Technical Analysis
This part outlines vital rules of charting. Simplicity should not be overlooked. Many traders tend to get too technical and forget the fact that they came to the market to make money. Keeping it simple with simple trading rules and money management rules can make trading successful and less stressful.
Aggregation and dispersion
As mentioned before in this education program, The underlying basics of trends and corrections can be seen as accumulation and distribution of stock; this activity reflects patterns in the price chart, accumulation can be seen as all the buyers (traders investors, institutional and fund managers) accumulating stock, which is creating a demand. When the demand tilts the equal point of supply (sellers) the stock price will upraise. Whilst the stock is moving up attracting new interest, traders will be selling their stock to these new buyers causing distribution of stock and price creating certain patterns derived from the volume. The distribution of stock causes over supply of stock, thus causing tops and certain patterns. This action is a reflection of volume seen in price, a building process of supply toppling demand and can be seen in smaller wave degrees building into larger patterns - they are all connected and intertwined. The sellers become part of the distribution of stock process, this is why in the charts we can see volume spikes at the tops and bottoms of trends, and this is the changeover in direction.
The ending of a trend in any time frame can be a lack of interest, i.e. volume or divergence where the stock price is moving up and the volume is diminishing. In more detail, it would be that each price bar is moving up, but the volume bar that accompanies each price bar will be less than the previous volume bar - divergence. Also the end of trend in any time frame can present volume spikes, distribution of stock. This is a combination of buyers and sellers focused at a certain price, giving the appearance of high volume, however the stock is not reflecting a stable price movement according to the amount of volume - essentially a concentration of volume in a particular range in price - it is the sellers hitting the bids or vice versa in a bear market and it is a sure sign of a market turning. Once this is understood and the trader sees this process in action, then the trader is working with the market. The same is true for a down trend ending - once the trader grasps the process of accumulation and distribution and can work with it in the degree of trend they are trading in, they will rely less on indicators and more on reading the volume and price. So accumulation is buying, and distribution is selling. It can be very specific or it can be very general. It is important to know what degree of trend you're working with and trending, I call this choosing your trading time frame.
One of the common mistakes of traders is moving their stops or price exit targets and this is partly due to the trader moving from one degree of trend to another. Understanding the accumulation and dispersion of your trading trend brings more confidence and the trader is more likely to enter and exit at the right times. This is not simply moving from hourly to daily, then weekly but viewing the volume against price in these different periods is a great start in reading the volume and price as this adds greatly to seeing what is really happening in the trend - the volume creates the price and the price creates the volume. Benefit from researching the great analysts that have defined trends, including Dow, Elliot and Gann.
Support and resistance levels
After to accumulation and distribution the next aspect to comprehend in Technical Analysis is substantiate and resistance levels. The trader needs to trade between these levels of support and resistance - quite simply the trader needs to buy above support and sell short below resistance. It wouldn't be smart buying long below resistance, its much safer having a long position with support under you. Trading support and resistance levels with an understanding of the market being in a process of accumulation or distribution is considered to be working with the market. A market is constantly accumulating or distributing, working through levels of support and resistance, and breaking out from those levels.
How do you find these levels of support and resistance?
If the market is travelling in old territory then the analyst will work from old levels of support and resistance and where would they be? They would be at tops, bottoms and centre points of old corrections, places of accumulation and distribution.
If a market was falling where would it fall to? The first place of support. Where would that be? It would be where the last correction was, on the way up. The market would be expected to bounce off that level forming part of a larger correction which could very well drop down to the next level of support. Bear in mind that as the analyst you need to place this correction in the right degree of trend, as this correction will belong to a larger trend. The degrees of trend can be seen by simply viewing the size of them and grouping them according to their size. Elliott does this best of all and Dow defines a trend and when to enter the trend - simple and very helpful. When a market has corrected and is moving up again, firstly it will need to pass old ground from the highs it fell from.
As the market is moving up where will it have resistance? It will have resistance where the market had corrections on the way down, remembering that price comes from volume and volume comes from people. Those corrections on the way down are brought about by people who bought on the way up, who have been holding a loss, and are likely to sell to end their loss, to break even, end their grief of loss, as the price moves back to their entry price- this is the resistance. The market on the way up will stop at these old corrections, old highs. It is technical but also should be seen in terms as psychological, as indeed that's what the market is. Know your own psychology and you'll start to know the market psychology.
Below The BHP chart demonstrates major support and resistance levels at 30, 40 and 50. There are also simple trend lines in green, capturing medium size trends. When the market has moved up past the old high then the market is in blue sky, it tends to move quicker as there is no old resistance, so where would you find resistance now? The analyst can see it in the volume and price pattern - classic patterns, Elliott patterns or the tradinglevels. Support and resistance begin to frame the market in a horizontal style and adding to this would be the trend line. Markets generally tend to develop on the 45 degree line and the trend line can pick up the trending angle and find the trend's support. The simple humble trend line is a powerful way to trade and to capture the support of the market. In fact trend lines can be used in an unlimited number of ways capturing many aspects of the markets.
Other means of capturing the trend is with the Moving Average. For large trends the 200 Moving Average is used and for smaller trends the 20 Moving Average. Both are very common as a moving trend line that works with the market movement. The dotted green line represents the 200 period Moving Average and the dotted red line represents the 20 point Moving Average.
About the Author:TradingLounge™.com.au and the TradingLevels™ Analysis Service have been developed by Peter Mathers to meet a growing demand for accessible, sensible education and his TradingLevels™-based analysis. Delivering high quality analysis and trades recommendations for shares, CFDs, fx trading, indices, commodity, the TradingLounge™ has been in strong demand growing from strength to strength. Peter is author of "Trading CFDs in Today's Markets". If you want to know more about trading analysis, click here.
