by N.
• An exponential moving average gives more weight to recent prices than a simple moving average does.
• A price crossing above its moving average is read as bullish; crossing below is read as bearish.
• Oscillators such as RSI and Stochastic show momentum and overbought or oversold zones, and can stay extreme in strong trends.
• Volume that confirms the price move strengthens the signal; a move on weak volume is less reliable.
• Reversal patterns signal a change in trend; continuation patterns signal a pause before the trend resumes.
• Fibonacci retracement levels and Elliott Wave counts are tools for estimating pullback and trend structure, not certainties.

Common mistakes

• Treating a secondary trend as a change in the primary trend. Fix: A secondary trend is a correction within the primary trend. Only a clear reversal signal ends the primary trend.
• Listing 'fundamentals drive price' as an assumption of technical analysis. Fix: Technical analysis assumes price already reflects everything, so it need not study fundamentals separately.
• Saying a line chart shows the high and low of each day. Fix: Remember a line chart joins closing prices only.
• Mixing up the open and close ticks on a bar chart. Fix: Open is on the left, close is on the right, as time runs left to right.
• Drawing an uptrend line through the highs Fix: Uptrend line goes under the lows; downtrend line goes over the highs.
• Treating support and resistance as exact prices Fix: Think of them as zones; a marginal intraday penetration does not always mean a break.
• Calling a hammer and a hanging man the same signal. Fix: Hammer appears after a downtrend and is bullish. Hanging man appears after an uptrend and is bearish.
• Treating a triangle as always a reversal. Fix: Triangles are mainly continuation patterns. Ascending is generally bullish and descending generally bearish; the symmetrical one usually follows the prior trend.
• Saying EMA ignores older prices. Fix: EMA still includes all past prices with shrinking weights. Only SMA drops the oldest price completely.
• Calling moving averages leading indicators. Fix: They are built from past prices, so they are lagging. They confirm trends.

Exam tips

• Memorise the three assumptions word for word. They are a frequent question source.
• Practise telling primary, secondary and minor trends apart by their role, not just their duration.
• For comparison questions, anchor on input data and purpose: price and volume for timing versus financials for valuation.
• Beware of options with 'always', 'guarantees' or 'only'. Dow Theory and technical analysis deal in probabilities.
• With negative marking of 25% of the marks on each question, skip a question only if you cannot eliminate at least two options.
• Expect direct questions on what each chart plots. Learn the four prices: open, high, low, close.
• Watch for the claim that point and figure charts show time. It is false.
• Questions on scales usually test absolute versus percentage change. Link arithmetic to rupees and logarithmic to percentages.