Various techniques and terms
Many different techniques and indicators can be used to follow and predict
trends in markets. The objective is to predict the major components of the
trend: its direction, its level and the timing. Some of the most widely known
- Bollinger Bands - a range of price volatility named after John Bollinger,
who invented them in the 1980s. They evolved from the concept of
trading bands, and can be used to measure the relative height or depth
of price. A band is plotted two standard deviations away from a simple
moving average. As standard deviation is a measure of volatility,
Bollinger Bands adjust themselves to market conditions. When the
markets become more volatile, the bands widen (move further away
from the average), and during less volatile periods, the bands contract
(move closer to the average).
Bollinger Bands are one of the most popular technical analysis
techniques. The closer prices move to the upper band, the more
overbought is the market, and the closer prices move to the lower
band, the more oversold is the market.
- Support / Resistance - The Support level is the lowest price an
instrument trades at over a period of time. The longer the price stays
at a particular level, the stronger the support at that level. On the
chart this is price level under the market where buying interest is
sufficiently strong to overcome selling pressure. Some traders believe
that the stronger the support at a given level, the less likely it will
break below that level in the future. The Resistance level is a price at
which an instrument or market can trade, but which it cannot exceed,
for a certain period of time. On the chart this is a price level over the
market where selling pressure overcomes buying pressure, and a price
advance is turned back.
- Support / Resistance Breakout - when a price passes through and stays
beyond an area of support or resistance.
CCI - Commodity Channel Index - an oscillator used to help determine
when an investment instrument has been overbought and oversold. The
Commodity Channel Index, first developed by Donald Lambert,
quantifies the relationship between the asset's price, a moving average
(MA) of the asset's price, and normal deviations (D) from that average.
The CCI has seen substantial growth in popularity amongst technical
investors; today's traders often use the indicator to determine cyclical
trends in equities and currencies as well as commodities.
The CCI, when used in conjunction with other oscillators, can be a
valuable tool to identify potential peaks and valleys in the asset's price,
and thus provide investors with reasonable evidence to estimate
changes in the direction of price movement of the asset.
Hikkake Pattern - a method of identifying reversals and continuation
patterns. Used for determining market turning-points and continuations
(also known as trending behavior). It is a simple pattern that can be
viewed in market price data, using traditional bar charts, or Japanese
- Moving averages - are used to emphasize the direction of a trend and to
smooth out price and volume fluctuations, or "noise", that can confuse
interpretation. There are seven different types of moving averages:
- simple (arithmetic)
- time series
- volume adjusted
The only significant difference between the various types of moving
averages is the weight assigned to the most recent data. For example,
a simple (arithmetic) moving average is calculated by adding the
closing price of the instrument for a number of time periods, then
dividing this total by the number of time periods.
The most popular method of interpreting a moving average is to
compare the relationship between a moving average of the
instrument's closing price, and the instrument's closing price itself.
Sell signal: when the instrument's price falls below its moving
- Buy signal: when the instrument's price rises above its moving