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Chart Patterns Tutorial
Traders have debated the merits of
“technical analysis” versus “fundamental analysis” for years. In
reality, most traders probably do not make such a rigid distinction
between these two approaches to market analysis and use some of both
in making their decisions.
Fundamental analysis studies factors
such as supply, demand, weather, political developments, economic
reports and the like to come up with their forecast for potential
price direction. But many traders do not have access to all of the
vast amount of fundamental information available nor do they have
the ability to interpret the significance of much of this
information on the market they are trading. Conclusions from
fundamentals tend to be quite subjective.
Instead of trading to digest all of
this fundamental information and convert it into an opinion on
prices, those who use technical analysis believe that everything
that is to be known about a market is incorporated into one thing,
price, and look only at data generated by the action of the market
itself. The technical trader’s main resource is a price chart, which
shows visually what has happened to prices historically and, based
on past market action, what is likely to happen when the same
conditions arise in the present.
Even the staunchest advocate of market
fundamentals is likely to refer to a price chart before making a
trade, if for no other reason than to get some perspective on how
current prices fit into a market’s price history. By the same token,
even the most dedicated follower of technical analysis is likely to
keep in mind the importance of key fundamentals such as natural
disasters, political upheavals, major economic reports, etc.
This trading tutorial focuses on the
basics of technical analysis, which involves several underlying
assumptions:
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All
fundamentals or any other inputs known to the market are
reflected in price.
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History repeats
itself so that a study of what prices did in the past can
provide clues about what they will do in the future.
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Prices tend to
move in trends – up, down or sideways – and changes in existing
trends provide potential trading signals.
Technical analysis can be rather simple or quite
complex, depending on the capabilities you have to manipulate the
market data. The "primary" trading
tools include basic chart patterns, such as triangles, double tops
and bottoms, head-and-shoulders, flags, pennants and, of course, one
of the most basic, yet most powerful, trading tools, the trend line.
As long as you have the relevant price data, these basic tools do
not even require a computer although a computer does make analysis
much faster and easier.
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Charts for traders
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The basic tool: Trend lines
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Basic Chart Patterns:
Continuation
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Basic Chart Patterns:
Reversals
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More Chart Basics
Main Trading
Resources Section |
