Technical Analysis & Strategy

Understanding Technical Analysis

One clear point of distinction between fundamental and technical analysis is that fundamental analysis studies the causes of market movements, while technical analysis studies the effects of market movements. Technical analysis evaluates assets and attempt to forecast their future movement by analyzing statistics gathered from trading activity, such as price movement and volume. Unlike fundamental analysis which seeks to evaluate an asset’s intrinsic value, technical analysis focuses on charts of price movement and various analytical tools to evaluate an asset’s strength or weakness and forecast future price changes.

Strategies & Approaches with Technical Analysis

FINDING THE TREND

One of the first common understanding in technical analysis is the following motto: ‘the trend is your friend.’ Finding the prevailing trend will enables traders to become aware of the overall market direction and offer better visibility – especially when shorter-term movements tend to clutter the picture. Weekly and monthly charts are more ideally suited for identifying longer-term trends. Once the overall trend has been found, traders can select the trend of the time horizon in which to trade. Thus, effectively buying on the dips during rising trends, and sell the rallies during downward trends.

SUPPORT & RESISTANCE

Support and resistance levels are points where a chart experiences recurring upward or downward pressure. A support level is usually the low point in any chart pattern (hourly, weekly or annually), whereas a resistance level is the high, or peak point of the pattern. These points are identified as support and resistance when they show a tendency to reappear. It is best to buy/sell near support/resistance levels that are unlikely to be broken.

Once these levels are broken, they tend to become the opposite obstacle. Thus, in a rising market, a resistance level that is broken could serve as a support for the upward trend; whereas in a falling market, once a support level is broken, it could turn into a resistance.

LINES & CHANNELS

Trend lines are simple, yet helpful tools to confirm the direction of market trends. An upward, straight line is drawn by connecting at least two successive lows. Naturally, the second point must be higher than the first. The continuation of the line helps determine the path along which the market will move. An upward trend is a concrete method of identifying support lines/levels.

Conversely, downward lines are charted by connecting two points or more. The validity of a trading line is partly related to the number of connection points. Yet it’s worth mentioning that points must not be too close together. A channel is defined as the price path drawn by two parallel trend lines. The lines serve as an upward, downward or straight corridor for the price. A familiar property of a channel for a connecting point of a trend line is to lie between the two connecting points of its opposite line