One of the reasons technical analysis works, is because stock prices do tend to move in a particular direction for quite some period of time. This direction can be up, down, or sideways. Newton’s first law of motion applies to this quite well. It states there is a natural tendency for objects to continue in the same direction. Momentum is another word to describe this phenomenon.
The most important tool in stock market technical analysis is the trend line. When a stock is following along a trend line, it will have a tendency to continue moving along that line. Properly analyzing this line will give you the ability to spot a trend. At this point, you will have an immediate edge over a majority of participants in the market. Putting as many factors as possible in your favor before taking a position in the stock market, is crucial to long-term success.
Marketwise, an uptrend is identified by a series of successive higher highs and higher lows. A downtrend is a series of successive lower highs and lower lows. Spotting an uptrend using a trend line involves drawing and connecting at least 3 lower points along the line. A downtrend line is drawn by connecting at least 3 higher points. In a sideways trend, both upper and lower points are pretty much parallel, straight horizontal lines.
The longer a stock has been moving in a trend, or inside a parallel channel, the stronger this trend most likely will be. On a breakout from a price channel, you want to see a major increase in volume. This helps to confirm the breakout as most likely being successful. Trends on a weekly or monthly chart, generally are more reliable than trends on charts of shorter durations.
My next article on stock market technical analysis will be about volume.
Volume is a key factor, and analyzing it properly can be worth a fortune. Volume tells you what big institutions such as mutual funds, pension funds, hedge funds, and other big stock market participants are doing.
Hi, I’m Gary E Kerkow, founder of Tradingmarkets4u.com. This site provides information to help traders and investors become successful. I have over 20 years of trading experience including stocks, futures and options. I implement the strategies, methods, and psychology of the world’s best traders and investors. This includes Jesse Livermore, William J O’Neil and others. Visit my website at http://www.tradingmarkets4u.com