More informed trading Technical Analysis: Trends, Support and Resistance

Transcription

1 Technical Analysis: Trends, Support and Resistance Beginner Level

2 Introduction 1 Stocks prices are always moving up and down and fortunes rest on the ability to predict such movements. The trader s job is to identify where the prices of actual or potential investments are going next. Stock and CFD traders track historical prices using charts. With these, they are able to more accurately project where prices are likely to head in future. The process of analysing historical prices to intelligently predict future price movement is called Technical Analysis. Technical Analysis is the natural progression after conducting Fundamental Analysis. Fundamental Analysis helps to determine whether or not to trade a particular stock or CFD. Technical Analysis then helps determine when to buy or sell that instrument. Despite the science and math behind it, Technical Analysis is considered by most traders to be almost an art form which takes time and practice to master. It may seem complex, but it is indispensable to good trading, and the basics of it are reasonably simple. The key things to know are Trends and the concepts of Support and Resistance.

3 Trading with the Trend 2 Identifying trends and trading intelligently with them in mind is vital to your success when trading stocks and CFD s. When a few traders identify an opportunity or threat, others follow, pushing the price in the same direction. Once a stock has achieved some momentum, it is likely to be sustained for a while as more traders join the band wagon. Spotting such trends increases the likelihood to making profit or equally important - avoiding losses. Trends indicate possible future price direction. Rising prices mean you ought to buy to make money. Falling prices mean you ought to sell to prevent losses. If traders disagree over a price, you could wait until a clear trend emerges, then follow it. When trading, timing is critical. Learning to identify the critical moments as a trader - the moments when a price will soar or plummet to create an opportunity - all hinges on recognising upward and downward trends.

4 Recognising Trend Types 3 Upward Trends Stocks or CFD s that are upward trending form a series of higher highs and higher lows. This is shown by the chart on the right Down Trends Stocks or CFD s that are trending downward form a series of lower highs and lower lows. This can be shown graphically by the chart on the right. Sideways Trends Stocks or CFD s that are sideways trending form a series of highs that are approximately the same price level, as shown on the right.

5 Recognising Trend Types cont 4 Long-term Trends (Weekly candlesticks) Long-term trends, sometimes called major trends, are those trends that have dominated a stock or CFD for the longest period. Notice the series of lower highs and lower lows as time progressed. Next, see if the Intermediate chart show the same trend. Intermediate Trends (Daily candlesticks) Intermediate trends, sometimes called minor trends, move more quickly than long-term trends because they do not last for so long. These trends are also affected by a company's fundamental factors. Trends tend to move in a stepped fashion, rarely straight up or down. Next, check the short-term trend for the same indication. Short-term Trends (Hourly or less candlesticks) Short-term trends, sometimes called micro trends, are more volatile than both long-term and intermediate trends because they cover the shortest period of time and are driven by the news of the day. Often, these short-term trends rapidly reverse.

6 Support and Resistance 5 Support and Resistance levels tell traders that the price of a stock or CFD is likely to stop moving, to turn around and to start moving in the opposite direction. Knowing when such a reversal should occur helps traders to buy and sell at the most profitable times. Support Support is a price level at which a currency pair tends to stop falling, turns around and starts climbing again. It usually occurs because of: 1. Traders who missed an earlier buying opportunity decide it is a good time to invest. 2. Traders who bought the stock or CFD decide it is a good time to add to their positions. 3. Traders who sold the stock or CFD decide it is a good time to take profits

7 Support and Resistance cont 6 Resistance Resistance is a price level at which a currency pair tends to stop rising, turns around and starts falling again. It usually occurs because of: 1. Traders who missed an earlier selling opportunity decide it is a good time to trade. 2. Traders who sold the stock or CFD decide it is a good time to add to their positions. 3. Traders who bought the stock or CFD decide it is a good time to take profits. Support and Resistance levels are not precise. You would only frustrate yourself trying to pinpoint a price level, instead you would be much better off identifying a price range. If support or resistance get broken, they often become future support or resistance when retested.

8 Types of Support and Resistance 7 Horizontal Support and Resistance These form as prices rise and fall. They are illustrated as a horizontal line that highs and/or lows are reacting to. The EURGBP chart to the right shows Diagonal Support and Resistance These are harder to identify than horizontal trends, but are invaluable. As you look at the charts of the stocks and CFDs you will notice that they often form higher highs and higher lows (or lower highs and lower lows). Connecting these highs or lows provide diagonal trend lines of support and resistance.