Technical analysis helps the trader to understand better what is happening in the marketplace and gain potential insight into what may happen next. There are five essential aspects to technical analysis that can, if better understood, help traders better determine when to open and close positions as well as offer clues to potential future price direction.
1. Market price action says all about it A technical analysis is less interested in “why” an asset trades at a given price, and more interested in where it may be headed next.
2. The volume of trading offers important information Many price movements – such as a breakout to a new high, for example – are generally considered to be of greater significance if accompanied by above-average trading volume.
3. Psychological factors drive the market in addition to fundamental values Demand for a given asset increases or decreases based on the collective assessment that all traders make regarding the real or perceived value of that asset
4. Prices tend to move in trends and patterns Public perceptions can change quickly. Sometimes these changes affect perceptions regarding the overall stock market or broader financial markets in general.
5. Work to build your weight of evidence – not to find the Holy Grail Trading signals can provide traders a clear set of criteria to look for and help them better identify potential trading opportunities.
Types of trends
Remember: “The trend is your friend!” There are three different types of trends: up, down, or sideways. Uptrend An
is a series of higher lows and higher highs over a given period of time. If you connect these increasing low points with a trend line you just provided yourself with a standard technical analysis tool that can help to identify whether or not an uptrend is still intact.
A Downtrend is a series of lower highs and lower lows. Connect these decreasing high points with a trend line provides you with a standard technical analysis tool that can help to identify whether or not a downtrend is still intact.
A Sideways trend is a series of highs and lows within a relatively flat or compressed range. Connecting these high and low points with a couple of trend lines can help to identify the trading range.