A Linear Regression Line: A Linear Regression Line is a straight line that best fits the prices between a starting price point and an ending price point. A "best fit" means that a line is constructed where there is the least amount of space between the price points and the actual Linear Regression Line as it runs through the middle of the trend.
The Linear Regression Line is regarded as the fair value price for the future, stock, or forex currency pair. When prices deviate above or below, traders expect prices to go back towards the Linear Regression Line. As a consequence, when prices are below the Linear Regression Line, this could be viewed as a buying opportunity, and when prices are above the Linear Regression Line, a trader might sell.
Fibonacci: Fibonacci is a special ratio that can be used to describe the proportions of everything from nature's smallest building blocks, such as atoms, to the most advanced patterns in the universe, such as unimaginably large celestial bodies. Nature relies on this innate proportion to maintain balance, but the financial markets also seem to conform to this 'golden ratio'.
When used in technical analysis, the golden ratio is typically translated into three percentages: 38.2%, 50% and 61.8%. However, more multiples can be used when needed, such as 23.6%, 161.8%, 423% and so on.
Fibonacci retracements use horizontal lines to indicate areas of support or resistance. They are calculated by first locating the high and low of the chart. Then five lines are drawn: the first at 100% (the high on the chart), the second at 61.8%, the third at 50%, the fourth at 38.2%, and the last one at 0% (the low on the chart). Often two more lines are included at 25% and 75%. After a significant price movement up or down, the new support and resistance levels are often at or near these lines.
Moving Average: Analysts plot an average of the price of a financial market on a chart to smooth the data – this average could be the day’s average, or average of day’s high, day’s low, or day’s opening or closing price and is therefore called a moving average. Technical chartists observe the moving average (MA) over a period of time, which can be as low as 9 days or as high as 500 days. One of the several theories is then applied to the MA curves on the chart to predict future price trends – for example, if a recent short-term (say, 15 days) MA crosses the long-term (say, 50 days) MA then it spells an upward trend, but if it’s the other way round then it’s a bearish signal. Analysts also use the moving averages as support and resistance areas.
Japanese Candlesticks: The Japanese have been using candlesticks since the 17th century to analyze rice prices. Candlesticks contain the same data as a normal bar chart but highlight the relationship between opening and closing prices. The narrow stick represents the range of prices traded during the period (high to low) while the broad mid-section represents the opening and closing prices for the period. If the close is higher than the open - the candlestick mid-section is hollow or shaded blue/green. If the open is higher than the close - the candlestick mid-section is filled in or shaded red. The advantage of candlesticks is the ability to highlight trend weakness and reversal signals that may not be apparent on a normal bar chart using a series of patterns.
Chart Patterns: One of the major premises of technical analysis is that history repeats itself. The recurrence of identifiable patterns and formations that have preceded important movements of the market in the past provide important clues as to the probable direction of price movement in the future. Chart patterns are formations that appear on the charts which provide you with forecasting tools of impending price movement. Some patterns are more reliable than others for price forecasting but none of the chart patterns are infallible. They have a high probability of success but are not guaranteed to work all of the time. Technicians must always be on the alert for chart signs that prove their analysis to be incorrect. After trend lines, support and resistance lines have been drawn on a chart, one of the most important and most difficult decisions you will have to make is determining the timing of entering and exiting the market as well as determining when a major top in a rising market or a major bottom in a declining market has occurred.
Reversal & Continuation Pattern: Patterns are made up of two types, the reversal pattern and the continuation pattern. Reversal patterns indicate that an important reversal in trend is taking place. Some of the most common reversal patterns include the head and shoulders top and bottom, double tops and bottoms, triple tops and bottoms, key reversals, island reversals, rounding bottoms and tops, "V" formations or spike bottoms and tops.
The breaking of a major trendline signals a change in trend, not necessarily a trend reversal. The breaking of an uptrend line might signal the beginning of a sideways trend which may later form either a reversal or continuation pattern. The larger the pattern the greater is the price movement potential. The height of the pattern measures the volatility, the width of the pattern measures the amount of time required to build and complete the pattern. The greater the height of the pattern ( the volatility ) and the longer it takes to build - the more important the pattern becomes and the greater the potential for the ensuing price move.
Topping patterns are usually shorter in duration and more volatile than bottoms. Price swings at major tops are wider and more violent. Tops usually take less time to form than bottoms. For this reason it is usually less risky to identify and trade bottoms than tops however the time spent in establishing a top is generally shorter than the time spent establishing a market bottom.
Volume should generally increase in the direction of the market trend and is an important confirming factor in the completion of all price patterns. The completion of each pattern should be accompanied by a noticeable increase in volume, particularly at market bottoms. Market tops tend to fall on their own weight once a trend reversal is underway. At a market bottom, if the volume pattern does not show a significant increase following the upside breakout, the entire price pattern should be questioned.
The second type of chart pattern is the continuation pattern. Continuation patterns suggest that market is only pausing for a while before the prevailing trend will resume. Another difference between reversal and continuation patterns is their time duration. Reversal patterns usually take much longer to form on the chart and represent major changes in trend. Continuation patterns, on the other hand, are usually shorter-term in duration and are often classified as intermediate term chart patterns. Some of the most common continuation patterns include; flags, ascending and descending triangles, symmetrical triangles, pennants, gaps, and rectangles.