Technical analysts seek to identify price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary. Technicians especially search for archetypal patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants or balance days.
Technical analysts also extensively use indicators, which are typically mathematical transformations of price or volume. These indicators are used to help determine whether an asset is trending, and if it is, its price direction. Technicians also look for relationships between price, volume and, in the case of futures, open interest. Technicians seek to forecast price movements such that large gains from successful trades exceed more numerous but smaller losing trades, producing positive returns in the long run through proper risk control and money management. Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns.
Technical analysis ignores the actual nature of the company, market, currency or commodity and is based solely on the charts, that is to say price and volume information. Technical analysis is widely used among traders and financial professionals, and is very often used by active day traders, market makers, and pit traders. Technical analysts believe that prices trend. Technicians say that markets trend up, down, or sideways (flat).
Technical analysis is not limited to charting, but it always considers price trends. For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. Surveys that show overwhelming bullishness, for example, are evidence that an uptrend may reverse – the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.
Globally, the industry is represented by the International Federation of Technical Analysts (IFTA). In the United States, there are two national organizations: the Market Technicians Association (MTA), and the American Association of Professional Technical Analysts (AAPTA). The United States is also represented by the Technical Security Analysts Association of San Francisco (TSAASF). In the United Kingdom, the industry is represented by the Society of Technical Analysts (STA). In Canada the industry is represented by the Canadian Society of Technical Analysts.
Charts used by Technical Analyst:
· OHLC - Open High Low Close charts plot the high and low of the price movement vertically and the open and close horizontally. Used to graph range and outliers.
· Candlestick chart - Similar to OHLC, but open and close are filled. Often Black or Red candles represent a close lower than the open. While White, Green or Blue candles represent a close higher than the open.
Some concepts in Technical analysis:
· Dead cat bounce - the phenomenon whereby a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement
· Elliott wave principle and the golden ratio to calculate successive price movements and retracements
Overlays are generally superimposed over the main price chart.
· Pivot point - derived by calculating the numerical average of a particular currency's or stock's high, low and closing prices
Price-based indicators:
These indicators are generally shown below or above the main price chart.
· Parabolic SAR - Wilder's trailing stop based on prices tending to stay within a parabolic curve during a strong trend
· Trix - an oscillator showing the slope of a triple-smoothed exponential moving average, developed in the 1980s by Jack Hutson
Volume based indicators:
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