One premise of technical analysis is that stock prices are affected by support and resistance. As those terms imply, support acts to keep a stock’s price above a certain level, while resistance acts to keep a stock’s price below a certain level. In fact, once it has been determined that a price has acted as important support or resistance in the past, it is very likely that a particular price will do so again in the future. Drawing support and resistance lines on stock charts helps determine how significant they were in the past and how significant they might be again..
When price moves substantially above or below its moving average, there’s a good chance (all things being equal) the price will return at least in part toward its average price. The idea of range trading is to capitalize on this tendency of prices to revert to the mean.
Technical analysis is a method of evaluating market activity, such as past prices and volume, to help identify patterns or events that can help suggest future activity. Learn how to access, select, and apply technical patterns and events to a chart.
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Technical analysis focuses on market action – specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering what stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.
Article copyright 2012 by Technical Analysis Inc. Reprinted from the January 2009 issue with permission from Stocks & Commodities Magazine.