When a stock's price is rising, analysts argue, the pattern is almost always followed by a reversal. Well, think of the behavior this pattern portrays. Some owners cautiously sell off a bit, but others may hold on as the first shoulder is formed.
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The head represents yet another burst of support. But though the stock reaches higher, the trading has less volume. Conviction is limited and the stock drops again. Two such rises and falls might be thought inconsequential, but by the time the stock rises yet again, worry becomes palpable. The faith in the stock cannot be supported. The uncertainty shown in this pattern might be affected by a company's fortunes, or the state of the economy, but according to the theory, interpreting the pattern requires no knowledge of any of this.
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And the pattern has the same meanings for any stock. The theory of analysis then goes even further: rules not only predict broad patterns, they also provide guidance about the extent of a rise or fall. For analysts, charts almost seem to follow aesthetic principles. For example, analysts suggest that in the ''head and shoulders'' pattern, the second shoulder will tend to mirror the first, and the rise of the ''head'' will tend to be matched by the extent of the fall after the stock drops below the ''neckline.
But they reveal a determination to find order in the midst of seeming chaos.
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Critics argue that these sorts of rules have so many exceptions they can hardly be relied upon; that patterns are best seen in retrospect, when they are no longer helpful; that analysts' ideas can becomeself-fulfilling prophecies. And indeed, while investment banks have technical analysts on staff, strict analysis is generally tempered by considerations of other factors. But the effort to find pictorial order seems almost universal.
The Japanese, for example, have used a year-old method of charting known as ''candlesticks,'' made familiar in the West after the analyst Steve Nison examined them in books like ''Beyond Candlesticks: New Japanese Charting Techniques Revealed'' , Wiley. Instead of just marking the range of a day's trading with a single vertical line, as on Western charts, the Japanese create candlesticks: small rectangles whose ends represent the stock's opening and closing prices.
If the price fell during the day, the candlestick is darkened and is called a ''long black body'' ; if the price rose, it is left unshaded and is called a ''long white body''. In candlestick charts, technical analysis becomes almost poetic, with patterns named ''morning star,'' ''hanging man'' and ''falling window. But if charts reveal hidden patterns, some believe there are even deeper esoteric patterns guiding them.
In ''The Psychology of Technical Analysis'' , Irwin , which The Financial Times of London said would ''entertain and intrigue keen investors,'' Tony Plummer, a British trader, argues that the ebb and flow of human activity actually follow a pattern that resembles the curve of the Nautilus shell. That curve, which expands outward without changing its shape, recurs throughout the natural world in various organic forms pine cones, sunflowers, tree leaves. Cart items. Toggle navigation.
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Trading analysis Knowing what to trade, when to trade and when not to trade depends on a thorough assessment of the markets. Start trading now. For example, different types of charts such as bar charts and candlestick charts, or the analysis of patterns generated by historic price movements, or the use of mathematical formulas known as indicators paint a clearer picture of the sometimes random looking price swings.
For currencies an analyst would look at the economic health of a country by monitoring the release of economy indicators, the rhetoric and actions of central banks or social and political events. While fundamental analysis is taking a long-term view on a particular market to establish the correct valuation, technical analysis can be used to determine the right trade timing. Combining both methods gives you valuable insight into what to trade, when to trade and when to do nothing at all and remain on the side-lines. The basic principles of technical analysis Dow Theory, based on principles outlined by Charles Dow, the first editor of the Wall Street Journal, serves as the basis for technical analysis.
The theory is founded on three central tenets: Firstly, price movements are of primary importance. Primary technical analysis tools Technical analysis focuses on the assessment of prices and volume to predict futures movements.