|
The Basics of Technical Analysis:
1. Support
A term used in
technical analysis indicating a specific price level at which a currency will
have the inability to cross below. Recurring failure for the price to move below
that point produces a pattern that can usually be shaped by a straight line. A
support level penetrated becomes resistance.
2. Resistance
A term used in
technical analysis indicating a specific price level at which a currency will
have the inability to cross above. Recurring failure for the price to move above
that point produces a pattern that can usually be shaped by a straight line. A
resistance level penetrated becomes support.
3. Trend
Trend is simply, the overall direction
prices are moving, UP, DOWN, OR FLAT.
Classification:
Short term - less than 3 weeks,
Medium term - 3 weeks to 6 months
Long term (major term) - more than 6
months.
An up-trend line is a straight
line passing through the "rising" troughs of an up-move. The importance of a
trend line is increasing with every additional touching point, confirming the
trend lines value. A reversal of the trend is indicated with a violation of the
up-trend line.
A down-trend line
is a straight line passing through the
“falling” troughs of a down move. The importance of a trend line is increasing
with every additional touching point, confirming the trend lines value. A
reversal of the trend is indicated with a violation of the down-trend line.
A Neutral Trend (No trend,
sideways trend) means there is no direction.
4. Channel
When prices trend between two parallel
trend lines they form a Channel. When prices hit the bottom trend line this may
be used as a buying area and when prices hit the upper trend line this may be
used as a selling.
5. Double top (reversal formation)
For obvious
reasons this is often called an "M-top". The market is failing twice at a
resistance and is reversing then sharply. A break of the support would indicate
further losses towards the target that can be evaluated through the following
procedure. The vertical width of the "M" (price difference) is projected
downwards from the breakpoint of the support.
6. Double bottom (reversal
formation)
The opposite of Double top. (often
called an “W-top”). When the market is failing twice at a support and is
reversing then sharply. A break of the resistance would indicate further rising
towards the target that can be evaluated through the following procedure. The
vertical width of the “W” (price difference) is projected downwards from the
breakpoint of the resistance.
7. Triangle
The triangle formation can be quite
difficult to analyse and the fact that a few different types of triangles exist
doesn't make this task any easier. Furthermore a triangle is most commonly just
a pause in a trend (continuation pattern) but can also terminate a trend
(reversal formation).
8. Head and Shoulders
Formation of left shoulder forms a new
high with a corrective dip, next rally forms higher high = head, correction from
head goes below high of left shoulder and near as low of the left shoulder
correction, breaching up trend line, rally of right shoulder does not breach
head high, retracing half to three quarters of head correction.
9. Fibonacci
12th century monk Leonardo de Pisa,
better known to his friends as Fibonacci, discovered a fascinating mathematics
sequence that appears throughout nature. Beginning with a simple 1 + 1, the sum
of the last two number sets that precede it creates another
Fibonacci value:
1+1=2 1+2=3 2+3=5 3+5=8 5+8=13 8+13=21
13+21=34 21+34=55 etc, etc.
These numbers possess an intriguing
number of interrelationships, such as the fact that any given number is
approximately 1.618 times the preceding number and any given number is
approximately 0.618 times the following number.
PIVOT POINTS. For reasons that remain
unknown, major ratios drawn from Fibonacci numbers describe a predictable
interaction between trend and countertrend movement in markets. The most
important ones to remember are 38,2%, 50% and 61,8%. Applying these percentages
to trending price predicts the extent of retracement contrary to the underlying
trend, as well as how far a new high or low will travel. For traders, these
hidden points represent invisible support/resistance zones where prices will
hesitate and/or reverse.
Most markets (and stocks) swing off
Fibonacci ratios as they move from support to resistance and back. Fibonacci
retracement works as well on intraday charts as it does on weekly and monthly
ones.
Fibonacci Retracements are displayed
by first drawing a trend line between two extreme points, for example, a trough
and opposing peak. The retracement tool then automatically inserts a series of
three horizontal lines intersecting the trend line at the Fibonacci levels of
38.2%, 50%, 61.8%.
After a significant price move (either
up or down), prices will often retrace a significant portion (if not all) of the
original move. As prices retrace, support and resistance levels often occur at
or near the Fibonacci retracement levels.
| 
