Module for Traders
Introduction to Technical Analysis
11. Glossary (Technical analysis terms for beginners)
1. Technical analysis
Technical analysis is a technique that is utilized to study the historical price movements of a stock or index to predict its future price movements. It primarily works on the assumption that history always repeats itself.
2. Opening price
The opening price is the first price at which an asset is traded at the start of a trading session.
3. Highest price
The highest price at which an asset is traded in a trading session.
4. Lowest price
The lowest price at which an asset is traded in a trading session.
5. Closing price
The closing price is the last price at which an asset is traded at the end of a trading session.
Volume is the total number of shares traded in the market during a specified period of time. A high volume indicates greater interest in the shares and vice versa.
A line chart depicts the various price points of an asset at different points in time. These price points are connected by a single line.
8. Bar chart
A bar chart consists of a thin vertical central line with two horizontal lines, one on the left and one on the right. The horizontal line on the left indicates the opening price of the asset, the horizontal line on the right indicates the closing price of the asset. The lowest point in the vertical central line depicts the lowest price of the trading session, while the highest point in the vertical central line depicts the highest price of the trading session.
9. Candlestick chart
Quite similar to the bar chart, the candlestick chart also consists of a central vertical line. However, it uses a vertical rectangular body to depict the open and closing prices of an asset.
When the body of the candle is coloured in red, it indicates that the opening price is higher than the closing price. This effectively means that the price of the asset moved negatively during the trading session. When the body of the candle is coloured in green, it indicates that the opening price is lower than the closing price. This means that the price of the asset moved positively during the trading session.
Additionally, the lowest point in the vertical central line depicts the lowest price of the trading session, while the highest point in the vertical central line depicts the highest price of the trading session.
10. Single candlestick patterns
When a pattern is generated by a single candle, it is termed as a single candlestick pattern. Single candlestick patterns usually take only one trading session into account.
11. Multiple candlestick patterns
Patterns that are generated by multiple candlesticks are termed as multiple candlestick patterns. These patterns take multiple trading sessions into account.
Trend is known as the overall price movement of an asset in a specific direction over a specified period of time.
13. Bullish trend
Also known as an uptrend, a bullish trend occurs when an asset’s price moves upward over a specified period of time.
14. Bearish trend
Also known as a downtrend, a bearish trend occurs when an asset’s price moves downward over a specified period of time.
15. Sideways trend
Also known as a horizontal trend or a range-bound trend, a sideways trend occurs when an asset’s price moves within a specific range without showing any clear signs of either a bullish or bearish trend.
16. Trend reversal
A trend reversal is said to happen when the price movement of an asset changes direction and starts moving in the opposite direction. For instance, when a bullish trend changes direction and becomes a bearish trend, a trend reversal is said to have occurred.
Volatility is the rate of change in the price of an asset over a period of time. High volatility indicates that the price of an asset is changing rapidly, whereas low volatility signifies that the price is changing slowly.
18. Support level
The support level is the price point of an asset below which the price of the said asset refuses to fall.
19. Resistance level
The resistance level is the price point of an asset above which the price of the said asset refuses to rise.
20. Dow theory
Propounded by Charles Dow, the dow theory is a set of six basic tenets that gives some much needed insight into the markets and the price movements therein. The following are its six basic tenets.
- The market discounts everything.
- The market has three trends.
- Market trends have three phases.
- The indices must confirm with each other.
- The trading volume must confirm with the price trends.
- Trends persist until there is a clear reversal.
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