Analysis Guide: Technical

Understand the difference between fundamental analysis and technical analysis, the two basic methodologies for predicting price movements and market trends.

1. Introduction to Technical Analysis

Technical analysis is the study of past financial markets (the interpretation of charts) to predict price trends based on investment strategies. In theory, technical analysis only considers the behaviour of the market or the real price of the financial instruments, and the premise is that that its price will reflect all investors via other channels with all relevant factor studies.

The basic beliefs of technical analysis are built on the assumption that 'history will repeat itself', and uses statistical datasets to predict movements in the market. Technical analysis was traditionally only used by a limited number of market professionals, but following the advent of trading online, it has become accessible to casual traders.

2. Support Line

The Support Line is considered as the level at which a lot of buyers tend to enter the market, and is often referred to as the "support level." In an uptrend, a trend line is drawn through the lowest swing-points of the price movement, and connecting at least two "lowest lows" will create a trend line, which confirms its validity when the price respects this line. The more "lowest lows" the trend line contains, the more reliable it is. When the price drops down to the support level, there may be pressure that prevents it from further decrease, and by investigating the support level, we can identify an optimal buy-in price.

3. Resistance Line

In an uptrend, a trend line is drawn through the highest swing-points of the price movement, and connecting at least two "highest highs" will create a trend line. The more times that the price has unsuccessfully attempted to go above the resistance level, the more formidable that area of resistance becomes. When the price increases up to the resistance level, there may be pressure that prevents it from further increases. Generally, the resistance level is viewed as a selling signal.

4. Uptrend

This describes the price movement of a financial asset when the overall direction is upwards - with each successive peak and trough higher than the ones found earlier in the trend (see graph). There are buying signals at each trough.

Plotting a trend line on a chart gives very valuable information about the price movements of a particular financial product, such as the points of support and resistance levels for market price. Additionally, it will help to determine good entry and exit points and the best positioning for profit-generation, and placing protective stops. This is a very simple but powerful tool that indicates possible trend reversals.

5. Downtrend

This describes the price movement of a financial asset when the overall direction is downward - with each successive peak and trough lower than the ones found earlier in the trend (see graph).

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