What Does Technical Analysis Mean?

A method of evaluating securities by analyzing

statistics generated by market activity, such as
past prices and volume. Technical analysts do not
attempt to measure a security's intrinsic value,
but instead use charts and other tools to identify
patterns that can suggest future activity.

Technical analysts believe that the

historical performance of stocks and
markets are indications of future
performance. 
 The Market Discounts Everything 
A major criticism of technical analysis is that it
only considers price movement, ignoring the
fundamental factors of the company. However,
technical analysis assumes that, at any given
time, a stock's price reflects everything that has
or could affect the company - including 
fundamental factors. 
The field of technical analysis is based on three
assumptions: 
The market discounts everything. 
1.     The everything
2.     Price moves in trends. 
3.     History tends to repeat itself. 
 Price Moves in Trends 
After a trend has been established, the future
price movement is more likely to be in the same
direction as the trend than to be against it.

The field of technical analysis is based on three

assumptions: 
1.     The market discounts everything. 
2.     Price moves in trends. 
3.     History tends to repeat itself. 
 History Tends To Repeat Itself 
The repetitive nature of price movements is
attributed to market psychology; in other words,
market participants tend to provide a consistent
reaction to similar market stimuli over time.

The field of technical analysis is based on three

assumptions: 
1.     The market discounts everything. 
2.     Price moves in trends. 
3.     History tends to repeat itself. 
One of the most important concepts in
technical analysis is that of trend.
The meaning in finance isn't all that
different from the general definition of the
term - a trend is really nothing more than
the general direction in which a security or
market is headed.
 An uptrend is classified as a series of higher highs and higher lows,
while a downtrend is one of lower lows and lower highs. 

Point 2 in the chart is 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.   
 A formal downtrend occurs when each
successive peak and
trough is lower than the ones
found earlier in the trend.
 

The low at Point 3 is lower than the

low at Point 1. The downtrend will be
deemed broken once the price closes
above the high at Point 4.
What Does Sideways Trend Mean?
Describes the horizontal price movement that
occurs when the forces of supply and demand
are nearly equal. A sideways trend is often
regarded as a period of consolidation before
the price continues in the direction of the
previous move. 

Sideways trend is generally a result of the price traveling

between strong levels of support and resistance. It is not
uncommon to see a horizontal trend dominate the price
action of a specific asset for a prolonged period before
starting a move higher or lower.
Along with these three trend directions, there are three trend
classifications. A trend of any direction can be classified as a long-
term trend, intermediate trend or a short-term trend.

In terms of the stock market, a major trend is generally

categorized as one lasting longer than a year.

An intermediate trend is considered to last between one and three

months and a near-term trend is anything less than a month.

A long-term trend is composed of several intermediate trends,

which often move against the direction of the major trend.

The short-term trends are components of both major and

intermediate trends

Trend Lengths 
If the major trend is upward and
there is a downward correction in
price movement followed by a
continuation of the uptrend, the
correction is considered to be an
intermediate trend.
•
When analyzing trends, it is
important that the chart is
constructed to best reflect the
type of trend being analyzed.
Daily data charts are best used
when analyzing both
intermediate and short-term
trends.
To help identify long-term
trends, weekly charts or daily
charts spanning a five-year
period are used by chartists to
get a better idea of the long-
term trend.
It is also important to remember
that the longer the trend, the
more important it is; for
example, a one-month trend is
not as significant as a five-year
trend. 
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 An upward trendline is drawn at the lows of
the identification of trend an upward trend. This line represents
the support the stock has every time
reversals. 
it moves from a high to a low. Notice how
the price is propped up by this support.
This type of trendline helps traders 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.
Channels 
A channel, or channel lines, is the addition
of two parallel trendlines that act as strong
areas of support and resistance. The upper
trendline connects a series of highs, while
the lower trendline connects a series of lows.
A channel can slope upward, downward or 
sideways but, regardless of the direction, the
interpretation remains the same. Traders will
expect a given security to trade between the
two levels of support and resistance until it
breaks beyond one of the levels, in which case
traders can expect a sharp move in the direction
of the break. Along with clearly displaying the
trend, channels are mainly used to illustrate
important areas of support and resistance. 
Role Reversal 
Once a resistance or support level is broken, its role is reversed. If the price falls
below a support level, that level will become resistance. If the price rises above a
resistance level, it will often become support. As the price moves past a level of
support or resistance, it is thought that supply and demand has shifted, causing the
breached level to reverse its role. For a true reversal to occur, however, it is important
that the price make a strong move through either the support or resistance.

The dotted line is shown as a level of resistance that has

prevented the price from heading higher on two previous
occasions (Points 1 and 2). However, once the resistance is
broken, it becomes a level of support (shown by Points 3 and 4)
by propping up the price and preventing it from heading lower
again. 
In almost every case, a stock will have
both a level of support and a level of
resistance and will trade in this range as
it bounces between these levels. This is
most often seen when a stock is trading
in a generally sideways manner as the
price moves through successive peaks
and troughs, testing resistance and
support. 

Support and resistance

analysis is an important
part of trends because it
can be used to make
trading decisions and
identify when a trend is
reversing.
•As long as the price of the share remains between these levels of
support and resistance, the trend is likely to continue
•It is important to note, however, that a break beyond a level of
support or resistance does not always have to be a reversal. For
example, if prices moved above the resistance levels of an upward
trending channel, the trend has accelerated, not reversed. This
means that the price appreciation is expected to be faster than it
was in the channel. 
•Being aware of these important support and resistance points
should affect the way that you trade a stock. Traders should avoid
placing orders at these major points, as the area around them is
usually marked by a lot of volatility.
 Support levels are Price movements can be
usually below the volatile and dip below
current price, but it is support briefly.
not uncommon for a Sometimes it does not
security to trade at or seem logical to consider a Some traders and
support level broken if
near support. the price closes 1/8 investors establish
Technical analysis is below the established support zones.
not an exact science support level. For this
and it is sometimes reason, some traders and
difficult to set exact investors establish
support levels. support zones.

Where Is Support Established?

•Resistance levels are usually above the current price, but it is not
uncommon for a security to trade at or near resistance.
•Sometimes it does not seem logical to consider a resistance level
broken if the price closes 1/8 above the established resistance
level. 
•Some traders and investors establish resistance zones.

Where Is Resistance Established?

 Support can be established with the previous reaction lows.
Resistance can be established by using the previous reaction highs.

resistance

Trading
Range

support

Methods to Establish Support and Resistance?

Trading ranges can play an important role in determining support and
resistance as turning points or as continuation patterns. A trading range is
a period of time when prices move within a relatively tight range. This
signals that the forces of supply and demand are evenly balanced.

When the price breaks

out of the trading range,
above or below, it signals
that a winner has
emerged. A break above
is a victory for the bulls False Breakout
(demand) and a break
below is a victory for the
bears (supply).

Trading Range
Because technical analysis is not an exact
science, it is useful to create support and
resistance zones.

Support and Resistance Zones

 Each security has its own
characteristics, and
analysis should reflect the
intricacies of the security. 
Sometimes, exact support and resistance levels are best, and,
sometimes, zones work better. Generally, the tighter the
range, the more exact the level. If the trading range spans
less than 2 months and the price range is relatively tight, then
more exact support and resistance levels are best suited. If a
trading range spans many months and the price range is
relatively large, then it is best to use support and resistance
zones. These are only meant as general guidelines, and each
trading range should be judged on its own merits.