Earlier Posts on Technical Analysis:
One of the principles on which technical analysis is based is that prices move in trends, and continue to do so for some time.
Trendlines: A trendline is simply a straight line connecting two or more points on a price graph. An uptrend line connects a series of bottoms, and a downtrend line connects a series of tops.
Trendlines are broken when three criteria are met:
Channels: Like trendlines, prices also tend to move in channels, with parallel support and resistance lines. There are traders who trade for price actions within the channel, buying near the support line, and selling near the resistance line, with stop-loss on other side of the lines. Some signals from channels:
Support and Resistance: Support and Resistance are very important levels, and prices often bounce back from these levels. A support is the level where there is good demand for the stocks, and resistance are levels where there is a good supply of the stock.
Retracements: Another important tool is retracements levels – after a trend reversal, the prices tend to retrace by a certain proportion before continuing the earlier trend. Often, prices will retrace from a minimum of 33% to a maximum of 67% of its previous move, before continuing in its earlier trend direction. 50% retracement is also a very important level, and is observed quite frequently. However, if the prices retrace by more than 67%, then the trend may be broken for good.
One of the principles on which technical analysis is based is that prices move in trends, and continue to do so for some time.
Trendlines: A trendline is simply a straight line connecting two or more points on a price graph. An uptrend line connects a series of bottoms, and a downtrend line connects a series of tops.
- The more the number of points that form the line, the more important it is.
- The longer the trendline holds (time period), the more significant it becomes.
- The angle of the trendline is also very crucial, the lower the angle, the stronger is the trend (a very steep trend is very unlikely to persist).
Trendlines are broken when three criteria are met:
- Extent of penetration: The trendline must be broken by atleast 2%-3% to be sure of a clear break, more valid for longer term lines. For short term trends, the extent of break would be lower to confirm the break-out.
- Time Filter: The prices shouldn’t go back to trendline immediately after penetration, and should confirm the penetration by staying in the range for 2-3 days. Usually, intra-day breaks are discounted to confirm a break-out.
- Volumes: If the penetration is followed by heavy volumes, then the breakout is much more credible, as against one with low volumes.
Channels: Like trendlines, prices also tend to move in channels, with parallel support and resistance lines. There are traders who trade for price actions within the channel, buying near the support line, and selling near the resistance line, with stop-loss on other side of the lines. Some signals from channels:
- If prices after being in a channel, fail to reach the top line or bottom line, then it might signal a break on the other side. For example, if prices fail to reach the top line repeatedly, then it might signal that prices would break the lower support line.
Support and Resistance: Support and Resistance are very important levels, and prices often bounce back from these levels. A support is the level where there is good demand for the stocks, and resistance are levels where there is a good supply of the stock.
- If the prices touch a level repeatedly, then the level becomes more and more important – a long term support/resistance is much more important level, then short term levels.
- After the level is broken, support becomes resistance and vice versa. And more the time stock has spent near the level (consolidation), more important is the level.
Retracements: Another important tool is retracements levels – after a trend reversal, the prices tend to retrace by a certain proportion before continuing the earlier trend. Often, prices will retrace from a minimum of 33% to a maximum of 67% of its previous move, before continuing in its earlier trend direction. 50% retracement is also a very important level, and is observed quite frequently. However, if the prices retrace by more than 67%, then the trend may be broken for good.
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