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Trading strategies: The most important concept in technical analysis

by , 18 April 2014

Technical analysis is one facet of investing that can lead to confusion. Some traders swear by it. Other traders view it as a lot of old hog wash. So what is technical analysis? And what is the most important aspect of technical analysis that you can apply to your trading? Let's take a closer look…

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What is technical analysis?

Technical analysis has its uses, Brian Hunt in S&A Digest explains. There are a few significant ideas that can be a valuable addition to your trading arsenal.

Technical analysis, or chart reading, is the study of past market prices and trading volume to produce signals to anticipate the market’s next move.

Regardless of whether you think technical analysis has its uses in predicting the stock market’s next move, it does have its applications in your trading.

Technical analysis can help you gauge where an asset you’re interested in is relative to the next big trend. And it allows you to see what fundamentals surrounding that asset are doing to its price.

There’s one concept in technical analysis that most traders will find a very useful tool. And that is trends.

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What is a trend?

A trend is a series of price movements in one general direction. A trend tends to be either upwards or downwards.

The best way to look at this is to look at a chart. Let’s have a look at a chart showing an uptrend…

The above chart shows you the trend in the price of gold from 2001 to 2009.

You can see that the gold price shows a series of higher highs and higher lows. Each rally in the gold price takes the price up higher than the previous high. And each fall in the gold price ends up a bit higher than the previous fall.

That’s an uptrend.

A downtrend is the opposite of an uptrend.

The key thing about trends is you shouldn’t try to fight them. You should trade with the trend. Fighting the trend usually results in losing trades.

So there you have it, the most important concept in technical analysis.

Trading strategies: The most important concept in technical analysis
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