Lesson

Technical analysis is a method used to determine the value of equity securities by examining historical price and volume data to identify patterns and trends. This approach is based on the belief that past market behavior can help predict future price movements. Technical analysts use various tools and techniques, such as chart patterns, indicators, and oscillators, to analyze the market and make investment decisions.

Practice Question #1

Which of the following is NOT a component of technical analysis?

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Terms

Technical analysis:
A method of evaluating securities by analyzing historical price and volume data to identify patterns and trends.
Chart patterns:
Visual representations of price movements that can help predict future price movements.
Support:
A price level at which a security tends to stop falling and start rising.
Resistance:
A price level at which a security tends to stop rising and start falling.
Volume:
The number of shares or contracts traded in a security or market during a given period.

Practice Question #2

What is the primary purpose of using moving averages in technical analysis?

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Do Not Confuse With

Fundamental analysis:
A method of evaluating securities by analyzing financial statements, economic factors, and industry trends to determine a company's intrinsic value.

Practice Question #3

Which of the following is a key difference between technical analysis and fundamental analysis?

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Historical Example

In the early 1900s, a trader named W.D. Gann developed a series of technical analysis tools, such as the Gann angles and the Gann square, which are still used today. Gann's methods were based on geometry, astronomy, and ancient mathematics, and he claimed to have a success rate of over 85% in predicting market movements.

Practice Question #4

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Real-World Example

A technical analyst might notice that a stock's price has been consistently bouncing off a support level and rising to a resistance level. They may decide to buy the stock when it approaches the support level, anticipating the price will rise again, and sell when it reaches the resistance level, expecting the price to fall.

Practice Question #5

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Rhyme

Technical analysis, a method quite fine, uses patterns and trends to predict the next line. With charts and indicators, we analyze the scene, to make investment decisions and keep our portfolios green.

Practice Question #6

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More Detail

- *Support*: Support is a price level at which a stock or the market as a whole tends to stop falling and may start to rebound. It represents a level where buying interest is strong enough to overcome selling pressure. - *Resistance*: Resistance is a price level at which a stock or the market as a whole tends to stop rising and may start to decline. It represents a level where selling interest is strong enough to overcome buying pressure.

Practice Question #7

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More Detail Examples

- *Support example*: If a stock consistently bounces back after dropping to $50, this level can be considered support. - *Resistance example*: If a stock consistently fails to rise above $70, this level can be considered resistance.

Pitfalls to Remember

- *Support and resistance pitfalls*:
Past performance does not guarantee future results, so these levels may not continue to hold. Support and resistance levels can be broken.

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