Technical analysis 101 part 1

John Locke John Locke Locke In Your Success, LLCLocke In Your Success, LLC

Technical Analysis 101 Part 1Technical Analysis 101 Part 1

www.LearnToTradeOptionsNow.com

•© 2016 Locke in Your Success, LLC.

http://www.learntotradeoptionsnow.com/



© 2016 Locke in Your Success, LLC. © 2016 Locke in Your Success, LLC.

2 ways of looking at things2 ways of looking at things

1 Fundamental Analysis – What the price “should be doing or should do” based on actual numbers. We are using past earnings, future earnings projections, company strength and news to predict price movement.

2 Technical Analysis – What the price “is doing”. We are using the information on a chart such as support, resistance and other indicators to predict price movement.


Why Does Technical Analysis Why Does Technical Analysis Work?Work?

Technical Analysis works because:

A. People tend to react in a predictable and similar manner.

B. Traders believe it works. When a large percentage traders can look at a chart and attach a similar meaning to it’s appearance, then they react in a similar manner.


Market StructureMarket Structure

• Price – is a measure of investors attitude. When investors are optimistic, price rises. When investors are pessimistic, price falls.

• Volume – is the intensity of investors attitude. High volume indicates more intense optimism and/or pessimism.

• Breadth – is the extent of the emotion. How wide spread is the emotion?


Chart basicsChart basics

• Support – General area where the price resists going lower.

• Resistance – General area where the price resists going higher

• Trend – Is the price going up, down or sideways?


Support / ResistanceSupport / Resistance

General rules:

A. The longer the time that a support or resistance level has been forming, the stronger it is.

B. The more times the support or resistance level has been tested, the stronger it is.

C. The easier is to see the support or resistance level, the stronger it is.


There Are Many Types of Support / There Are Many Types of Support / ResistanceResistance

• Horizontal Support – Support area that is horizontal

• Diagonal Support - Support area that is diagonal

• Moving Average Support – Support of price by moving averages

• Pivot Points, Bollinger Bands, Fibonacci, Etc.


Moving Averages as Moving Averages as Support/ResistanceSupport/Resistance

• Sometimes prices use moving averages as support or resistance.

• Common moving averages used by major institutions are the 20 Period Moving Average, the 50 Period Moving Average and the 200 Period Moving Average.


Traders pick areas on the chart that prices seem to stop and reverse at and Traders pick areas on the chart that prices seem to stop and reverse at and then use these areas for buy and sell signals.then use these areas for buy and sell signals.


Traders will continue to use support and resistance as buy and sell areas until Traders will continue to use support and resistance as buy and sell areas until one day something, often news, causes the price to “break out” through a one day something, often news, causes the price to “break out” through a

support or resistance level. support or resistance level.

Old resistance becomes new support

Test of new support


Old Resistance Becomes New SupportOld Resistance Becomes New SupportWhat happens when a break out occurs? What happens when a break out occurs?

As the price approaches resistance, many aggressive traders are already selling the stock in anticipation of the price reversing. By the time the stock hits the resistance area and even after it starts to turn, more and more people are selling out. But this time instead of heading down, it heads up and breaks the resistance level. When this happens, people short the stock will buy to cover their position and others will buy in anticipation of making money, forcing the price up. Once the initial buy pressure comes off the stock, the price will usually drop back up toward the old resistance area. Here is where the people who missed the initial break out tend to get in forcing prices back up. Old resistance has become new support.


Old Support Becomes New ResistanceOld Support Becomes New ResistanceWhat happens when a break out occurs? What happens when a break out occurs?

As the price approaches support, many aggressive traders are already buying the stock in anticipation of the price reversing. By the time the stock hits the support area and even after it starts to turn more and more people are buying in. But this time instead of heading up, it heads down and breaks the support level. When this happens, a lot of people will sell their stock forcing the price down. Once the initial sell pressure comes off the stock, the price will usually rise back up toward the old support line (where many people bought). As the price enters the old support range, many of the people who bought there will usually sell the stock to break even, driving it down again. Old support has become new resistance.


Log or Arithmetic ?Log or Arithmetic ?• Most charts offer 2 price scale settings, log and arithmetic.

• An arithmetic scale will space price by price. Spaces will be equally spaced from top to bottom. A 4 to 2 dollar move ($2) will look the same as a 204 to 202 dollar move. Arithmetic scale is useful for short term charts up to a year as long as the price movement is not extreme.

• A log scale will space price by %. Prices will be spaced wider at the bottom and closer together at the top. A 4 to 2 dollar move (50%) will look the same as a 204 to 102 move. Log scales are most useful on longer term charts or during extreme price movements.


Arithmetic scale on the DOWArithmetic scale on the DOW


Log Scale on the DOWLog Scale on the DOW

• John Locke• www.lockeinyoursuccess.com• [email protected]• Facebook: Locke in Your Success• Twitter: locke4success• 603-738-1795

Locke In Your Success, LLCLocke In Your Success, LLC

© 2016 Locke in Your Success, © 2016 Locke in Your Success, LLC. LLC.

http://www.lockeinyoursuccess.com/

Economy & Finance

Technical analysis 101 part 1