Elliott's wave theory: The Elliott Wave Theory is an approach to market
analysis that is based on repetitive wave patterns and the Fibonacci number
sequence. An ideal Elliott wave pattern shows a five-wave advance followed
by a three-wave decline.
Gaps are spaces left on the bar chart where no trading has taken place.
Gaps can be created by factors such as regular buying or selling pressure,
earnings announcements, a change in an analyst's outlook or any other type of
An up gap is formed when the lowest price on a trading day is higher than the
highest high of the previous day. A down gap is formed when the highest price
of the day is lower than the lowest price of the prior day. An up gap is usually
a sign of market strength, while a down gap is a sign of market weakness. A
breakaway gap is a price gap that forms on the completion of an important
price pattern. It usually signals the beginning of an important price move. A
runaway gap is a price gap that usually occurs around the mid-point of an
important market trend. For that reason, it is also called a measuring gap. An
exhaustion gap is a price gap that occurs at the end of an important trend and
signals that the trend is ending.
A trend refers to the direction of prices. Rising peaks and troughs constitute
an up trend; falling peaks and troughs constitute a downtrend that determines
the steepness of the current trend. The breaking of a trend line usually signals
a trend reversal. Horizontal peaks and troughs characterize a trading range.
In general, Charles Dow categorized trends into 3 categories: (a) Bull trend
(up-trend: a series of highs and lows, where each high is higher than the
previous one); (b) Bear trend (down-trend: a series of highs and lows, where
each low is lower than the previous one); (c) Treading trend (horizontaltrend:
a series of highs and lows, where peaks and lows are around the same
as the previous peaks and lows).
Moving averages are used to smooth price information in order to confirm
trends and support-and-resistance levels. They are also useful in deciding on a
trading strategy, particularly in futures trading or a market with a strong up
or down trend. Recognizing a trend may be done using standard deviation,
which is a measure of volatility. Bollinger Bands, for example, illustrate
trends with this approach. When the markets become more volatile, the
bands widen (move further away from the average), while during less volatile
periods, the bands contract (move closer to the average).
Pattern recognition in Trend lines, which detect and draw the following
patterns: ascending; descending; symmetrically & extended triangles;
wedges; trend channels.