The methods used to analyze securities and make trading decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the macro events that are happening in the world. Technical analysis takes a completely different approach and only interested in the price movements in the market.
The technical analysis simply just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.
In the next tutorial, we’ll introduce you to the subject of technical analysis. It’s a broad topic, so we’ll just cover the basics, providing you with the foundation you’ll need to understand more advanced concepts down the road.
Technical Analysis of the concepts of support and resistance are two of the most highly discussed attributes of technical analysis. We will attempt to explain these concepts by focusing on the basics of what traders need to know. You’ll learn that these terms are used by traders to refer to price levels on charts that tend to act as barriers from preventing the price of an asset from getting pushed in a certain direction. Most experienced traders will be able to tell many stories about how certain price levels tend to prevent traders from pushing the price of an underlying asset in a certain direction.
As you can see from the chart below, resistance levels are also regarded as a ceiling because these price levels prevent the market from moving prices upward. On the other side of the coin, we have price levels that are known as support. And they refer to prices on a chart that tend to act as a floor by preventing the price of an asset from being pushed downward. As you can see from the chart, the ability to identify a level of support can also coincide with a good buying opportunity because this is generally the area where market participants see good value and start to push prices higher again.