Technical Analysis

Introduction to Technical Analysis

The beginnings of modern-day technical analysis were developed by Charles Dow who created the Dow Theory around 1900. Dow wanted a method to see, either directly or indirectly from the Dow Theory, the trending nature of prices, prices discounting all known information, confirmation and divergence, volume driving changes in price, and support/resistance lines.

Charts

Stock Market Charts offer us a look at the emotions of Greed and Fear. They display historical data in a variety of perspectives. We will take a short look at different styles of charts and which to use in specific circumstances.

Common Charting Periods

The different chart types illustrate a few ways price movement is expressed over a period of time. Now we will reverse that and examine price movement over different periods of time. You will notice that your view of a particular market can change drastically only by switching to a different time horizon.

Trends

A trader’s job is similar to those in the fashion industry – they both need to keep up with "trends." Also, traders don’t only need to keep up with technological trends to improve their trading - these trends are merely secondary to their main focus, which is on the trends that are made up by price action of the markets they trade. The trader’s ability to recognize these trends, and changes in these trends, early on, is often the difference between profitability and high performance returns – or the lack thereof. Trading on the correct side of the correct trend and the correct change in trend, is one of the main highways to a trader’s profits.

Support and Resistance

Support and resistance are used to identify key levels where the trend in price has a greater probability of halting and possibly changing direction. It can be a specific price, or price area. Interpretation of the degree of significance of a level depends on a trader’s time frame. It is best to use in conjunction with other indicators, such as moving averages, Fibonacci retracement ratios, and trendlines in order to support the price pattern. However, support/resistance areas can be traded based on price alone.

Technical Indicators

Technical indicators are used as tools to assist the trader in making buy/sell decisions. They should be used to supplement price and volume behavior and are most useful when used in conjunction with other indicators. There is no reason to get too complicated. The simplest indicators are usually the most effective.

Economic Indicators

Economic Indicators are valuable and reliable reports that are assembled by the Government, Universities and the private sectors of business. They measure the economic health of our overall economy. Most are monthly reports and some are weekly. Generally, the Market, as a whole, listens very carefully to the results to determine whether they are "net buyers" or "net sellers" for the day.

Broad Market Indicators

The overall conditions of the market or sectors have a tremendous effect on individual stock prices. Being aware of the overall market conditions is as critical as a pilot familiarizing himself with the weather before take-off. Stock prices have a strong tendency to move together in the same direction especially in the short-term. Stocks are also especially susceptible to the collective trading direction of their peers within the same sector. Conversely, individual stocks have a strong tendency to affect their entire sector as well, if the price effect is large, and particularly if the stock is among the larger or more popular stocks in the group. The larger the company capitalization, the more likely it is that its individual price action will affect the rest of its peer stocks within the sector.

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