Technical Analysis Basics

In basic terms the principles of technical analysis is the study of prices and volume, for forecasting of future stock price or financial price movements. It should also be noted that technical analysis does not result in absolute predictions about the future and is not an exact science. Instead technical analysis is an art and takes considerable experience. Not all studies work the same for every instrument traded. One study may give excellent buy and sell signals while another may not work for you at all.

 

Identifying A Trend

One of the most basic fundamentals is to identify the trend, which can be explained by the direction of the market due to supply and demand. Unfortunately, trends are not always easy to see. Moreover, defining a trend can at times be rather complex. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs. 

Below is an example of an uptrend. In this diagram, point 2 is a reference to the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend, each successive low must not fall below the previous lowest point or the trend is deemed a reversal.  

Uptrend graph   Downtrend graph

(Uptrend)                                                           (Downtrend)

 

Trendlines

A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals. 

upward trendline chart

As you can see in the above chart, an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps forex metatraders to anticipate the point at which a stock's price will begin moving upwards again.

Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.

downward trendline chart