TradeSense: Technical Analysis
Here we show excerpts from our introduction to Technical Analysis, including explanations of basic concepts, such as signals and price patterns, and details of key TA indicators.
Part 4: Friday 4 July 2008
When discussing trends, peaks and troughs, we should consider all price action; that is, we should include the intraday highs and lows and not just the closing price.
That means that we should use bar charts or candlestick charts rather than line charts. Having said that, the closing price is the most important of the day.
Trendlines are tools that help us define trends and determine when they have ended. As with the trends themselves, they can be drawn over differing timeframes. The procedure is as follows.
1. Determine the period of consideration; whether long, medium or short term.
2. For an uptrend within the period considered, draw a line from the lowest low up to the highest minor low point before the highest high, such that the line does not pass through any of the price bars.
3. For a downtrend within the period considered, draw a line from the highest high down to the lowest minor high point before the lowest low, such that the line does not pass through any of the price bars.
The chart (below) shows two medium term downtrends that were broken when the long term uptrend resumed.
The black long term uptrend was the uptrend that existed upon achievement of the higher high during the summer. This line was broken by the decline to the October low. Once the latest high was achieved, the long term up trendline could be redrawn as the green line.