Technical analysis studies the supply and demand in a market in the attempt to determine the future direction or trend. Technical analysts use charts and other tools to identify patterns that may suggest future activity.
Technical Analysis Know-How
One of the basic principles of economics is the law of supply and demand. It states that when there are more buyers than there are sellers of a given good, the price should rise. Likewise, when there are more sellers than buyers, the price should fall. In this technical analysis article, we focus on a type of chart that attempts to capture the battle between supply and demand: the point and figure chart.
Point and figure charts have been in use for over 100 years, yet they exist in relative obscurity compared to bar charts and candlesticks. Their usefulness lies in their ability to filter out market “noise”—short-term price fluctuations that occur during longer, more established trends. They differ from the more conventional charts in that they ignore the passage of time and do not take trading volume into account—they are only affected by price movements.
Figure 1 is an example of a point and figure chart for Cisco Systems, which covers daily price movements for the period from January 4, 1999, through April 31, 1999....
The study of technical analysis focuses primarily on price and volume. Perhaps it is not surprising that price garners most of the attention. However, volume deserves more than a cursory glance.
Volume is important because it provides information about the strength (or lack thereof) of price movements.
Heavier volume should be in the direction of the existing trend—volume should be relatively higher on “up” days during an uptrend and on “down” days during a downtrend. Furthermore, price...
Technical Analysis Articles
- Illuminating Trends: An Intro to Japanese Candlestick Charting
- Analyzing Volume & Price Ranges Using Equivolume Charting
- Arms' Ease of Movement: Adding Volume to the Equation
- Predicting Short-Term Trends: The Cup-With-Handle Pattern
- Monitoring the Smart Money by Using On-Balance Volume
- How to Test and Interpret Trading System Performance
- Point & Figure Charts Revisited
- ID'ing When to Buy and Sell Using the Stochastic Oscillator
- Analyzing Supply and Demand Using Point and Figure Charts