In addition to my explanations, the definitions of terminology used in Technical Analysis can be found at:
Key Learning Points: Lesson 9
- Technical Analysis is mainly used by “day” traders, or speculators, to determine the greater probability of one thing happening over another (price direction).
- By plotting prices, technical charts actually record the behavior of the market participants. Technical analysts look for these patterns to repeat themselves.
- There are (3) main types of technical charts used:
- daily bar chart, which shows the “Open/High/Low/Close” prices;
- “close only” or line chart, which shows the settlement price for each time segment;
- candlestick chart, which shows the same information as the daily bar chart, but also indicates “up and down” days.
- Trend lines are used to identify current and past trends, but must touch-on at least two pricing points to have significance.
- Examples of simple trend indicators are:
- volume – this illustrates the amount of activity behind the price movement, which either reinforces it or fails to support it;
- moving averages – traders look to the statistical “regression to the mean” as a predictor of price direction;
- relative strength index – a momentum indicator that identifies both the speed and change in price with a resultant “overbought,” “oversold,” or “neutral” market condition.
- Examples of price signals are:
- support – the price level at which buyers will step in, establishing a “floor”;
- resistance – the price level at which sellers will step-in, establishing a “ceiling”;
- “tops and bottoms” – these are recurring Highs or Lows that “hold,” thus establishing strong support or resistance. Double or triple tops and/or bottoms are very strong indicators of a possible change in price direction;
- “head-and-shoulders” reversal pattern – a 3-day price pattern whereby the middle day’s High or Low is higher or lower than the other two, thus forming a “left shoulder,” “head,” “right shoulder” configuration. The right shoulder “leans” in the direction of the price change;
- “consolidation” – this represents several days of trading stuck within a certain High/Low range. It indicates price indecision by the market and a “battle” between buyers and sellers. The more days within the pattern, the greater the velocity of any “break-out” of the pattern.
In the next lesson, we will explore other, more advanced, financial derivatives that can also be used for hedging. Among these are "swaps", "spreads", and "options". They are mostly traded in the "over-the-counter" markets, that is, non-exchange traded. "OTC" encompasses electronic trading platforms as well as "voice" brokers where transactions occur over the phone.
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