For short and medium-term investors, chart analysis is a valuable decision-making aid. It provides clear buy and sell signals that can be derived solely from the chart of a security, i.e. from its price performance. In this article, you will learn about the considerations underlying chart analysis and how it helps you make smart investment decisions.
Dow theory: All information is already in the chart
The most important assumption on which chart analysis is based is that all information about a security is already contained in its chart in trade-exness.com/swap. This theory was first formulated by the US financial journalist Charles Dow (his name is also in "Dow Jones"). This approach is also plausible if one considers how quickly a chart reacts to rumors and news and how much it reflects the psychology of investors or their greed, fear or reluctance to buy. You can learn how much psychology is involved in chart analysis in our free webinar, "The Psychology of Charting."
The Dow Theory also states: trends can be clearly identified from the chart, a trend reversal as well. However, the prerequisite is that these developments are also accompanied by a corresponding trading volume. A few trades with a certain security cannot establish or break a trend.
From trend lines and resistances: How to identify trends
To identify trends, all you need first is a ruler with which you draw straight lines. The straight lines connect the various highs or lows of a chart. The result:
Trend lines: These are upward or downward straight lines through the chart lows or highs. They indicate whether the price continues to rise or fall.
Trend channels: These are two parallel trend lines that mark the price lower limits on the one hand and the price upper limits on the other.
Clear recommendations for action can already be derived from trend lines, trend channels and resistances. Whenever the price breaks through a trend channel or upper resistance to the upside, this is a buy signal. If, on the other hand, it breaks through the trend line, trend channel or lower resistance to the downside, this is a sell signal. You can learn more about these basics of chart analysis in our free webinar "Technical Chart Analysis".
Formations, moving averages and oscillators: Recognizing trends early on If you work with trend lines, trend channels and resistances alone, you will catch a trend, but only when it is in full swing and not earlier than other investors. For this reason, chart analysts use other indicators to detect trends early:
Sometimes you can almost paint a picture from a chart by connecting the various price swings with straight lines. With a little imagination, flags, pennants, wedges, ascending and descending triangles or shoulder-head-shoulder formations then appear. These can also be used to draw conclusions about future price trends. The free webinar "Trading Strategies with Classic Chart Patterns" shows you how to interpret such formations and use them for your trading strategy.