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Classical Chart Analysis
(Chapter-3)
There are various kinds of charts which can be analysed and studied in the field of Technical Analysis. The two most important types are Bar charts and Candlestick Charts.
Bar charts try to show the price movements of stock during that day in terms of "bars".
Theopening price of a bar or a candlestick chart reflects an “amateur’s opinion” The closing prices show the actions of the professional traders. After watching the prices for the day, they try to act. If prices closed higher than they opened, then market professionals were probably more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs.
Efficient Market Theory:
Efficient Market Theory is an academic notion. It says that anyone can outperform the markets. It says that the price in the market incorporates all available information at that given point of time. All factors which affect the demand and the supply and may affect the price are discounted by the price.
An analyst should try and depict the repetitive patterns of crowd behaviour and try to act on them.
Support and Resistance Levels
Support is a price level where buying is strong enough which can reverse its downtrend.
Resistance is a price level where selling is strong enough which can reverse or halt its uptrend.
The author says that support and resistance levels exist because people have memories.
Our memories prompt us to buy and sell at certain levels. Buying and selling by crowds of traders creates these support and resistance. If traders remember that prices have recently stopped falling and turned up from a certain level, they are likely to buy when prices approach that level again. If traders remember that an uptrend has recently reversed after rising to a certain peak, they tend to sell and go short when prices approach that level again.
The longer a support or resistance area - its length of time to form or the number of hits prices made at those levels - the stronger it is. Support and resistance, like good wine, becomes better with age.
As support and resistance levels grow old, they gradually become weaker.
High volume in a support or resistance area shows active involvement by traders. It is a sign of strong emotional commitment. Low volume shows that traders have little interest in transacting at that level. It is a sign of weak support or resistance.
The author mentions some crisp trading rules with respect to support and resistance.
1.When riding the broader trend, tighten your stop loss, if the prices approach important support or resistance.
2.Longer term supports and resistances on weekly charts are more important than short term supports and resistances.
3.Stop Loss orders should be mostly put on important support and resistance.
4.Never place stop loss orders on exact round numbers.
