Estimated Duration: 1 Day

Notes: You don't need to know how to read the charts, you only need to know the basics

Understanding Technical Analysis

Technical Analysis is the art of reading the technical patterns in stock-related charts to determine future direction. Technical Analysis is indeed an art. It takes years of experience to perfect, so don't expect to learn it overnight, but you should be able to understand how to use data derrived from technical analysis after reading this tutorial. In addition, it requires adherence to a list of guidelines in order to reap the rewards from the study. In the following lesson you will learn the basic concepts behind Technical Analysis and you will also learn how to incorporate the understanding which you should come away with into our trading strategies.

Technical Analysis has 2 main components that need to be recognized before any futher discussion is made. They are:

Support

Resistance

These 2 components are essentially what are derived from the study of the afforementioned charts. By reading the detailed charts on the NASDAQ, for example, a studied technical analyst should be able to determine where current and future support and resistance levels exist.

With an understanding of current support and resistance levels, stock market traders should be able to make accurate trading decisions, which, in turn, should allow them to recognize profits from their trading practice.

The Goal of Technical Analysis to make it easier for you to make money.

In doing so, we need to understand a few things:

Technical Analysis is not an exact science.

Buy signals exist at specific times only

Sell signals exist at specific times only.

When no trading signals exist we should not trade.

Because Technical Analysis is not an exact science, we must always know what to do if a support or a resistance level breaks. But first, let's understand what to do when a support or a resistance level is tested:

When a support level is tested we should always assume that the support level will hold, and we should also assume that the Market (assuming we're watching the Market) will increase to the next resistance level thereafter as well. That means when support levels are tested we should consider long positions with the understanding that the Market will rise.

When a resistance level is tested

When a resistance level is tested we should always assume that the resistance level will hold, and we should also assume that the Market (assuming we're watching the market) will decline to the next support level thereafter as well. That means when resistance levels are tested we should consider short positions with the understanding that the Market will decline.

These are the 2 easiest concepts to understand: Buy at support, target resistance; Short at resistance, target support.

However, there are 2 other triggers for long and short positions as follows:

When levels of resistance begin to break higher we should understand that the Market (assuming we're watching the Market) could increase from that break of resistance to the next level of resistance. With this understanding we should initiate a long position just as resistance levels break higher with a target of the next level of resistance. By the way, when resistance levels break higher, they also become support levels (remember this when the term 'all inflections' comes up in later studies).

When levels of support begin to break lower we should understand that the Market (assuming we're watching the Market) could decline from that break of support to the next level of support . With this understanding we should initiate a short position just as support levels break lower with a target of the next level of support . By the way, when support levels break lower, they also become resistance levels (remember this when the term 'all inflections' comes up in later studies).

Therefore trades are triggered based on support and resistance levels as follows:

Long triggers occur upon tests of support or upon breaks above stated resistance levels.

Short Triggers occur upon tests of resistance or upon breaks below stated support levels.

Now we know when buy and sell triggers are triggered. But when do we take profits in these positions?

The following rules should be applied to all long and short positions:

The target for long positions should always be the next level of resistance above the trading trigger

The target for short positions should always be the next level of support under the trading trigger

When targets are reached profits should be taken from the positions in question, without question.

An astute reader of this section will understand that we may have long and a short position very close together.

Here's an example: If the NASDAQ had a support level at 2000 and the Market was trading near 2000, a long signal would occur. However, if 2000 began to break slightly, a short position would be triggered. In this circumstance we may have a long and a short position at the same time.

This is called balance, as you learned in the previous section, and it is incorporated into this strategy because Technical Analysis is not an exact science. It also requires the incorporation of the 5-point rule, which you also learned about in the previous section.

In the lessons that follow you will learn exactly how to use these tools to make money from the technical analysis, and of course the trading Parameters that are derived from said technical analysis.

We will always tell you where support levels exist and where resistance levels exist for Day Trades, Swing Trades, and Longer Term Trades in advance of every trading session. We also will give you more than 1 level of support and resistance so in case initial support or resistance levels break, clear targets are in place thereafter.

Here's an example of the format you can expect:

Initial Swing Trading Parameters exist between 1970 - 2015

If 1970 breaks lower expect 1900

If 2015 breaks higher expect 2100

Otherwise expect 1970 - 2015 to hold

Technical Analysis is the basis for our historical accuracy. The details behind how these data points were derived do not need to be understood from this tutorial. What should be grasped is an understanding of how to use them to make money with our system. You should walk away from this section knowing what to do when support levels are tested, what to do if support levels are broken, what to do when resistance levels are tested, and what to do when resistance levels are broken. If you do not know this, please re-read this tutorial until you understand.