Technical Analysis

Technical analysis attempts to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs by using what are called technical indicators. Every charting program has a link to overlay technical indicators. Most, in and of themselves DO NOT WORK. They are a guide or a tool to use to help visually look at equity instruments, and markets and their respective price movements.

In fact, some view technical analysis as simply the study of supply and demand forces as reflected in the market price movements of a security. Technical analysis most commonly applies to price changes, but some analysts track numbers other than just price, such as trading volume or open interest figures.

Over the years, analysts have developed numerous technical indicators to help forecast future price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. Commonly used technical indicators include trendlines, moving averages and momentum indicators such as the moving average convergence divergence (MACD) indicator.

Technical analysts apply technical indicators to charts of various timeframes. Short-term traders may use charts ranging from one-minute timeframes to hourly or four-hour timeframes, while traders analyzing longer-term price movement scrutinize daily, weekly or monthly charts.

There are two primary methods used to analyze securities and make investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves analyzing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.

Technical analysis may appear complicated on the surface, but it boils down to an analysis of supply and demand in the market to determine where the price trend is headed. In other words, technical analysis attempts to understand the market sentiment behind price trends rather than analyzing a security’s fundamental attributes. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor over the long-term. The above was taken from investopedia. I couldn't have said it better myself.

Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at opposite ends of the spectrum. Both methods are used for researching and forecasting future trends in stock bond futures and commodity prices, and like any investment strategy or philosophy, both have their advocates and adversaries. 

Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts.

Technical analysis differs from fundamental analysis in that the stock's price and volume are the only inputs. The core assumption is that all known fundamentals are factored into price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value, but instead use price charts to identify patterns and trends that suggest what a future, or etf, or stock, or forex pair will do in the future.

(Here is a hint. It is good to look at both and know both then build systems to take advantage of both!)

The most popular forms of technical analysis are simple moving averages, support and resistance, trend lines, regression channels and momentum-based indicators.

I want you to learn:

• Simple Moving Average
• Support and Resistance
• Trend Lines
• Regression Channels
• Volume
• Moving Average Envelopes

Simple moving averages are indicators that help assess the stock's trend by averaging the daily price over a fixed time period. Buy and sell signals are generated when a shorter duration moving average crosses a longer duration one.

Below is a sample 1 minute chart of the Nasdaq emini future price movement with a 20 period simple moving average line. The play here would be to buy when the price goes from below to above the SMA and closes above the SMA and then sell when the price closes back below the SMA. Not rocket science is it. If it were that easy however everyone would be doing it successfully. They aren't. That is why you need to learn more then. So keep reading.

Support and resistance utilize price history. Support is defined as areas where buyers have stepped in before, while resistance consists of the areas where sellers have impeded price advance. Practitioners look to buy at support and sell at resistance. Defining Support and Resistance. Support is a price level where a downtrend can be expected to pause due to a concentration of demand. As the price of a security drops, demand for the shares increases, thus forming the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.

Below is an example of support and resistance zones. Multiple touches on either the support on the bottom or the resistance on the top suggests strong zones.

Trend lines are similar to support and resistance, as they give defined entry and exit points. However, they differ in that they are projections based on how the future or instrument has traded in the past. They are often utilized for prices moving to new highs or new lows where there is no price history.

There are a number of momentum-based indicators such as Bollinger Bands, Chaikin Money Flow, stochastics and moving average convergence divergence (MACD). These each have unique formulas and give buy and sell signals based on varying criteria. Momentum indicators tend to be used in range-bound or trendless markets. There is a whole bunch to learn in technical analysis. Most of what we have researched and found with it is not worth too much. Each indicator seems to work some of the time but not enough to make it worth while to follow religiously. This is why we use some of them and add math to make the systems and strategies robust.

Below are a few samples of regression channels. Very simply you have an upper lower lines and a middle or median line and you trade off the levels of the lines in the direction of the trend. If the trend is down, you favor going short at the touch of the price on the upper line. If the trend is going up, you favor going long at the touch of the lower line.

Bullish regression channel means prices are going up inside a channel.

Bearish regression channel means prices are going down inside a channel.