| The technical analyst
deal with only three pieces of data: price, trading volume, and
open interest. He evaluates them to form an opinion on the
likely direction of prices over the next several days.
The financial section of the
newspapers report four prices for each day's activity in a futures
contract: the day's opening price, high, low, and settlement or
closing price. The closing price is generally considered to
be the most meaningful of the four prices, as it represents the
day's final verdict. The opening price is the least significant,
as it is often distorted by the overnight buildup of the market
orders.
In the broadest terms, a rise is
price reflects growing demand for the futures contract. If
the trading volume increases when prices rise, it is a sign that
there is interest in the rally - that the price increase is
attracting followers. That's a bullish omen. Rising
open interest would further strengthen the technical picture, as
it would indicate that new buyers are entering the activity.
NOTE: Technical analysis deals with
probabilities, not certainties.
Common Technical Analysis
Terms
| Price Trend |
- The tendency for
prices (or any other value) to move more in one direction
than the other
|
| Uptrend |
- Each peak is
higher than the previous peak, and each valley is higher
than the previous valley
|
| Downtrend |
- A series of
lower highs and lower lows
|
| Trendlines |
- Trendlines serve several
purposes. One purpose is for warning. if
prices break through a well-established trendline, it
is an indication that the ongoing trend is losing its
force.
- Breaking of a trendline
means that the market is losing its run; it does not
mean that the opposite price trend has begun.
|
| Support
and Resistance |
- The price level where a
decline may be expected to stop is called a price
support level. Prices receive support from
below.
- The price level where a
rally can be expected to run into trouble is called a
price resistance level. Sellers there resist any
further advances.
- Prices tend to stop
where they have stopped before
|
| Chart
Patterns |
- A price chart is a
moving picture of the conflict between the bulls and
the bears.
- A chart provides a
comparison between today's price action and previous
action.
- It enables the technical
analyst to spot when prices have moved into new highs
or low ground.
- Rectangles - the
pattern is formed by trading for several weeks or
event months in a relatively narrow horizontal price
range. It is completed when prices then suddenly
break out.
- Candlestick Charts
- highs and lows are marked by the top and bottom of
the single vertical line. The cylinder provides
two pieces of information. Its color shows where
that day's closing price was in relation to the
opening price. If the close was higher than the
open, the candle is left open or white. If the
close was lower than the opening, then the candle is
colored black. The candles overall length
represents the distance between the opening and
closing prices.
- Point-and-Figure
Charts - typically hand drawn; The X symbol is
used to record rallies and the O symbol to record
declines; A new column to the right is started when
the trend reverses.
|
| Moving
Averages |
- The oldest among the
trading tools
- Used to smooth out
short-term ups and downs in prices, to reveal the
underlying trend.
|
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