5 Trading Book

Technical Analysis

Publisher: Tradementor

Chapter 1.3

TECHNICAL ANALYSIS: TRENDS, SUPPORT, AND RESISTANCE Stocks are rising. Stocks are falling. If you watch or read financial news reports, you have seen or read people talking about stocks moving up and down. Of course, it is not the stocks themselves that are moving up and down but rather the prices of those stocks that are moving up and down. Stock prices change daily. Your job as a stock or CFD trader is to learn to identify where the price is going to go next

TRADING WITH THE TREND Identifying the trend and trading with it is vital to your success as a stock or CFD trader. The stock market can be an emotionally charged place and, when traders start pushing the price of a stock in one direction or another, other traders typically start to follow suit and push the price of the stock in the same direction. When you see increasing momentum building behind a moving stock, the chances are good that the stock will continue moving in that direction. At that point, you increase your odds of making money by trading with the trend. Fighting the trend generally turns out to be a losing proposition

High & Low

Upward trends—stocks or CFDs trending upward from a series of higher highs and higher lows.

Downward trends—stocks or CFDs that are trending downward form a series of lower highs and lower low

Long-Term Trend: Fundamental factors are the major drivers of a stock’s long-term trend. As companies perform well fundamentally their stock prices typically move higher.

Intermediate Trend: Intermediate trends, sometimes called minor trends, move more rapidly than long-term trends because they cover a shorter period. These trends are also affected by a company’s fundamental factors. Looking at this daily chart of McDonald’s, you can see that the stock price has not moved straight up; it has followed its long-term upward trend.

Short-Term Trend: Short-term trends, sometimes called micro-trends, are more volatile than both long-term and intermediate trends because they cover the shortest period and are predominantly affected by the day’s news.

Aligning Trend: Time-frames Your most profitable trading opportunities will come when the long-term, intermediate, and short-term trends all line up in the same direction. Just as it is easier to swim downstream instead of upstream against the current, it is easier to trade with a trend than against it. When the long-term, intermediate, and short-term trends are all moving higher

PAYING ATTENTION TO SUPPORT AND RESISTANCE: Support and resistance levels are like the ends of an Olympic swimming pool. Just as the ends of the pool tell swimmers when it is time to turn around and start swimming in the opposite direction, support and resistance levels tell you if the price of a stock or CFD is likely to stop, to turn around, and to start moving in the opposite direction in the future. Knowing where a stock or CFD may stop and turn around helps you to enter and exit your investments at the most profitable times.

Horizontal Support and Resistance Horizontal support and resistance: levels form as stock prices rise or fall to the same levels time and time again. You can see these support and resistance levels take shape on charts of the stocks and CFDs you are interested in trading as the stock price moves back and forth.