What is Technical Analysis?

Technical analysis is where a trader relies solely on price action to speculate where the market may head next. Technical traders pay no attention to the underlying fundamentals behind price movements.

This said, it is not uncommon for traders to use both technical and fundamental analysis as part of their trading strategy.

There are many technical tools that can be used as part of your strategy to help you make successful trades including:

Support and Resistance

To understand the basics of technical trading, it is important to have a clear understanding of exactly what support and resistance are.

Support is a price at which there is a strong possibly there will be buyers. If the market hits this price, there will often be spike upwards as a result of technical traders buying.

Resistance is the opposite, it is a price where there is likely to be sellers. Conversely when a resistance point is hit, the market may head downwards.

Now let’s examine how technical traders establish these support and resistance points.

Trendlines

Trend lines are commonly used by traders as price will often respond to them. Below is an old Exxon Mobil chart. You can see how price has bounced on the trend line.

Trendline

 

In this example, we are using an ascending (upwards) trendline. Trend lines can be ascending, descending or straight lines. Trend lines are also good for picking out if a market is currently trending and how strong the trend is.

Fibonnaci Retracement lines

 

fib lines

Fibonacci Retracement lines are usually drawn from an significant high and a significant low. Once drawn, there are horizontal lines at different Fibonacci levels.

As you can see on the chart above lines are drawn at 0, 23.6, 38.2, 50.0, 78.6 and 100. Other commonly used Fibonacci levels are include 161.8, 261.8, and 423.6.

These numbers are a percentage. If you draw ascending Fibonacci lines on a price chart from 50 upto 100, the 23.6 Fibonacci line would be at 61.8, the 50 line would be at 75 and so on.

These lines often act as support and resistance points and are often part of a technical traders strategy.

Pivot Points

Pivot points often provide support and resistance. A pivot point can be calculated for any time frame using the following simple formula:

Previous high + Previous low + Previous Close price

All Divided by 3

So for example, Lets assume the Exxon Mobil prices for last week prices were as follows:

High 60
Low 50
Close 55

To calculate this weeks pivot point, we would add 60+50+55 which comes to 165, then divide this number by 3 which would give us the weekly pivot of 55.