Technical analysis relies on the assumption that all information is already reflected in the price of a security, which means that analysis of that price is all that matters. By looking at price patterns and statistics, technical analysts try to gauge the market’s overall sentiment and determine where prices may be headed.
Here’s a brief summary of the topics we’ve discussed:
- Technical analysis is a method of evaluating securities by analyzing market activity. It’s based on the assumption that the market discounts everything, price moves in trends, and history tends to repeat itself.
- Technical analysts believe that all information needed to analyze a stock can be found in its price charts.
- Technical analysts tend to take a short-term approach to trading.
- Critics of technical analysis tend to focus on the Efficient Market Hypothesis, which states that the market price is always correct, which makes historical analysis useless.
- Trends are the most important concept in technical analysis and may consist of uptrends, downtrends, and sideways trends.
- Trendlines are simply charting techniques whereby a line is added to a chart to represent a trend.
- Channels are two parallel trendlines that act as strong areas of support and resistance over time.
- Support is the price level where a stock or market seldom falls, while resistance is the price level where a stock market seldom surpasses.
- Volume is the number of shares of contracts that trade over a given period, with higher volume representing more activity.
- Charts are a graphical representation of a series of prices over a set timeframe.
- The time scale refers to the range of dates at the bottom of the chart, which can vary from seconds to decades. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly, and annually.
- The price scale is on the right-side of the chart and shows a stock’s price over time. These prices can either be linear or logarithmic.
- There are four types of charts used by traders and investors, including: line charts, bar charts, candlestick charts, and point and figure charts.
- Chart patterns are distinct formations on a stock chart that create a trading signal or a sign of future price movements. These can be either reversals or continuations.
- A head and shoulders pattern is a reversal pattern that signals that a security is likely to move against its previous trend.
- A cup and handle pattern is a bullish continuation pattern in which an uptrend has paused but is poised to continue once confirmed.
- Double tops and double bottoms are formed after a sustained trend and signal that the trend is about to reverse.
- A triangle is a chart pattern created by drawing trend lines along price ranges that get narrower over time. The two most common types of ascending and descending triangles.
- Flags and pennants are short-term continuation patterns that form when there’s a sharp price movement followed by a sideways price movement.
- Wedges are chart patterns that can be a continuation or reversal depending on their design.
- Gaps are empty spaces that occur in charts between trading periods.
- Triple tops and triple bottoms are reversal patterns that occur when the price movement tests a level of support or resistance three times.
- Rounding bottoms are long-term reversal patterns that signal a shift from a downward trend to an upward trend.
- Moving averages are the average price of a security over a given period of time. These can be simple, linear, or exponential in their calculation.
- Moving averages help traders smooth out the noise that’s common found in day-to-day price movements to give them a clearer picture of the trend.
- Indicators are statistical calculations based on the price or volume of a security that measures things like money flow, trends, volatility, and momentum. They can be either leading or lagging in nature.
- The accumulation/distribution line is a volume indicator that measures the ratio of buying to selling in a security.
- The average directional index (ADX) is a trend indicator that measures the strength of the current trend.
- The Aroon indicator is a trend indicator that measures whether a security is in an uptrend or downtrend and the magnitude of that trend.
- The Aroon oscillator plots the difference between the Aroon up and Aroon down lines by subtracting them.
- The moving average convergence divergence (MACD) measures a security’s momentum using two exponential moving averages.
- The relative strength index (RSI) helps measures overbought or oversold conditions.
- The on-balance volume (OBV) indicator helps traders gauge volume changes.
- The stochastic oscillator compares a security’s closing prices to its price range over a given period of time.
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