Charts and Technical Analysis

Part 1: Technical analysis

Reading charts and understanding price action is an essential skill for any trader. The markets are a daily tug of war between buyers and sellers, and charts are an easy to use, effective way to show the outcome of these mini-battles.

Understanding and interpreting charts successfully will help you make buy and sell decisions. Certain charting patterns can tell you a lot about what the market sentiment is around an option and can give an insight into what may be in store for the stock price.

Part 2: Trend, support and resistance

Identifying trends as well as support and resistance levels may be one of the simplest forms of analysis a trader can employ, but without a doubt these can be the most powerful.

A trend is defined as the way in which a stock’s price has been trading over a given time period and signals to a trader how to approach the market.

Support and resistance levels are stock prices that historically alter the short-term trend of a security. Support levels halt a downward movement in price as demand in the stock increases. Resistance levels are a price where the upward movement in price halts due to an increase in supply.

A breakout of these price levels gives a clear indication to the trader whether to buy or sell a stock - or trade the underlying option.

Part 3: Chart patterns

Over time many patterns in the movement of a share price are evident. These patterns tend to be replicating and if a trader can identify these, a reasonable expectation can be formed as to the way the price will move following this pattern.

There are primarily two types of charting patterns: a continuation pattern or a reversal pattern. A continuation pattern suggests that the present trend being experienced will continue. Conversely, a reversal pattern suggests that that the current trend seen will reverse in the foreseeable future.

With the introduction that is presented in this section, you will be ready to start searching for these patterns in the price action.

Part 4: Technical indicators

Technical indicators are a powerful way to identify and anticipate possible changes to a stock trend.

Key to using technical indicators is not being able to use every possible indicator, but to able to effectively understand and implement a select group.

The indicators you’ll learn here are moving averages, the relative strength index (RSI), stochastic oscillator, Bollinger bands and on balance volume.

RSI, stochastic oscillator and on balance volume are leading indicators and can help a trader to predict a possible change in trend.

Moving averages are a trend following indicator and Bollinger bands measure changes in volatility.

By using a combination of these indicators, you can put the odds on your side and select potentially lucrative trading opportunities with reduced downside.

Part 5: Putting it all together

Technical analysis is a great way to understand the price action occurring within the share market, but this is of little use without a successful trading strategy.

In this module, you’ll pick up a set of simple yet extremely useful trading rules. Using these rules reduces your trading risk and maximises the probability of enjoying significant profits consistently.

We look in detail at criteria to enter a trade, including possible signs from indicators and charting signals.

There are many exit criteria out there in the trading world. Whatever exit strategy you employ, the tenet used by all successful traders is to “keep your losses small, but let your profits run”.

Another characteristic of successful traders is to diversify your trading interests to ensure you don’t keep all your eggs in one basket.

By adhering to these simple trading techniques, including entry and exit points and effective money management, the probability of making profits over a period of time are significantly increased.

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