Technical analysis is the study of price and volume. This helps the trader or investor set up "if-then" scenarios appropriate for the timeframe of the trade or investment.
In and of itself, technical analysis it is a rather simple matter, as price and volume are factual statistics generated during the trading day. It is no different than baseball statistics. What the analyst does with the information, how he manipulates the facts, is where all the controversies lie. Facts describe the situation in the here and now, but extrapolating them, because human beings insist on knowing the future, is tricky business. The good news, however, is that we do not need to know the future in order to make money in the market today.
Traders and investors can prepare themselves by analyzing observations on market sentiment, internals, support/resistance levels and key pivot points for market indices, stocks and futures. Use of moving averages and the Average Directional Index (ADX) indicator helps to determine whether the market is trending up/down or chopping sideways. With swing charts, bar charts, and Japanese candlestick charts, we gain insight into market action around support and resistance to analyze supply and demand based on the fundamental principles of classical technical analysis. "If => Then" scenarios are formed, based on our observations.
Technical analysis is not used as a tool to "predict" the future or to pick tops and bottoms. It is used to detect areas of trend change and emerging trends. In a trading range, traders generally look to buy at the low end of the range and to sell at the high end of the range or stay out all together. In a trending market, traders generally look to enter the market on every retracement until it enters a trading range and ends on a test. The goal is to buy every dip in an uptrend and sell every rally in a downtrend.
The trend is your friend, until the end, when it bends!
Teresa Lo
Founder
www.IntelligentSpeculator.com
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