Technical Education

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Technical Education

Technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. This analysis has three principles. The first one is market action discounts everything. This principle is based on premise that all relevant information is already reflected by prices. Technical analyst believes it is important to understand what investor thinks of that information, known and perceived. The second one is price move in trends. Technical analyst believes that prices trend directionally, i.e., up, down, sideways (flat) or some combination. The last principle is history tends to repeat itself. Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them.

We often hear about support and resistance level in technical analysis. So, what is support and resistance level? A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level. The opposite of support level is the resistance level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level.

Technical Education

Chart Analysis

Chart analysis is one of many techniques in technical analysis. Chart pattern is a term of technical analysis used to analyze a stock's price action according to the shape its price chart creates. Trading by chart patterns is based on the premise that once a chart forms a pattern the short term price action is predictable to an extent. For instance, if a chart creates a "channel" the stock price will be bouncing off the upper and lower boundary until it breaks out. Based on each pattern's rules many different trading strategies can be applied. Candlesticks chart is the most popular among technical traders.

candlesticks

Candlesticks are graphical representations of price movements for a given period of time. They are commonly formed by the opening, high, low, and closing prices of a financial instrument.If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn. If the closing price is above the opening price, then normally a green or a hollow candlestick (white with black outline) is shown. The filled or hollow portion of the candle is known as the body or real body, and can be long, normal, or short depending on its proportion to the lines above or below it. The lines above and below, known as shadows, tails, or wicks represent the high and low price ranges within a specified time period. However, not all candlesticks have shadows. For reversal pattern, candlestick has Hammer, Inverted Hammer, Hanging man, Shooting Star, Engulfing, Harami, Morning Star, Evening Star.

Pattern Recognition

Pattern recognition is a chart pattern generates a certain development of the stock rate, though the interpretation demands a lot of experience from the analyst. A major distinction is made between Trend Continuation patterns and Trend Reversal patterns.

This is an art. There are many patterns that have different shapes and meanings. For example : Head & shoulders pattern, Cup & handle formation, Double tops, Triangles. In the starting a new trader need not to know every pattern, Slowly and gradually a trader should learn to recognize patterns. Focus on the patterns and develop a trading plan around it.

Trend and Momentum Analysis

Momentum refers to speed at which prices are moving in a certain direction gradually . There are many oscillators and indicators in use like MACD , RSI etc. Traders learn to follow these indicators to interpret the next move of stock. Trend phases play an important role because everybody wants to buy at dips (start of an upward trend, end of a downward trend) and sell at a tops (end of an upward trend, start of a downward trend).

Typical mathematical trend following systems are Moving Averages. Moving Averages are rather simple instruments that serve as the basis for more sophisticated methods. If you plot in a line chart on the price axis averages of the previous days instead of the daily quotes you get a new line that resembles the original chart but is a little smoother and has a time lag. The longer the average (i.e. the more data is used) the smoother the line and the bigger is the time lag.