You may have looked at stock prices in the bottom bar on your TV screen, or if you trade currencies in the forex market, you may have looked at exchange rates going up and down on your computer screen. Prices are moving and you wonder if their behavior means something. Could the market be sending signals that you can use to make your decisions? How, exactly, are you going to study the market?
For anyone who makes his money from the market, he must have a way to study it. Mostly there are two main approaches: basic and technical. Fundamental analysis focuses on value but this will be a topic for another article. Technical analysis, on the other hand, focuses on price and its movements.
Price action has the following characteristics that traders should consider to help them make their decisions:
1. Direction - meaning the continuation of movement in one direction,
2. Volatility – the size of its fluctuations on a periodic basis,
3. Momentum – the rate of acceleration and deceleration,
4. Cycle - the tendency to move in cyclical patterns, particularly in the futures market,
5. Market strength - the number of deals that support its movements
6. Support and Resistance - the tendency to rise or fall to a certain level and then repeatedly reverse.
Analysts who use the technical approach to analyzing the markets, have developed their own set of indicators that are different from those used in fundamental analysis. These indicators are used to measure price movement. Fortunately, day traders like you do not need to invent their own tools. All you have to do is learn how it works and how to use it.