Introduction to Technical Analysis

For Presentation Notes in PDF format click here.

For better understanding through video tutorial click here.

Technical Analysis is

•       The method of Forecasting the direction of prices.

•       By studying the past market data.

•       Market data comprise of Price and Volume.

•       With the help of charts showing the trading history and statistics.

•       To make buy or sell decisions.

Definition of Technical Analysis

•       Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, past prices, and volume.

•       Technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.

•       Technical analysis is a methodology that makes buy and sell decisions using market statistics. It primarily involves studying charts showing the trading history and statistics for whatever security is being analyzed.

Fundamental Analysis

•       A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors including macroeconomic factors and company-specific factors

•       The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security's current price, with the aim of figuring out what sort of position to take with that security (under-priced = buy, overpriced = sell or short).

Difference between the two

Assumptions of TA

1.     The market discounts everything.

2.     Price moves in trends.

3.     History tends to repeat itself.

The Importance Of Volume

•       What is Volume?

Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security.

•        Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume.

In the other blogs we will study the Concepts related to TA

•       Trend Analysis

•       Support and Resistance

•       Charts and their types

•       Chart patterns

•       Technical Indicators and so on…

Concept of C-V-P Analysis

C-V-P Analysis means Cost Volume Profit Analysis

It is the Relation between Cost incurred to manufacture a product, Volume or number of units produced and Profit generated by selling the product.

Lets understand with the help of a graph

It is the graph between amount and the number of units.

You can see that there is a Fixed Cost Area and Variable Cost Area.

Fixed cost is the cost which is independent of the number of goods or services produced. For example cost incurred to buy land, machinery etc. or the rent of the place or office etc.

Variable cost is the cost which varies with the number of goods produced. For example the cost of raw material or cost of packaging etc.

Now you can also see a Total Cost Line and a Total Sales Line.

If you observe, you can see that the income or sales line starts from zero and the cost line starts from $ 1,000,000, it is because when a first product is sold then the company will start earning profit , before that there was no profit but before the company starts manufacturing the product they already have spend their fixed cost in establishing the plant and machinery.

now you see as the goods are manufactured their variable cost increase with the number of goods produced and as they are sold the income generated in increased and hence there is one point where the cost incurred becomes equal to the income generated and this point is called Break Even Point.

Break Even Point

It is the point at which there is no profit and no loss and the revenue equals the expenditure. We can see in the graph that we get two BEP points , one on X axis in terms of number of units produced to cover all the cost with income and the other on the Y axis, which shows the amount of sales required to cover all the cost incurred.  You will notice that after this point the company will start generating profit.

Red and Green shaded area

Red area is the area of loss and green area is the area of profit.

In this chapter you will find few formulas , so let me revise few concepts and correlate them with the new concept.

So, lets recall the income statement format.

Sales

- Variable cost (also called Marginal cost)

-------------------------------------------------

Contribution

- Fixed cost

-----------------------------

EBIT ( Earning before Interest and tax)

- Interest

-----------------------------

EBT  (Earnings before tax)

Just remember this format as this will help you in deriving the unknown figures from the known ones.

Here we will study the relation between profit and volume of sales known as P/V Ratio.

P/V Ratio  (%) = Contribution * 100

                                       Sales

If the income statement of two different years is given then

P/V Ratio  (%) =  Change in contribution * 100

                                       Change in Sales

Now another concept which we must know is concept of BEP or  Break Even Point. As we have already discussed while discussing the graph that we will get two BEP points one on X axis (in terms of Number of units produced and another on Y axis ( in terms of Amount of sales)

BEP (in units) =              Fixed cost       

                            Contribution per unit

BEP (in amount) =              Fixed cost       

                                             P/V Ratio

In the next concept we will learn to find out how much Sales has to be done to earn the desired profit. For example , we decide that this year we decide to earn a profit of $1,000,000 , now we will have to find out the amount of sales to be done to earn this amount as profit. For this we will apply the following :-

Sales to earn desired profit (in units) =    Fixed cost + Desired profit  

                                                                   Contribution per unit

Sales to earn desired profit (in amount) = Fixed cost + Desired profit 

                                                                               P/V Ratio

Last concept of this chapter is MOS ( Margin of Safety)

MOS = Actual Sales - BEP Sales

Its the time for you to revise all the above concepts and get prepared for the Numerical problems.

Basics of Technical Analysis

For Downloadable Notes in PDF format Click :- Introduction To Technical Analysis

Numerical Problems on CVP Analysis

1. MBA ltd has supplied with the following information:

Total Fixed Costs 18,000

Total Variable Costs 30,000

Total Sales 60,000

Units Sold 20,000

Find

a. Contribution per unit  b. B.E.P. c. M.O.S. d. Profit e. Volume of Sales to earn profit of Rs.24000.

  

2. Calculate MOS.

Given

Particulars	A	B
Sales	1,00,000	1,00,000
Total Cost	80,000	80,000
Variable Cost	30,000	50,000
Fixed Cost	50,000	30,000

3. Given:-

Variable Cost per Unit = R. 75,

 Selling Price per unit is Rs. 100,

 Fixed cost = Rs. 2, 70,000.

If the BEP is to be brought down to 9000 units, what will be selling price per unit?

4. Given

Particulars	A	B
Sales	1,50,000	1,50,000
Variable Cost	1,20,000	1,00,000
Fixed Cost	15,000	35,000
Profit	15,000	15,000

You are required to:

• Calculate the break-even point for each business
• Calculate the sales volume at which each business will earn Rs.5,000 Profit.
• State which business is likely to earn greater profit in conditions of:

1. Heavy demand for the product
2. Low demand for the product, and, briefly give your argument also.