I personally support the assumption that an adequate comprehension of technical analysis can lead to higher trading or investment success. The method is commonly applied to forecast future price trends through the process of evaluating historical market action. Every market participant should familiarize themselves with valuable technical analysis tools and concepts if they want to strengthen their capability in applying the method in their trades and investments.
Below are the essential technical analysis tools that we need to familiarize ourselves with:
They refer to the path the price is going. The steepness of the existing trend is determined by the “rising peaks and troughs” and the “falling peaks and troughs”. A trend reversal is usually indicated by a trend break. A trading range is distinguished by “horizontal peaks and troughs”.
This is explained by the Elliot wave theory. It is a type of market analysis that is based on the Fibonacci number sequence and the recurring wave patterns. Appealing Eliot wave patterns display a five-wave advance then afterwards a three wave decline.
The Fibonacci number sequence (1, 1, 2, 3, 5, 8, 13, 21… ) is created by adding the first two numbers to acquire the third. A well-known Fibonacci retracement number is 62% in which is derived from the ratio of any number to the next bigger number.
Stochastic Oscillator is one of the technical analysis tools used to determine the oversold/overbought status usually on a range of 0-100%. This indicator is supported by the observation on strong up trend in which period closing prices will usually focus in the upper part of the period’s range. The two lines (%K and %D) that stochastic calculations produce are valuable indicators of oversold/overbought areas on a chart. The variance between the underlying instruments’ price action and stochastic lines emits a strong trading hint.
These are areas seen on the bar chart in which no trading has transpired. An up gap is a sign of market stability in which is usually formed when the cheapest price on a trading day is larger than the previous trading day’s highest price. Conversely, the down gap is a sign of market vulnerability in which it is formed when the largest price of current trading day is lower than the previous day’s cheapest price.
Breakaway gaps signify the start of a significant price change. A runaway gap happens around the middle of a significant trend in the market. An exhaustion gap is a sign of a trend’s coming conclusion.
This assumption explains the significance of using the angles in the charts to identify the resistance and support areas as well as forecast when the changes of coming trends will occur. In addition, it uses the charts’ lines to forecast resistance and support areas.
Moving Average Convergence Divergence or MACD
It is a display that involves the plotting of two momentum lines namely the MACD line and signal or trigger line. You will find the difference between two exponential moving averages in the MACD line while the exponential moving average of the difference is seen in signal or trigger line. The intersection of the MACD and trigger lines can signify a high probability change in trend.
Relative Strength Index (RSI)
The RSI involves the computation of the ratio of up-moves to down-moves then balances the computation in order for the index to be articulated in a range of 0-100. The instrument is believed to be overbought when the RSI is 70 or more. An instrument is believed to be oversold when the RSI is 30 or less.