Technical analysis is important for both stock and options traders. At its core, technical analysis is a study of supply and demand in a market. This information helps traders to determine the general direction or trend from a broader perspective. In this section, we look at Technical Analysis terms such as Trend, Support and Resistance, Fibonacci Retracement, and Bollinger Bands, and handful of other useful tools.

What is a trend?

A trend is loosely defined as the period when a stock is consistently moving up or moving down. Chartists use patterns to identify current trends, trend reversals, and to identify buy and sell signals. We use several tools to find trends and assess their strength.

Time frames

Chart Time Frames are of 3 different types based on their candlestick duration, which will reflect a particular amount of historical data and be used to determine 3 different time horizons for a trade:

Short Term (5-30 minutes): These candlestick durations will be looking back in days or weeks worth of data, and be used to inform intraday trading strategies.

Medium Term (1-4 hours): These candlestick durations would be using about 4 months worth of data, for example, and be used to inform swing-trading strategies.

Long Term (1-5 days): These candlestick durations would be looking back 12-24 months worth of data, and be used to inform long-term investment strategies.

It is very important to choose the appropriate chart based on your preferred time frame for trading.  If you are a Buy and Hold Trader, then you can look at the daily, weekly or even monthly charts. Tradespoon’s charts will typically depict the underlying Stock trend, the Fibonacci Retracement for the trade and various other key technical indicators.

Figure 32- Tradespoon Stock Chart

Uptrends, Downtrends & Trendless

Chart trends gives the trader an idea of the general direction of an asset’s value. Trends can exist as either Uptrends, Downtrends or Sideways trends. It’s important to know the general direction of an underlying asset-you have to be absolutely sure on the value of a Stock at a certain time.

Uptrends are generally characterized as showing Higher Highs and Higher Lows in an asset’s value over a specific period of time. The example shown depicts an Uptrend as point 6 is higher than point 4 and (Higher High) and point 5 is higher than point 3 (Higher Low).

Downtrend is the inverse of Uptrend- generally characterized as lower highs and lower lows in an asset’s value over a specific period of time. When you are making lower highs and lower lows as time goes by, that limits your trading style and trading horizon. The example shown depicts a Downtrend since point 3 is lower than point 1 (Lower Low) and point 4 is lower than point 2 (Lower High).

Sideways Trends are generally characterized as showing steady highs and steady lows in an asset’s value over a specific period of time.