NCFM Technical Analysis cheat sheet

Technical analysis assumes price discounts all known information and that prices move in trends that repeat; it studies price, volume, and open interest rather than intrinsic value.

Dow Theory: markets move in primary (months to years), secondary (weeks to months), and minor (days) trends; a trend persists until a clear reversal signal appears.

Dow Theory confirmation requires two averages (historically Industrials and Transports) to confirm each other; volume must expand in the direction of the primary trend.

A trend has three phases: accumulation (informed buying), public participation (trend-following), and distribution (informed selling).

Chart types: line (closing prices only), bar (OHLC), candlestick (OHLC with body and shadows), and point-and-figure (price only, no time axis).

Volume confirms price: rising price with rising volume is healthy; rising price with falling volume signals weakening participation.

Open interest rises when new contracts are created and falls when positions are closed; it measures commitment in futures and options.

Sentiment and breadth tools (advance-decline line, put/call ratio, VIX) are contrarian or confirming indicators, not standalone signals.

Random walk critique holds that price changes are independent; technical analysis counters that behavioral biases create persistent, exploitable patterns.

Reversal patterns signal a trend change: head and shoulders, double/triple top or bottom, rounding bottom, and V-shaped reversal.

Continuation patterns pause a trend: triangles (ascending, descending, symmetrical), flags, pennants, wedges, and rectangles.

Head and shoulders: neckline connects the two intervening lows; measured target equals the head-to-neckline distance projected below the neckline.

Double top: two peaks at roughly equal price with a trough between; confirmed on a close below the trough (neckline); target equals peak-to-trough height.

Symmetrical triangle: converging trend lines with declining volume; breakout direction is unresolved until price closes beyond a boundary, ideally with volume expansion.

Flag and pennant: short consolidation after a sharp move; measured move projects the length of the pole from the breakout point.

Gap types: breakaway (starts a move), runaway/measuring (mid-trend), exhaustion (ends a move); gaps often act as support or resistance later.

Candlestick signals: doji (indecision), hammer/hanging man, engulfing, morning/evening star; reliability rises when they appear at support, resistance, or trend extremes.

Pattern reliability increases with volume confirmation at breakout, a clear prior trend, and adequate pattern depth and duration; false breakouts are common in low-volume conditions.

An uptrend is a series of higher highs and higher lows; a downtrend is lower highs and lower lows; a break of that sequence signals possible reversal.

An uptrend line connects at least two rising swing lows and is drawn below price; a downtrend line connects falling swing highs and is drawn above price.

A valid trend line needs at least two touch points; three or more touches increase its significance.

Trend line break confirmation: a close beyond the line plus increased volume; intraday penetration alone is weak evidence.

Channel lines are drawn parallel to the trend line through the opposite swing points; price oscillates between the two boundaries.

Steep trend lines break easily and are unsustainable; shallow lines are more durable but offer later, wider stops.

Internal trend lines connect wick extremes; external (body) trend lines connect closing prices; choose one convention and apply it consistently.

A broken trend line often flips roles: former support becomes resistance (and vice versa); retests of the broken line are common.

Trend line slope approximates trend strength; measuring the angle or rate of change helps compare trend intensity across instruments.

Support is a price zone where buying interest halts a decline; resistance is a zone where selling interest halts a rally; both are zones, not exact prices.

Role reversal: broken support becomes resistance and broken resistance becomes support; the more times a level is tested, the more significant, but the weaker it may become.

Round numbers, prior highs/lows, gap edges, and moving averages often act as psychological or technical support/resistance.

Volume-by-price and prior consolidation zones identify high-volume nodes that tend to act as stronger support or resistance than isolated spikes.

A decisive breakout requires a close beyond the level, ideally with above-average volume; a retest of the broken level offers a lower-risk entry.

Stop placement commonly sits just beyond the support/resistance zone, not exactly at it, to avoid stop-hunting wicks.

Fibonacci retracements (23.6%, 38.2%, 50%, 61.8%, 78.6%) are projected between swing highs and lows and often coincide with support/resistance.

Support/resistance strength increases with the number of touches, the time spent at the level, and the volume traded there.

Simple moving average (SMA) = sum of closing prices over N periods divided by N; each price is weighted equally.

Exponential moving average (EMA) applies a smoothing factor k = 2/(N+1); EMA = (Close − prior EMA) × k + prior EMA; it reacts faster than SMA.

Price above a rising MA suggests an uptrend; price below a falling MA suggests a downtrend; a long MA (e.g., 200-period) defines the primary trend.

MA crossovers: a shorter MA crossing above a longer MA is bullish (golden cross); crossing below is bearish (death cross); crossovers lag and whipsaw in ranges.

MA envelopes and Bollinger Bands use standard deviation: bands = N-period SMA ± k × standard deviation (typically k = 2, N = 20).

Bollinger Band squeeze (narrow bands) signals low volatility and often precedes a sharp move; band width expands with volatility.

Average True Range (ATR) measures volatility as the average of true ranges; true range = max(high − low, |high − prior close|, |low − prior close|).

Parabolic SAR places dots above or below price and flips with the trend; it works best in trending markets and poorly in sideways ones.

Ichimoku Kinko Hyo uses a conversion line, base line, leading span A and B, and a lagging span to define trend and support/resistance zones.

Oscillators are bounded indicators that measure momentum and identify overbought/oversold conditions; they work best in range-bound markets, not strong trends.

RSI = 100 − [100/(1 + RS)], where RS = average gain / average loss over N periods (typically 14); readings above 70 are overbought, below 30 oversold.

RSI divergence: price makes a higher high while RSI makes a lower high (bearish) or price makes a lower low while RSI makes a higher low (bullish).

Stochastic oscillator: %K = 100 × (Close − Lowest low) / (Highest high − Lowest low) over N periods; %D is an SMA of %K; above 80 overbought, below 20 oversold.

MACD = EMA(12) − EMA(26); the signal line is EMA(9) of MACD; the histogram is MACD minus the signal line.

MACD crossovers and histogram expansions signal momentum shifts; zero-line crosses indicate trend direction changes.

Rate of Change (ROC) = [(Close today − Close N periods ago) / Close N periods ago] × 100.

Williams %R ranges from 0 to −100; readings above −20 are overbought and below −80 oversold, similar to the stochastic.

In strong trends, oscillators can stay overbought or oversold for extended periods; use trend filters before acting on oscillator signals.

Position sizing formula: position size = (account equity × risk %) / (entry price − stop price); this fixes the dollar risk per trade.

Risk/reward ratio compares potential profit to potential loss; a minimum of 2:1 is a common threshold for a valid trade setup.

Expectancy = (win rate × average win) − (loss rate × average loss); a positive expectancy is required for a system to be profitable over time.

Win rate and payoff ratio are inversely related; a low win rate can still be profitable with large winners and small losses.

Maximum drawdown measures the largest peak-to-trough equity decline; it determines capital required and psychological tolerance for a system.

A trading system needs explicit entry, exit, stop-loss, and position-sizing rules; discretionary overrides undermine backtest validity.

Backtesting must avoid look-ahead bias, survivorship bias, and overfitting; out-of-sample testing validates robustness.

Stop-loss orders limit loss per trade; trailing stops lock in profits as price moves in the trade's favor.

Diversification across uncorrelated instruments and strict risk per trade (commonly 1–2% of equity) reduce ruin risk.