Conclusion
Each point mentioned in this book forms a contributing part of technical analysis. Here is a brief summary of what we’ve covered:
• Technical analysis is a method of analyzing the market action through past movements. It is based on three assumptions: the market discounts everything; price moves in trends and history tends to repeat itself.
• The difference between technical and fundamental analyses once more stresses the factors essential in technical trading and helps traders understand what type of analysts they are.
• Trend is one of the most important concepts in technical analysis. It is the direction that a security is headed and can be of three main types: uptrend, downtrend and sideways trend.
• A trendline adds a line to the chart showing the trend in the market.
• A channel line is the addition of two trendlines which act as support and resistance levels.
• Percentage retracements show how prices, before continuing in the original direction, retrace the previous trend by some percent.
• Price gaps represent such areas on a chart where no kind of trade has been executed.
• A chart is another important concept in technical trading. It is a graphical representation of price movements over a certain time frame.
• The time scale refers to the range of dates varying between seconds and decades. The price scale, which can either be arithmetic or logarithmic, shows security’s current price and compares it to the past data.
• There are four main charts used by traders: the line chart, the bar chart, the candlestick chart and the point and figure chart. Price patterns are certain formations that appear on charts creating a sign of future price movements.
• There are two types of chart patterns: reversal and continuation. Reversal chart patterns include the following patterns: head and shoulders, reverse head and shoulders, triple tops and bottoms, double tops and bottoms, saucer bottom, V-patterns. Continuation chart patterns are triangles (symmetrical, ascending and descending), flags and pennants, the wedge and the rectangle pattern.
• Volume shows the number of stocks or contracts that trade over a particular time. Higher volume indicates higher degree of intensity or pressure. It plays a very important role in technical analysis since it is used to confirm trends and chart patterns.
• Indicators are used to identify trends, volatility, momentum and other aspects in a security to help in the trend’s technical analysis. There are two main types: leading and lagging.
Most widespread indicators are: a moving average, which shows the average price of a security over a defined time frame and can be of three types: simple, linear and exponential; RSI which helps to identify the overbought and oversold conditions in a security; Bollinger Bands which is also mainly used to signal the overbought and oversold conditions of market; Stochastic oscillator that compares the securities closing price to its price range over a specified time; MACD that measures the short-term momentum compared to longer-term momentum; RSI-Bars that characterizes a stability of a price momentum and allows a definition of a trend potential.