Guide to Pips and Spread in Online Forex Trading

The first thing you must understand in forex trading is the spread and the pips. Each currency is traded against another one.

This is called a currency pair. An example for a popular pair with high daily trading volume is EUR/USD.

The EUR/USD exchange rate is one of the most traded contracts in the world. In total the forex market trades around $2 trillion Dollars every day but there are only a few currency pairs that are traded with high volume.

When you want to trade this pair then you need to know the spread and the value of a pip. The spread is the difference of the buy and sell price. For example you want to buy the Euro against the Dollar. The current price that your trading platform displays is 1.5000 x 1.5003. That means there are 3 pips spread.

You can buy the Euro at 1.5003 but sell it only at 1.5000 right now. The price of the currency pair is constantly changing. The spread can also change. The spread will get bigger with more market activity for example. Your broker is the one who earns the spread. He widens the spread when he has more risk and reduces the spread when the risk for the broker becomes smaller.

You have no other choice than paying the spread. There are brokers that offer zero spread trading but that is often an illusion. The broker makes the pricing and he can give you any price he wants. The price you see may have no spread but you can be sure that you pay a price for it some way.

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6) Forex Technical Analysis Basics

Technical analysis uses information from the past in order to predict movements of the forex market. The latter represent any changes in the prices of currencies as well as volumes and open interests.
Technical analysis applies several instruments in its execution. Some of them are as follows:
• Forex Technical analysis charts
Different kinds of charts that are applied in technical analysis tend to picture changes in the prices of currencies that occur during a specific time period.
• Forex Technical analysis indicators
These indicators are generally extracted from various mathematical processing of averaging and other traits coming from movements in currency prices.

The tools that are applied when making a technical analysis can be applied to every sector of the forex market. Additionally, they are applicable to every currency as well as every time period.
By applying a technical analysis, forex traders can easily calculate the figures that matter to them, moreover it has been greatly facilitated by the development and progress in technical services, which have been accompanied by reasonable prices. Additionally, these technical services can be used by all forex market traders no matter what their trade plans are or the strategies they have chosen to apply for the completion of these plans.
To be successful at forex trading you need two main things - the knowledge and the right trading plaftorm.

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4. Low capital start, with $250 as a minimum account size.
5. Liquidity and 24/5 availability are the characteristic factors of the Forex market compared with other financial markets.
6. ForexGen offers a free trial Forex demo account that allows you to test your skills and practice without risking real money

Forex Technical Analysis Indicators Based on Moving Averages

In this article we will examine some of the mathematical tools based on moving average applied in technical analysis.
Envelope
The envelope model includes plotting two bands around a short term closing price (typically a 5-day one) based moving average, by adding and subtracting a specific percentage rate. For foreign currencies it is usually recommended that this percentage is around 2%.
Forex Technical analysis interpret as a buying signal the intersection of the underlying chart price from above down by the envelope chart.
Bollinger Bands
Bollinger bands represent another mathematical tool in technical analysis. Bollinger bands consist of a middle simple moving average (typically a 20-day one) band and two bands plotted at two standard deviations above and below the middle band. Those standard deviations are mathematical formulas which measure volatility and show how the currency price can be extended around its "true value".

The bands resemble an envelope model that is expanding and contracting. The moments of considerable contractions are viewed as a signal that the volatility is low. On the other hand, when the bands are far apart, this is viewed as a signal of high volatility in price. Additionally, the sequence of two top formations, one being outside the band and the other inside it, is also considered a signal. Forex traders tend to sell a position when the signal appears above the band. On the other hand, forex traders buy a position when it appears below the band.
Median Price
An additional mathematical tool used in technical analysis is the median price indicator chart. The arithmetic averages of the high and low for the prices prevalent in the trade period are used in order to diagram the median price chart. In order to get an idea of the degree and direction of the close prices deviation from the average prices during the period under consideration, one should examine the superposition of the indicator chart and the underlying price chart.
Average True Range
In order to get information on the degree of the volatility Technical analysis forex traders should refer to the Average True Range indicator, which is also known just as ATR. A reversal can be expected if the values of the volatility are of a minimal or maximal value, meaning located in the extremes.
Moving Average Convergence Divergence (MACD)
Another application of the moving averages is viewed in the Convergence-Divergence of Moving Averages oscillator, also known as MACD. It is constructed on a moving average that has been exponentially smoothed.
The MACD combines two charts plotted against a zero line. The first chart is the difference of two EMA, where the first one should be short-term and the second one long-term. The second chart is the "shortest" EMA.
The zero line shows the number of times when the values of the moving averages are equal. A move above zero line would be interpreted by Technical analysis forex traders as a buy sign, while a cross below the zero line could be interpreted as a sell signal.
Additionally, when the short-term average line crosses the long-term average line, forex traders receive further trading signals. For example, they should buy a position when the intersection is of an upward direction. On the other hand, they should sell a position when the crossover is of a downward direction.
To be successful at Technical analysis forex trading you need two main things - the knowledge and the right trading platform.

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Forex Indicators and drawing tools

This is a subject we are quite passionate about at PFX. Charting is the core of the analysis done by a technician. Reading and analyzing charts is something that you get better at with time and experience. But if it's not harnessed correctly, it can also become almost hypnotizing and lead to “ticker-itus,” a dangerous condition that borders on obsession as a trader spends more and more time staring at charts and indicators and less time making trading decisions and controlling risk.
I think the reason why it is so easy to abuse chart analysis is because it is highly subjective. Show the same chart to two technicians (which is fun to try), and they are likely to come to similar conclusions but possibly through very different means and details. And in some cases, they may not come to the same conclusion at all.
We have assumed for this section that you understand that a chart plots a currency pair’s price movements over time. On most charts, time is plotted from left to right on the X, or horizontal, axis and price is plotted from bottom to top on the Y, or vertical, axis. While most charts are built on this basic setup, each type of chart—from line charts to candlestick charts—illustrates price movement differently. Each chart type has specific advantages and disadvantages, and you will need to find the chart type that works best for you as a trader. Here a few things you need to know.

Time is important
Each data point on the chart, whether it is shown as a line, candle, bar or box (all discussed later in this lesson) represents price at or within a specific point or interval in time. Very short-term traders may have their charting intervals set for 30-minute increments or shorter, while longer-term traders will often use daily, or 24-hour, increments. You can see in the image below of two charts both spanning the same length of time. The shorter-term (4-hour) chart on the right shows a lot more detail than the daily chart on the left.

What's your type?
There are different ways to illustrate each interval of time on a chart. It really depends on what kind of trader you are and personal preference.
Here are the most common types of charts and samples below:
Candlestick charts: Most forex traders use candlestick charts in their trading and analysis. Candlesticks show the open, high, low and close prices for each trading period. The body, or rectangular portion, of the candlestick shows the open and close prices, and the wick, or shadows, of the candlestick shows the high and low prices. We use candlestick charts for our own analysis and on the PFX site.
Line charts: Some traders use line charts—which only shows one price, usually the close price, for each period. Line charts are certainly easy to read, but they leave out a lot of detail.
Bar charts: Bar charsts are similar to candlestick charts, but many traders feel they are more difficult to read. A bar chart shows the open and closing prices as horizontal tick marks on a vertical bar that shows the period’s total trading range.
Exotic styles: Some traders have come up with other, more unusual, ways to chart price movement—typically to accommodate a specific style of analysis as well as to show price movement. For example, the chart below is a Renko chart, which shows price movement but does not progress linearly through time

Many traders will layer drawn trend lines, technical studies and moving averages on top of their price charts. Most dealer charting applications include many of these studies, indicators, and line tools. At PFX, we use trend lines and Fibonacci analysis frequently—which you will learn more about later in the course.

Technical studies can be useful, but they can also be abused by traders. The biggest danger traders face when using charting tools is “analysis paralysis.” At some point, you have to make a decision about your trade, and simply adding more analytical tools that may just end up muddying the water does not necessarily increase your probability of success. “Indicator piling,” or adding several indicators to a single chart, will probably only obscure your real trading opportunities.
If your charts start to look like the one on the left rather than the one at the right, it may be time for you to reevaluate how much time you are spending adding indicators.

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Beginners Guide to Bigger Profits

This article gives you a complete guide to currency technical analysis. We explain why it works, and show you how you can use technical analysis in the currency markets
, to make huge profits.
Many traders don’t fully understand the advantages of technical analysis - and scoff at it, saying that it can’t work.

We will however, show you how to use currency technical analysis the right way, to make big profits – so let’s get started.
What is Currency Technical Analysis?
It is simply defined as the study of price action through the use of charts - for the purpose of identifying price trends. It’s not a science, as many chartists claim - it’s an art, and it works! Why? Because technical analysis reflects human psychology. What about the supply and demand fundamentals, you may ask - well it takes them into account too.

Currency technical analysis uses the following equation:
Market Perception (trader psychology) + Fundamentals = Price Action
All currency technical analysis does, is postulate that all fundamentals are quickly reflected in price action (and in the 21st century with our advanced communications this is truer than ever) - so it simply concentrates on price action. It really is that simple!
Price action reflects all the fundamentals, and more importantly, how the participants perceive them.

Traders who study fundamentals claim that you can’t use technical analysis - because you need to know and study the fundamentals, to know where prices are going - this is simply not true! Some of the largest price moves in history, have occurred with little or no change in the fundamentals.

It’s a fact that markets are generally most bullish at market tops and most bearish at market bottoms - and these markets occurred with little or no change in the fundamentals. Human psychology was at work here - and currency technical analysis studies this, as well as fundamentals.
Learn to use technical analysis, and you will see the reality as it is - rather than listening to the opinions of others. Keep in mind that 90% of traders lose money - because they’re influenced by greed and fear created by the news services.
Charts allow you to see the reality - and that’s a huge advantage
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Explaining The Technical Analysis

The study of a security's price action for the purpose of forecasting profitable price trends and movement is known as Technical Analysis. The price action is defined as movement in a security's price, volume, and open interest.

Technical analysisis primarily, maybe not exclusively, conducted by studying charts of the recent past price action. Many different methods and tools are new in Technical Analysis, but they all rely on the superlative assumption that price patterns and trends exist in markets, and thus, that they can be identified and exploited too.
Technical Analysis does not try to analyze the financial data of a company, can say the cash flow, dividends and projection of future dividends, an area of analysis which is also known as the fundamental analysis. However, some speculators try to combine Technical Analysis as the elements from both technical and fundamental analysis.

Like any predictive method, Technical Analysis is not 100% accurate, but it surely attempts to give the presumable outcome. Some forms of Technical Analysis, like charting, are viewed by many of its practitioners as more art than science.

Some scholastic studies conclude that Technical Analysis has little predictive power while other studies show that the practice can produce excess returns too. For an instance, measurable forms of Technical Analysis non-linear prediction using neural networks have been shown to occasionally produce statistically significant prediction results.

Lets take an example to understand the debate regarding the efficacy of Technical Analysis, a very well-known and successful fundamental analyst, once commented that, "Charts are wonderful for predicting the past."
A Federal Reserve working paper has shown that the statistical properties of intraday foreign exchange prices change near the "support and resistance" lines, without showing that this result would be new in a profitable trading approach

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Trade and scalp the market ForexGen has the pleasure to announce the availability of both Dealing Desk and No Dealing Desk Platforms.

No Dealing option provide traders with direct access to the best bid/ask prices through multiple bank access. No re-quotes & No dealer confirmation is the main characteristic of the no dealing option made specifically for “scalpers” and active FX professionals. Absolute freedom to trade during news and economic events.

Fundamentals Of Technical Analysis

Technical analysis was truly an arcane art before the internet boom. Chartists perform technical analysis in their secret rooms with data that was carefully collected from professional sources. Those were the times when stock prices and data did not have a medium through which to be readily available to the public and be ran through publicly available software to produce the charts that are available today.

Today, with internet in almost every household, technical analysis became an art anyone could practice. Complex charts, technical indicators and analysis that was once the sole domain of a few highly paid wallstreet analysts are now available to anyone who wants it, often for free.

Technical analysis also became linked to short term aggressive trading instruments such as stock options and futures because of its excellent short term predictive nature.

With technical analysis this popular, I feel obligated to teach you once and for all everything you need to know about how to conduct proper technical analysis before you start looking at your first chart. A lot of amateurs fail at technical analysis simply because they didn't have the necessary basic knowledge to understand how to interpret technical indications properly in the first place. With the knowledge in this article, you will definite experience more success at technical analysis.

[Why ForexGen?]

1. Lowest spreads in the market with 0-1 pips in 10 pairs, no commissions, no swaps and instant account Activation.
2. Scandinavian quality with Swiss precision, funds secured and local agents in 18+ countries.
3. ForexGen offers Forex trading in the major currency pairs and crosses.
4. Low capital start, with $250 as a minimum account size.
5. Liquidity and 24/5 availability are the characteristic factors of the Forex market compared with other financial markets.
6. ForexGen offers a free trial Forex demo account that allows you to test your skills and practice without risking real money.

Why you Should Know Technical Analysis:

No matter which style of investment
you are engaged, you have to meet and know the basic of technical analysis. As you know, fundamental analysis and technical analysis are two main ways to forecast the price trend. Fundamental analysis involves researching and evaluating the characteristics of the object. Technical analysis, on the other hand, pays
more attention to price movements.

To understand technical analysis, you have to believe three assumes: all market fundamentals are depicted in the actual market data; history repeats itself and therefore markets move in fairly predictable, or at least quantifiable, patterns; prices move in trends.

Technical analysis is a method of predicting price movements by looking at purely market-generated data. Price data from a particular market is most commonly the type of information analyzed by a technician, though most will also keep a close watch on volume and open interest in futures contracts. Based on these information, there are many technical analysis methods which can be used as a tool to forecast the price trend, such method as chart research and technical indicators.
Chart research is the basic method of technical analysis. You can know a variety of charts patterns that show price action or specific trend. Trend is a term used to describe the persistence of price movement in one direction over time. Trends move in three directions: up, down and sideways.

Technical indicators can be expressed by the value of the indicator. The value will be up, down or same and you can get the signals which are coincident or leading the market. Technical indicators are objective, and you can be objective too.
Almost every trader uses one method or more of technical analysis. Even the most reverent follower of market fundamentals is likely to glance at price charts before executing a trade. At their most basic level, these charts help traders determine ideal entry and exit points for a trade. They provide a visual representation of the historical price action of whatever is being studied.

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Smart Investments are Made With the Technical Analysis Software

Have you always had a taste for great investments?
Do you find trading to be an exciting and extremely rewarding experience? If the answer to either of these questions is affirmative, then perhaps you might be interested in the most recent technical analysis software developed for enthusiasts like you. It’s all presented online but we are going to make a brief summary of what you can expect. There are many great features to be explained, so let’s proceed!

You’ve heard without doubt of technical analysis before we mentioned it to you. It represents that method, approach or study of historical price movements, trying to predict future ones. It is based on the use of various parameters and indicators. Well, the stock analysis software is just what you need. And if we are going to talk about the latest advances in the field, we would have to mention the neural network forecasting.
Have you heard about technical analysis and neural networks? If not, it’s high time that you did. First of all, keep in mind that the stock analysis software studies various patterns of price movements. Then, try and picture a complex network formed of virtual neurons, a sort of an artificial brain. This amazing mechanism is highly intelligent, helping the software locate and gain knowledge of diverse patterns. There is no better way to predict price movements than by analyzing previous changes and the technical analysis software is very useful in such situations. Thanks to the neural network technology, the software can produce exactly the trading signals which are needed.

Specialists have studied carefully the advantages brought to the technical analysis software by the neural networks. Thus, they discovered that once the network is stimulated by various parameters, such as historical price information and several indicators, the results are diverse trading signals (future price levels). As opposed to the regular technical analysis we are all acquainted with, the stock analysis software with neural network forecasting manages to find a connection between original parameters (with stimulating effect) and future price levels. Neural networks locate patterns with extreme ease, working with numerous indicators. Thus, you can rely all of your trading decisions on the technical analysis software.

And how about the portfolio scan? This is another impressive tool offered within the stock analysis software. Depending on the criteria you have chosen and also on the neural network estimating, winning stocks can be selected. Thus, you can rely on the technical analysis software to identify exactly the stocks that match the originally chosen criteria. This feature is highly useful for anyone looking to make smart investments and make a nice profit from them as well. Yes, there are other products available for technical analysis. But why settle for the first you see when you can have the best there is?

While performing the portfolio scan, you will certainly notice how the technical analysis software combines various criteria and adds weight to each and every one of them, according to how relevant that reference truly is. The scan includes price return measures, neural network forecasting and risk management. The smallest change in the stocks can be easily determined thanks to the advanced technical analysis technology.
There are many other features of the technical analysis software you can discover while reading about the product online. For example, there is adaptive noise suppression for price movements and an automatic selection of the best technical analysis models. Model parameters are optimized on a regular basis and the stock analysis software offers only stable trading signals, as a direct result of combining several of the existing models (optimal combination).

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ForexGen | Using Technical Analysis To Profit In Forex Trading

There are two basic ways to approach the analysis of the fx markets: Technical analysis and Fundamental Analysis. Someone who is using a fundamental analytical approach will look at the current economic climate, political events, a variety of economic indicators, and so on to try to predict currency moves. What we will examine is technical analysis, or the use of historical price patterns in economic data to predict future moves in the FOREX. We will also look at the tools used for technical analysis.

The three major assumptions underlying technical analysis are:
1 - All market forces are taken into account in price movement. Many things can affect the price of a currency. Some of these factors would be economic conditions, political happenings, natural disasters, seasonal supply and demand and even the weather. Technical analysis, however, does not attempt to take these into account because the market has already done that. Rather, a technical analyst is concerned with the actual movements of the market, not with the reasons for the movement.
2 - There are observable trends in currency prices movements. There are known market patterns that follow predictable paths.
3 - There are historical trends in price movements. Over a century of forex data collection has shown that human nature interacts with events in predictable ways. Thus, when circumstances are similar in the market, the same patterns will show up.

Technical Analysis: Is It Necessary?
Day traders in the FOREX usually use technical analysis most heavily, though they may supplement it with fundamental analysis. Technical analysis has the huge advantage of being applicable to a wide range of currencies and markets simultaneously. To properly do fundamental analysis requires a good knowledge of events and conditions in a certain country so the number of markets any particular trader can analyze by the fundamental approach is necessarily limited.
Technical analysis can seem so complicated to the beginner that they may be tempted to wonder if it is really needed. The truth is that all investing requires a strategy and technical analysis is a proven way to set strategy by predicting FOREX movements. Of course, no strategy or method is always successful, which is one reason many technical traders also do some fundamental analysis as a supplement.
Using Price Charts In Technical Analysis
Charts lie at the heart of technical analysis and you will find a good selection available from any online FOREX broker. Not only are the charts updated constantly, real time, but they can be viewed in a variety of ways. You can see movement over various periods of time, broken down into different time scales, and with various analytical overlays applied. With the software provided you can see the broad picture over a long period or zoom into the most minute detail. The basic software is free from most online Forex brokers but there may be a fee for the more professional, in-depth, information.

Sometimes the charts are a built-in part of the broker's software package. Alternately, they may be available on the broker's website.
Practice, or demo, accounts are available from most brokers on their website. These allow you to use the charts and tools of that particular software to learn the techniques of following charts, noticing and learning about trends and studying market movements. Nothing can substitute for this valuable period of becoming intimately familiar with charts and market behavior.

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ForexGen | Explaining The Term Technical Analysis

The study of a security's price action for the purpose of forecasting profitable price trends and movement is known as Technical Analysis. The price action is defined as movement in a security's price, volume, and open interest.
Technical Analysis is primarily, maybe not exclusively, conducted by studying charts of the recent past price action. Many different methods and tools are new in Technical Analysis, but they all rely on the superlative assumption that price patterns and trends exist in markets, and thus, that they can be identified and exploited too.

Technical Analysis does not try to analyze the financial data of a company, can say
, dividends and projection of future dividends, an area of analysis which is also known as the fundamental analysis. However, some speculators try to combine Technical Analysis as the elements from both technical and fundamental analysis.
Like any predictive method, Technical Analysis is not 100% accurate, but it surely attempts to give the presumable outcome. Some forms of Technical Analysis, like charting, are viewed by many of its practitioners as more art than science.
Some scholastic studies conclude that Technical Analysis has little predictive power while other studies show that the practice can produce excess returns too. For an instance, measurable forms of Technical Analysis non-linear prediction using neural networks have been shown to occasionally produce statistically significant prediction results.

Lets take an example to understand the debate regarding the efficacy of Technical Analysis, a very well-known and successful fundamental analyst, once commented that, "Charts are wonderful for predicting the past."
A Federal Reserve working paper has shown that the statistical properties of intraday FX MARKET prices change near the "support and resistance" lines, without showing that this result would be new in a profitable trading approach.

History Of Technical Analysts
The Technical Analysis premises were derived from observation of financial markets over a long period of time say hundreds of years. Perhaps the oldest branch of Technical Analysis is the use of candlestick techniques by Japanese traders at least as early as the 18th century, and are yet still very popular today.
Another theory based resting on the collected writings of Dow Jones, the co-founder and editor Charles Dow, inspired the use and progress of Technical Analysis from the end of the 19th century. Modern research considers Dow theory its foundation stone.
For Technical Analysis the technical tools and theories have been developed and enhanced in recent decades, with a raising emphasis on computer-assisted techniques.
Common Beliefs Regarding Technical Analysis
The Technical Analysis is not at all concerned with why a price is moving but rather whether it is moving in a particular direction or in a particular chart pattern. For example, poor earnings, difficult business environment, poor management, or other fundamentals.
The analysts of Technical Analysis believe that profits can be made by the concept of "Trend following." What is tried to pronounce here is that if a particular stock price is steadily rising, that is, trending upward then a technical analyst will look for opportunities to buy this Stock.
Until the technical analyst is convinced this up trend has reversed or ended, all else equal, he will maintain to own this security.

Additionally, technical analysts during the Technical Analysis look for various price patterns to form on a price chart and will take positions in anticipation of the expected move following that pattern. The tools of the analysts are believed to assist the technician in determining when trends have formed, ended, and so on till particular patterns are unfolding.
Technical Analysis can be at odds with fundamental analysis. Fundamental analysis maintains that the markets can miswrite a security and, through various methods of fundamental analysis, the "correct" price can be calculated too.
Profits can be made by trading the mispriced security and then waiting for the market to distinguish its "mistake" and reprice the security. In contrast, a technical analyst during the process of Technical Analysis is not interested in a security's "correct" price, but is only in the price movement.

While Technical Analysis is done there are two well-known sayings among technical analysts that are, "The trend is your friend," and "Forget the fundamentals and follow the money." An example of the different views of technical and fundamental analysis follows.
Suppose a stock was trading at 124.25 pence, and that the accord fundamental analysis view of the stock was that it was worth 120.00 pence. If the share price rose to 125.00 pence, then to 126.00 pence, and then to 127.00 pence, a technical analyst during his Technical Analysis would likely be a buyer of this stock in order to profit from the perceived trend.
In contrast, a fundamental analyst would possibly look to sell the stock as it is moving away from what the fundamental analyst believes is the "correct" price

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ForexGen | Fundamentals Of Technical Analysis

Technical analysis was truly an arcane art before the internet boom. Chartists perform technical analysis in their secret rooms with data that was carefully collected from professional sources. Those were the times when stock prices and data did not have a medium through which to be readily available to the public and be ran through publicly available software to produce the charts that are available today.
Today, with internet in almost every household, technical analysis became an art anyone could practice. Complex charts, technical indicators and analysis that was once the sole domain of a few highly paid wallstreet analysts are now available to anyone who wants it, often for free.
Technical analysis also became linked to short term aggressive trading instruments such as stock options and futures because of its excellent short term predictive nature.
With technical analysis this popular, I feel obligated to teach you once and for all everything you need to know about how to conduct proper technical analysis before you start looking at your first chart. A lot of amateurs fail at technical analysis simply because they didn't have the necessary basic knowledge to understand how to interpret technical indications properly in the first place. With the knowledge in this article, you will definite experience more success at technical analysis.
Summary of Technical Analysis Basics
2 Principles of Technical Analysis: Significance, Prudence
2 Key Tools: Charts, Indicators
2 Key Components: Price, Volume
5 Key Concepts: Resistance, Support, Trend, Patterns, Setups
2 Principles of Technical Analysis: Significance, Prudence
The two principles of technical analysis are the most important foundation in understanding technical analysis and interpreting technical analysis properly. Too many amateurs misinterpret technical indications simply because they did not understand these two simple principles. This is also the only part in this tutorial that addresses the mental aspect of technical analysis and should be clearly understood before moving on. The two principles of technical analysis are Significance and Prudence.
Technical Analysis Principle #1: Significance
Significance refers to the degree that a technical indication is true. Take breakout and reversal signals for example. Does a 0.5% close above a resistance level indicate a breakout? Does a 1% reversal in a bearish that has fallen more than 40% indicate a reversal? No. The degree of significance for both cases is just too weak. Most technical analysis beginners who do not understand the principle of significance would take a small fake out as a breakout and then act on the wrong stocks. The judgment of significance is, however, a matter of experience. How much of a breakout represents a significant breakout? How much of a reversal represents a significant reversal and how big a candle represents a strong morning star signal? The judgment of significance is something you need to acquire and refine as you put more years behind your ears.

Technical Analysis Principle #2: Prudence
Prudence refers to the ability to say "No" when in doubt. Technical analysis is more of an art than a science. This is because even though technical indications are scientifically generated, the interpretation of technical indications is highly subjective. You are going to experience many marginal or doubtful moments in technical analysis. Technical signals that "almost made it" as well as technical signals that are "neither here nor there". Those are the times to exercise the technical analysis principle of Prudence and to make the most conservative interpretation. When a signal is marginal, you should always exercise prudence by giving benefit of the doubt to disqualifying the signal. When a significant breakout signal is produced after a huge drawdown, you should exercise prudence by waiting for further confirmation or enter the position gradually over a few days.
2 Key Tools: Charts, Indicators
Technical Analysis Key Tool #1: Charts
Chart reading is the most fundamental tool in technical analysis and is also why technical analysis is frequently referred to as "Chartology". Before the popularization of the internet, during the age where analysts still read tapes, technical analysts have to obtain stock quotes from "secret sources" and then plot them down on huge chart papers in their secret rooms. What then is a chart? A chart is simply a plot of the stock prices made into a curve. A chart's basic function is to show the TREND of a stock's price action. Without a chart, a stock closing at a price of $50 has no meaning at all. With a chart, you can clearly see the price action trend down from $100 to $50, giving investors the first indication of where the future price action of that stock might be. In the beginning, charts are plotted merely as a single line joining the prices together. Recently, with more and more powerful computers and software, more innovative and informative plotting methods like candlesticks, bar charts and point and figure charts are developed and made easily available through the internet. No matter what type of chart you look at, the only aim is to provide an indication of where the future movement of the stock might be. Another important aspect of charts is "Chart Patterns". Different types of charting method can produce easily recognizable patterns and formations that can be associated with certain future expectations. Popular chart patterns include "morning stars" in candlestick charting, "double top breakout" in point and figure charting and "double bottom" formation.

Technical Analysis Key Tool #2: Indicators
Technical Indicators are the other key tool in technical analysis. Technical indicators are graphical representations of various mathematical formulas based on the stock price and transaction volume. The are literally thousands of technical indicators out there and more are being developed daily as new finance theories are translated into mathematical formulas every day. Technical indicators' main function is to tell when a stock is considered oversold or overbought and when a stock is considered weak or strong relative to its past action. There are literally endless amount of formulas that can be used to provide those indications, hence the endless number of technical indicators. Because there are so many different technical indicators out there, beginners should start with a few well known and widely used ones as those tends to be used by institutional investors as well. It can be argued that the effectiveness of a technical indicator lies in its popularity. The more investors acting on the same indicator, the stronger the predictive nature of the indicator becomes. A self fulfilling prophecy? Maybe.
2 Key Components: Price, Volume
Surprisingly, so many different charting methods and technical indicators used in technical analysis all stems from the same 2 key components, Price and Volume. The price and volume of a stock are the only two publicly available information pertaining to that stock. Out of its price and volume, stock charts and technical indicators are created. Candlestick and bar charts are constructed out of the opening price, closing price as well as high and low prices. Relative Strength Index is created out of the price as well as volume of a stock compared against its historical data.
5 Key Concepts: Resistance, Support, Trend, Patterns, Setups
The 5 key concepts of technical analysis are the 5 most important analytical methods in technical analysis. Understanding all 5 are critical to the mastery of technical analysis. All 5 key concepts work together to help technical analysts predict future stock movement and know when to buy or sell a stock. Of particular importance is the ability to tell when to buy or sell a stock. This is the kind of information that fundamental analysis will not provide.

Technical Analysis Key Concept #1: Resistance Level
A resistance level is a price level at which most investors sells a particular stock at, resulting in the stock falling every time that price level is hit. It acts almost like a brick ceiling from which the stock falls down every time it hits its head on it. Resistance levels are identified from reading price charts, particularly point and figure charts. It is a level which you might want to at least take some profit off the table. Even though resistance levels make excellent selling points, a breakout of a resistance level does spur a stock strongly to upside, creating an excellent buying opportunity. When anticipating resistance level breakouts, it is important to apply the 2 key principles of technical analysis outlined above.

Technical Analysis Key Concept #2: Support Level
A support level is a price level at which most investors BUYS a particular stock at, resulting in the stock rising every time that price level is hit. Support levels are the reverse of resistance levels and acts almost like a trampoline on which the stock rebounds every time it lands on it. Support levels are also identified from reading price charts and is a level where you might consider buying a stock at, especially when a stock hits a correction. Even though support levels make excellent buying points, a breakdown of a support level does spur a stock down a lot more. This is why the 2 key principles of technical analysis are important when timing an entry using support levels.
Technical Analysis Key Concept #3: Trend
The main objective of looking at the trend of a stock through price charts is the anticipation that the trend is going to continue going in the same direction generally. It is like buying fashion that conforms to the current trend. If no other information is available, an investor looking at a price chart would always have a better feel of where a stock is going than an investor looking merely at a closing price, right? Of course, no trends go on and on forever. This is where technical indicators come in to provide an indication of how strong or weak a trend is.
Technical Analysis Key Concept #4: Patterns
Chart Patterns are shapes formed by price charts. Some popular chart patterns are "Double Bottoms" and "Head and Shoulder Formation". They are so named based on the shape formed by a price chart. These easily recognizable patterns provide an interpretation on what investors are expecting the stock price to head towards. Double Bottoms typically indicate a reversal and head and shoulder formations typically indicate a switch to a bear trend. There are a ton of chart patterns out there and all needs to be interpreted in conjunction with the right technical indicators while applying the 2 key principles of technical analysis.

Technical Analysis Key Concept #5: Setups
Setups are specific patterns formed by using different charting methods. A morning star setup using candlesticks charting may not show up as a buying signal in a point and figure chart. This is why different charting methods need to be used to cross check buying or selling setups produced by one charting method. A setup is a lot more specific than a chart pattern. A chart patterns tells you where a stock might be heading and a setup tells you when you can buy or sell a stock. Setups need to be interpreted together with the other key concepts while applying the technical analysis principles. A buying setup occurring at support levels or a selling setup occurring at resistance levels makes the setups more convincing.
Fundamentals of Technical Analysis - Conclusion
All the fundamentals of technical analysis needs to be used together like all parts of a car, nothing can be left out if you want to be successful with technical analysis. So far, you might notice that technical analysis has the ability to precisely time entries and exits on high probability stocks. This is also what makes technical analysis so important to options trading. Trading Stock options requires the stock in question to move as expected quickly in order to reduce the effects of time decay and to maximize profits. I hope this article has been useful to you as you start your journey in trading and to your future success

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