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Beginner-Trends_Support_and_Resistance

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									More informed trading




  Technical Analysis: Trends, Support
  and Resistance

  Beginner Level
                                                                                  1

Introduction


   Stocks prices are always moving up and down and fortunes rest on the
   ability to predict such movements. The trader’s job is to identify where the
   prices of actual or potential investments are going next.

   Stock and CFD traders track historical prices using charts. With these, they
   are able to more accurately project where prices are likely to head in
   future. The process of analysing historical prices to intelligently predict
   future price movement is called Technical Analysis.

   Technical Analysis is the natural progression after conducting Fundamental
   Analysis. Fundamental Analysis helps to determine whether or not to trade
   a particular stock or CFD. Technical Analysis then helps determine when to
   buy or sell that instrument.

   Despite the science and math behind it, Technical Analysis is considered by
   most traders to be almost an art form which takes time and practice to
   master. It may seem complex, but it is indispensable to good trading, and
   the basics of it are reasonably simple. The key things to know are Trends
   and the concepts of Support and Resistance.




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                                                                                  2

Trading with the Trend




    Identifying trends and trading intelligently with them in mind is vital to
    your success when trading stocks and CFD’s. When a few traders identify
    an opportunity or threat, others follow, pushing the price in the same
    direction. Once a stock has achieved some momentum, it is likely to be
    sustained for a while as more traders join the band wagon. Spotting such
    trends increases the likelihood to making profit or – equally important -
    avoiding losses.

    Trends indicate possible future price direction. Rising prices mean you
    ought to buy to make money. Falling prices mean you ought to sell to
    prevent losses. If traders disagree over a price, you could wait until a
    clear trend emerges, then follow it.

    When trading, timing is critical. Learning to identify the critical moments
    as a trader - the moments when a price will soar or plummet to create an
    opportunity - all hinges on recognising upward and downward trends.




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                                                         3

Recognising Trend Types


     Upward Trends
     Stocks or CFD’s that are upward trending form
     a series of higher highs and higher lows. This
     is shown by the chart on the right



     Down Trends
     Stocks or CFD’s that are trending downward
     form a series of lower highs and lower lows. This
     can be shown graphically by the chart on the
     right.


     Sideways Trends
     Stocks or CFD’s that are sideways trending form
     a series of highs that are approximately the
     same price level, as shown on the right.



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                                                                  4

Recognising Trend Types cont…


     Long-term Trends (Weekly candlesticks)
     Long-term trends, sometimes called major trends, are
     those trends that have dominated a stock or CFD for the
     longest period. Notice the series of lower highs and
     lower lows as time progressed. Next, see if the
     Intermediate chart show the same trend.


     Intermediate Trends (Daily candlesticks)
     Intermediate trends, sometimes called minor trends,
     move more quickly than long-term trends because they
     do not last for so long. These trends are also affected by
     a company's fundamental factors. Trends tend to move
     in a stepped fashion, rarely straight up or down. Next,
     check the short-term trend for the same indication.

     Short-term Trends (Hourly or less candlesticks)
     Short-term trends, sometimes called micro trends, are
     more volatile than both long-term and intermediate
     trends because they cover the shortest period of time
     and are driven by the news of the day. Often, these
     short-term trends rapidly reverse.



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                                                                                      5

Support and Resistance

     Support and Resistance levels tell traders that the price of a stock or CFD is
     likely to stop moving, to turn around and to start moving in the opposite
     direction. Knowing when such a reversal should occur helps traders to buy and
     sell at the most profitable times.

     Support
       Support is a price level at which a
       currency pair tends to stop falling,
       turns around and starts climbing
       again. It usually occurs because of:
1.     Traders who missed an earlier
       buying opportunity decide it is a
       good time to invest.
2.     Traders who bought the stock or CFD
       decide it is a good time to add to
       their positions.
3.     Traders who sold the stock or CFD
       decide it is a good time to take
       profits




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                                                                                          6

Support and Resistance cont…


     Resistance
       Resistance is a price level at which a
       currency pair tends to stop rising,
       turns around and starts falling again.
       It usually occurs because of:
1.     Traders who missed an earlier selling
       opportunity decide it is a good time
       to trade.
2.     Traders who sold the stock or CFD
       decide it is a good time to add to
       their positions.
3.     Traders who bought the stock or CFD
       decide it is a good time to take
       profits.

     Support and Resistance levels are not precise. You would only frustrate yourself
     trying to pinpoint a price level, instead you would be much better off identifying
     a price range. If support or resistance get broken, they often become future
     support or resistance when retested.



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                                                      7

Types of Support and Resistance


    Horizontal Support and Resistance
    These form as prices rise and fall. They are
    illustrated as a horizontal line that highs
    and/or lows are reacting to. The EURGBP
    chart to the right shows




    Diagonal Support and Resistance
    These are harder to identify than horizontal
    trends, but are invaluable. As you look at the
    charts of the stocks and CFDs you will notice
    that they often form higher highs and higher
    lows (or lower highs and lower lows).
    Connecting these highs or lows provide
    diagonal trend lines of support and resistance.




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