Chart Your Way to Profits: The Online Trader's Guide to Technical Analysis with ProphetCharts, Second Edition

Chapter 1. Technical Analysis

What It Is and Why It Works

Technical analysis is the study of past price movement for the purpose of predicting future price movement, which, if done correctly, can lead to substantial trading profits. The prices studied are typically those of financial instruments such as stocks, commodities, and foreign currencies. But no matter what market is being studied, the underlying principles are the same. Specifically:

• A price chart is the most perfect representation of the balance of buyers and sellers for any given entity.

• Prices tend to move in trends and patterns, which, based on historical analysis, can lead to statistically meaningful probabilities of future price movement.

• The close and skilled examination of a price chart can guide traders as to how long they should remain in a trade and when they should exit.

No matter what you trade, technical analysis can make you a better and more profitable trader. Price charts will consistently provide the most truthful picture that can be had of a tradable object, because everything that can be publicly known or speculated is already built into the graph. You will never get the same pure representation of a stock (or anything else) from a broker, a newsletter writer, or an analyst. A chart is as good as it gets.

THE BULLS VERSUS THE BEARS

Before we get into price charts—and there will be hundreds of them in this book—let's examine the basics about what forms a price chart in the first place: sellers (the supply) ...