Profiting with Technical Analysis Using its two Basic Tools
Our Objectives: Familiarize you with two basic tools of Technical Analysis. Build a Trading Strategy based on these two tools. Test our trading strategy on historical data. Evaluate the results.
Basic Tool – I Understanding Support & Resistance Level
Support Level: It is a price level at which sufficient demand for a stock appears to hold a downtrend temporarily at least, and possibly reverse it. At this level buying force is greater than selling. Resistance Level: It is a price level at which sufficient supply of a stock is forthcoming to stop and possibly turn back its uptrend. At this level selling force is greater than buying.
Basic Tool – II Understanding Trend Identification
To identify a trend, spot the peaks and troughs of prices. Uptrend is identified with higher peaks and higher troughs. Downtrend is one with lower peaks and lower troughs. Range bound trend has overlapping sections.
II. Build a Trading Strategy using these two tools.
When to Buy? We’ll buy if prices are in Uptrend, AND When price crosses the resistance level. When to cover our position? We’ll cover our buy position, when price falls below the last trough, which indicates a trend reversal. Where is our Stop Loss? We’ll place our initial stop loss just below the previous trough to our entry.
III.Lets test our trading strategy on historical data!