Technical Analysis Looks for Trends in the Market

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Technical Analysis Looks for Trends in the Market

Charts are the foundation of technical analysis.

Things To Know

  • Consolidation patterns and reversal patterns are used to foretell future movements.
  • Support and resistance levels measure the degree to which buyers or sellers are winning the price wars.

Consolidation patterns

A consolidation pattern indicates that a trend similar to the previous trend is likely to occur. It can also indicate investor indecision. If security prices rise above a consolidation line, it could indicate a rise in future prices.

Reversal patterns

A reversal pattern is the opposite of consolidation. A reversal indicates that the next trend to occur will be the opposite of the previous trend. If there was an upward trend, prices could now fall, and vice versa.

Support and resistance

Technical analysts also look at something called support and resistance. Security prices are decided by the negotiation between buyer and seller to reach an agreeable price. A buyer wants to buy low and a seller wants to sell high. Support and resistance measures the degree to which buyers or sellers are winning the price wars.

Support level

The support level is the lowest price at which sellers are willing to sell a security. A support level can indicate the price at which a downtrend may reverse itself. The resistance level is the level above which it is difficult for a price to rise. Upward trends may reverse themselves when prices reach the resistance price level.

Technical analysts look for these trends in stock indexes and market indicators, and use them as their basis for making decisions about buying, holding, or selling securities.