Technical Analysis is the study of price and volume behavior on a stock chart. Chartists believe that all information known about a company reflects in its price chart and use it to make their trading decisions.
All forms of technical analysis derive their information from the daily open, high, low and closing price and corresponding volume. In its simple form, technical analysis is a study of trendlines, supply (resistance) and demand (support) levels and corresponding behavior of volume on a bar chart to gauge whether the buyers or sellers are in control of the stock. More advanced technical analysis presents the above information via countless different indicators and various types of charts.
Daily Bar
A daily price bar shows the movement of a stock’s price on any given trading day. When coupled with volume, it can tell the trader whether buying pressure or selling pressure dominated the day.
Trendline - rising
A rising trendline is a straight line of support. It is drawn to define an uptrend by connecting common price lows on a chart. It can help the trader stay with a rising stock or sell on a break to the downside.
Trendline - falling
A falling trendline is a straight line of resistance. It is drawn to define a downtrend by connecting common price highs on a chart. It can help the trader stay with a short position in the stock or buy on a break to the upside.
Support
Support is defined as a price level where the market perceive a stock to be undervalued and demand is plentiful. Traders may purchase stock on a pullback to support or sell on a break to the downside.
Resistance
Resistance is defined as a price level where the market perceive a stock to be overvalued and supply is plentiful. Traders may sell stock at resistance or buy on a break to the upside.
Trend Channel - rising
In a rising trend channel, prices are bounded by two parallel lines of support and resistance. It is drawn by connecting common price highs and lows on a chart. It helps the trader stay with a trending stock that is rising in price or sell on a change of trend.
Trend channel - falling
In a falling trend channel, prices are bounded by two parallel lines of support and resistance. It is drawn by connecting common price highs and lows on a chart. It helps the trader stay with a short position that is falling in price or buy on a change of trend.
Trend channel - horizontal
A horizontal trend channel or sideways trading range shows a balance of supply and demand. Traders may purchase the upside breakout of resistance or sell short on a break of support .
For further information on how to use technical analysis in your trading, see chart patterns.