The most basic goal of technical analysis is to determine the direction and strength of the current trend in the market, and then identify when that trend is about to change. If the technician identifies the trend as bullish, the forecast is to remain Long and keep buying until the trend is deemed to be over. Technical analysis focuses almost exclusively on past and current prices. The technician believes that all the economic supply/demand news and forecasts are built into the current prices. Compared to fundamentalists, technicians, in a sense, take a shortcut. While fundamentalists study external factors, technicians study the effect of those factors as shown in actual price trends and patterns. There is a misconception that technical analysis means charting — using bar charts to find patterns. Actually, there are four sub-schools of technical analysis, including: Charting, Modeling, Cycles and Behavioral Studies.

Technicians look at more than just prices. They’re also interested in patterns of volume and open interest. Volume is the actual number of trades that have taken place during a specified time limit (usually one day or one trading session). Open interest is the number of open positions (positions not yet offset in the marketplace) held over from one trading
session to the next. These are important to chartists because they help identify the strength and direction of market trends. Spotting trends is essential, because neither bullish nor bearish markets ever go straight up or straight down. They fall during the course of an upward trend, and go up in the midst of a downward trend. Suppose a chartist sees that on one day the market finishes on an upward note with high volume and open interest, but the next day it finishes down on low volume and similar or decreased open interest. The chartist would note that the market
might be turning bullish, because sellers in the marketplace were not as keen to sell as buyers had been keen to buy on the previous day. Some technical analysts believe in cycle theory — the cyclical repetition of price patterns over time. Cycle theory requires in-depth analysis of market movements, ranging from relative high- and low-point cycles which last for two or three years, integrated with those that last only for a few days. Cycle theory is better applied to agricultural commodities than financials because of the seasonal nature of agricultural products.

Like fundamental analysis, technical analysis often looks to complex computer programs for assistance in interpreting market behavior. A number of trading systems, usually geared to specific commodities, are now used by system traders to identify trading opportunities.

Common Patterns in Technical Analysis
Now let’s take a look at some of the common chart patterns in technical analysis, such as the head and shoulders and the symmetrical triangle. These patterns are complex, so it’s enough for you at this stage of your futures education to have a general awareness of the kinds of patterns that exist. Their names are derived from their appearances, so don’t be
put off by them.

Head and Shoulders
This is a reversal pattern, meaning that it represents the end of a trend (either up or down). Let’s look at an example of the head and shoulders top (ending of an uptrend). This formation takes at least five days to appear because at least five minor reversals of the daily trend are required to form the pattern.

As you can see in the diagram, there are five reversals in the head and shoulders pattern, with the high point coming on the third reversal. The high point is the head; point one is the left shoulder and point five is the right shoulder (hence, the name). When a possible head and shoulders begins to form — usually around point three — the chartist carefully notes the location of the neckline, the most important line in the chart. The chartist draws a line from points two to four, and continues it forward in time on the chart. Once point five appears, chartists immediately offset any long positions they may be holding, and prepare to put on
short positions as the price nears the neckline. A measuring line is drawn from point three to the neckline. When the neckline is broken after point five, another line is drawn, the same length as the first line. If the pattern lives up to expectations, the price will drop at least this distance, maybe more.

A head and shoulders can also indicate a bottoming pattern, called the head and shoulders bottom. At the bottom of a downtrend, the formation shows a period when the market changes from down to sideways and then from sideways to up. The neckline is drawn from points two and four. The trend reversal is considered complete when prices pass the neckline on the right.

Symmetrical Triangles
Symmetrical triangles can be either reversal or continuation patterns. Usually they are continuations with about one in five being a reversal, which tends to form a major high or low in the contract’s life span. Once again, this pattern takes four to five days to appear, sometimes longer. There are only four reversals in the symmetrical triangle pattern, and it is usually fair to say that the direction of the price chart when it moves out of the triangle is the direction in which the market will continue to move. If the pattern is continuation, the chartist will draw up a measuring line, as with the head and shoulders, but from point two to the line between
points one and three. Another line is drawn from the “breakout” point, the same length as the original measuring line. This line usually, but not always, intersects with a line drawn from point one, parallel to the upper line of a triangle (in a downtrend continuation as previously illustrated). Volume and open interest are not so important in this pattern. Due to the uncertainty during the four-point reversal, volume usually gets lighter until the breakout, as does open interest. However, do not overestimate these factors in a symmetrical triangle.

However you look at charting, patterns or time cycles are not guarantees of the direction of market movement or how far it will move. The patterns have, however, acquired a self-fulfilling quality. When a head and shoulders pattern appears, for example, many traders will sell when
the neckline is broken (on the downward) in anticipation of the fall in the price. If people are selling more eagerly than buying, prices fall, thereby fulfilling the anticipated price downtrend. So charting is something you should be aware of, even if you don’t happen to believe in it.

Stock Trading References:

Market Club Trading Service
Day Trading Advice
fundamental analysis
ino.com marketclub promotions
Trading Philosophies
How to price options
Rockwell Trading Review
Swing Trading Defined
Options University Trading Tutorials
Options Trading Tutorials