Important Concepts You Should
Know to Master Trend Detection
Important Concepts You Should Know
Law of Supply and Demand
Support and Resistance
Price Action
Trend lines
Momentum
Trends
Tick Charts (Candlestick)
Important Concepts You Should Know
Law of Supply and Demand
A theory explaining the interaction between the supply of a resource and the demand
for that resource. The law of supply and demand defines the effect that the availability
of a particular product and the desire (or demand) for that product has on price.
Generally, if there is a low supply and a high demand, the price will be high. In
contrast, the greater the supply and the lower the demand, the lower the price will be.
The law of supply and demand is not an actual law but it is well confirmed and
understood realization that if you have a lot of one item, the price for that item should
go down. At the same time you need to understand the interaction; even if you have a
high supply, if the demand is also high, the price could also be high. In the world of
stock investing, the law of supply and demand can contribute to explaining a stocks
price at any given time. It is the base to any economic understanding.
Important Concepts You Should Know
Price Action
The movement of a security's price. Price action is encompassed in technical and
chart pattern analysis, which attempt to find order in the sometimes seemingly random
movement of price. Swings (high and low), tests of resistance and consolidation are
some examples of price action.
The candlestick and price bar are important tools for analyzing price action, since they
help traders visualize of price movement. Candlestick patterns such as the Harami,
engulfing pattern and cross are all examples of visually interpreted price action.
No two people will analyze every bit of price action the same way, and that is why a lot
of traders find the concept of price action so elusive. Quite literally, price action is
everything that a security's price does, and just like every other facet of analysis, it is
purely subjective.
Important Concepts You Should Know
Momentum
The rate of acceleration of a security's price or volume. The idea of momentum in
securities is that their price is more likely to keep moving in the same direction than to
change directions. In technical analysis, momentum is considered an oscillator and is
used to help identify trendlines.
Once a momentum trader sees acceleration in a stock's price, earnings or revenues,
the trader will often take a long or short position in the stock in the hope that its
momentum will continue in either an upward or downward direction. This strategy
relies on short-term movements in a stock's price rather than fundamental value, and it
is not recommended for novices.
Important Concepts You Should Know
Tick Charts (Candlestick)
A chart that displays the high, low, opening and closing prices for a security for a single
day. The wide part of the candlestick is called the "real body" and tells investors
whether the closing price was higher or lower than the opening price (black/red if the
stock closed lower, white/green if the stock closed higher). The candlestick's shadows
show the day's high and lows and how they compare to the open and close. A
candlestick's shape varies based on the relationship between the day's high, low,
opening and closing prices.
Candlesticks reflect the impact of investors' emotions on security prices and are used
by technical analysts to determine when to enter and exit trades. Candlestick charting
is based on a technique developed in Japan in the 1700s for tracking the price of rice.
There are many short-term trading strategies based upon candlestick patterns, such
as the engulfing pattern, harami, harami cross and evening star.
Important Concepts You Should Know
Tick Charts (Candlestick)
Tick charts allow traders to gather information about market activity. Since tick charts are
based on a certain number of transactions per bar, we can see when the market is most
active, and, likewise, we can see when the market is sluggish and barely moving. In a 144tick chart, for example, one bar will print after every 144 transactions (trades that occur).
These transactions include small orders as well as large, block orders. Each transaction is
counted just once, regardless of the size. In periods of high market activity, more bars will
print. Conversely, during periods of low market activity, fewer bars will print. Tick charts
provide an easy means of determining market volatility.
Important Concepts You Should Know
Support and Resistance
Support is the price level which, historically, a stock has had difficulty falling below. It is
thought of as the level at which a lot of buyers tend to enter the stock. If the price of a stock
falls towards a support level it is a test for the stock: the support will either be reconfirmed or
wiped out. It will be reconfirmed if a lot of buyers move into the stock, causing it to rise and
move away from the support level. It will be wiped out if buyers will not enter the stock and
the stock falls below the support.
Resistance is a chart point or range that caps an increase in the level of a stock or index
over a period of time. An area of resistance or resistance level indicates that the stock or
index is finding it difficult to break through it, and may head lower in the near term. The more
times that the stock or index has tried unsuccessfully to break through the resistance level,
the more formidable that area of resistance becomes. Resistance and support levels are
widely used by experienced traders to formulate trading strategies. For example, if a stock is
approaching a very strong resistance level, a trader may prefer to close the position rather
than take the risk of a significant decline if the stock uptrend reverses.
Important Concepts You Should Know
Trendlines
A line that is drawn over pivot highs or under pivot lows to show the
prevailing direction of price. Trendlines are a visual representation of support
and resistance in any time frame.
Trendlines are used to show direction and speed of price. Trendlines also
describe patterns during periods of price contraction.
Important Concepts You Should Know
Trends
The general direction of a market or of the price of an asset. Trends can vary
in length from short, to intermediate, to long term. If you can identify a trend,
it can be highly profitable, because you will be able to trade with the trend.
As a general strategy, it is best to trade with trends, meaning that if the
general trend of the market is headed up, you should be very cautious about
taking any positions that rely on the trend going in the opposite direction.
A trend can also apply to interest rates, yields, equities and any other market
which is characterized by a long-term movement in price or volume.
Important Concepts You Should
Know to Master Trend Detection