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A Guide
To Technical Analysis
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Technical analysis is a method of forecasting price movements by looking at purely
market-generated data. It is the art of charting financial instruments and overlaying
mathematical indicators to derive trading ideas. It is utilized to evaluate price
predictability and is based on the notion that prices do not move randomly but instead
move in repeating and identifiable patterns.
Almost every trader uses some form of technical analysis. Even the most reverent
follower of market fundamentals is likely to glance at price charts before executing
a trade. At their most basic level, these charts help traders determine ideal entry
and exit points for a trade.
There are literally hundreds of technical analysis indicators utilized by traders
and analysts to evaluate trading activity. The three key principles of technical
analysis are:
1. All market information is discounted and reflected in market
prices.
2. Prices move in trends and trends persist.
3. Market action is repetitive.
The following guide describes the most popular technical analysis tools. These technical
analysis tools include:
CHARTS
BAR
CHARTS
Bar charts are probably the most widely used by traders and not only give us the
closing price but also the high, low and opening prices. As traders we need to know
as much as possible about a stock and its movements and these bars are the perfect
tool for the job. With a single glance at one of these bars we can get a feel for
how investors traded this stock for the day and their general sentiment towards
it.
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Small bars (or bodies as they are technically called) are a sign the market maybe
consolidating its position or thinking about its next move. Long bodies could indicate
the market is again on the move and looking to test new levels. Some charting packages
will only show the close on the bar, many traders elect to use this style with great
success. Some say the opening price does not give a true indication of market sentiment
and choose to ignore it. There is a marked difference when drawing trend lines on
a line chart compared to a bar chart. With a bar chart you get the entire trading
range and a trend line can be drawn using these ranges as opposed to only using
closing price data on a line chart.
Candle stick Charts
Reading Candle stick charts
Candle stick charting was developed by the Japanese several centuries ago and has
undergone resurgence in popularity in recent times. This form of chart is by far
my personal favorite and I usually use it exclusively. Although more complex to
understand, once mastered, candle charts can give you the best overall view of market
sentiment.
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BullishCandle |
Bearish Candle
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