Terminology in Technical Analysis

[00:00:00.07] - Speaker 1
In this lesson, we are going to analyze some of the main terms used in technical analysis. This terminology will be used throughout the course and it is important to understand its meaning right away. Let's begin with the first term, bulls or buyers. They represent market participants who are interested in buying an asset and their action drives the price higher. We also have the bears or sellers.

[00:00:24.17] - Speaker 1
They represent market participants who are interested in in selling an asset and their action pushes the price down. Trends this is a very important concept that will have its own dedicated section. Trend represents the movement or direction of the price of an asset or market. They represent the price action of a security. There are different types of trends, but the main ones are the bullish trend or uptrend.

[00:00:49.26] - Speaker 1
An uptrend is characterized by a series of higher highs and and higher lows on a price chart. This pattern indicates that each successive high, also defined as peak and lows in the price, is higher than the previous one. The highs and lows grow and it is possible to draw a line that follows its movement there. It is also the bearish trend or downtrend. The downtrend represents a downward movement of a security or market which is characterized by candles that record points of decreasing highs and lows.

[00:01:21.17] - Speaker 1
Prices do not only move in one direction, up or down. We often come across the horizontal trend or sideways trend where the market tends to fluctuate in a price range. We are in the presence of a horizontal trend when there is indecision between buyers and sellers and there is no real and clear market direction. Another important concept is the trend line. It is a line which acts as support or resistance and which determines the development of the trend.

[00:01:50.01] - Speaker 1
During a trend, it is possible to connect the maximum and minimum points with the trend line. We will show you later how to do this. In this example, we see how it is possible to draw a trend line on an uptrend on the left. On the right, we see instead how it is possible to do the same in a downtrend. A word we will always come across when we talk about technical analysis is indicators.

[00:02:14.05] - Speaker 1
A technical indicator is a mathematical calculation based on historical price and volume information that aims to predict the direction of the price. We have dedicated an entire section to the different indicators we use. The next two terms are perhaps the most important in understanding how the market works and how to use these concepts to your advantage. Let's talk about support and resistance as tools to analyze the supply and demand of the stock or market. Support and resistance are fundamental concepts in technical analysis that help traders and analysts identify key Price levels on a chart where an asset's price tends to experience a pause or reversal in its trend.

[00:02:58.04] - Speaker 1
Support is a price level where there is historically a concentration of demand for an asset. It acts as a price floor, meaning that when the asset's price approaches or reaches this level, it tends to find buying interest preventing further decline. In other words, support is the point at which buyers are willing to enter the market and potentially drive the price higher. It is expected that demand will be strong enough to support the price from falling below that level. Support levels are usually identified by observing price chart patterns such as previous lows, trend lines, or areas where the price has historically stalled and reversed its direction.

[00:03:37.25] - Speaker 1
When an asset's price breaks below a significant support level, it is often interpreted as a bearish signal, suggesting that the downtrend may continue or strengthen Resistance. On the other hand, is a price level where there is historically a concentration of supply or selling interest for an asset. It acts as a price ceiling, meaning that when the asset's price approaches or reaches this level, it tends to encounter selling pressure, preventing further upward movement. In other words, resistance is the point at which sellers may become more active, potentially pushing the price lower. It is expected that supply will be sufficient to resist the price from moving above that level.

[00:04:20.03] - Speaker 1
Similar to support, resistance levels are identified by analyzing price chart patterns such as previous highs, trend lines, or areas where the price has historically stalled and reversed its direction. When an asset's price breaks above a significant resistance level, it is often interpreted as a bullish signal, suggesting that the uptrend may continue or strengthen. Traders and analysts use support and resistance levels to make decisions about their trading strategies. For example, a trader may look to buy an asset near a strong support level with the expectation of a potential price bounce, while they may consider selling or shorting the asset near a prominent resistance level with the anticipation of a potential price pullback. It's important to note that support and resistance levels are not fixed and they can shift over time as market conditions change.

[00:05:14.04] - Speaker 1
Now, let's look at the concept of breakout. We then have the breakout, which refers to a significant price movement of an asset that moves beyond a well established support or resistance level. It is a pivotal event that indicates the potential end of a trading range or consolidation phase and the beginning of a new trend. Breakouts can occur in both bullish and bearish directions. A bullish breakout occurs when an asset's price moves above a key resistance level, signaling that buyers have overwhelmed sellers and the price is likely to continue rising.

[00:05:49.05] - Speaker 1
This breakout suggests a potential upward trend and may attract more buying interest as traders seek to participate in the anticipated price appreciation. A bearish breakout occurs when an asset's price drops below a significant support level, signaling that sellers have gained the upper hand and the price is likely to continue declining. This breakout suggests a potential downward trend and may lead to increased selling pressure as traders seek to profit from the anticipated price decline. To confirm a breakout, traders often look for certain technical indicators, such as increased trading volume, to validate the move. Higher trading volume during a breakout suggests greater market participation, making the breakout more reliable.

[00:06:36.16] - Speaker 1
The last term is chart patterns. Chart patterns are distinctive formations created by the movements of security prices on a chart and are foundational elements in technical analysis. These patterns are used by traders and analysts to identify trends and predict future price movements. They are characterized by lines connecting closing prices and highs and lows. In the next lessons, we will put everything together.