Technical analysis is a method used to evaluate and predict future price movements of financial assets (such as stocks, commodities, or currencies) by analyzing historical market data, primarily price and volume. It focuses on chart patterns, trends, and various technical indicators to make decisions about buying or selling securities.
Here’s a breakdown of some key concepts in technical analysis:
1. Charts
- Line Chart:
A simple chart that connects closing prices over time. - Bar Chart:
Displays the open, high, low, and close (OHLC) prices of a security for a specific time period. - Candlestick Chart:
Similar to the bar chart, but provides more visual insight into market trends, with a body showing the range between the open and close prices.
2. Trends
- Uptrend:
A series of higher highs and higher lows, indicating a bullish market. - Downtrend:
A series of lower highs and lower lows, signaling a bearish market. - Sideways Trend:
The price moves within a range, showing neither bullish nor bearish conditions.
3. Support and Resistance
- Support:
A price level where a downtrend is expected to pause due to a concentration of demand. - Resistance:
A price level where an uptrend might pause due to a concentration of selling interest.
4. Patterns
Technical analysis often looks for price patterns that can indicate future market behavior.
- Head and Shoulders:
A reversal pattern that predicts a trend change from bullish to bearish. - Double Top/Bottom:
Patterns indicating a potential reversal in the current trend. - Flags and Pennants:
Continuation patterns that appear after a strong price move.
5. Volume Analysis
- Volume is an important factor in confirming price movements. Higher volume in the direction of the trend often suggests strength, while low volume may indicate a weaker or false move.