by Helmut Schmidhofer
Prices of bills and bonds, stocks and shares, commodities and currencies are always in a state of flux. The question is, which way are they going to change?
That question can be answered by an analysis of the fundamentals for long-term prediction and technical analysis of price action for short terms.
At the core of fundamental analysis is a forecast of interest rates. Four trends affect interest rates: secular (10 to 40 years), cyclical (3 to 5 years), seasonal (3 months to 1 year) and random. Factors that affect the trends are: government policy, global savings (supply) and global consumption (demand), business cycles, labour market and consumer confidence, productivity factors.
The forecasting is done globally for each of the major currency pairs. To do it properly requires the resources of reserve banks and major financial institutions. The lone speculator only knows what she is told. With all the resources, the forecasts are not infallible.
Superimposed on this core are product-specific factors - cost of production and demand for commodities, and psychological factors in the stock market.
All of these considerations result in price action. The skilled chart reader can see the trends within the trends and knows the current direction. With the aid of numerous devices points of entry and exit are identified. This is technical analysis at its best.
Price action is recorded for time frames that vary from one month to as brief as five seconds. For each frame, up to four points are drawn on a chart - the price at the beginning of the frame (the open), the highest and lowest prices during the frame, and the price at the end of the frame (the close). Sometimes, only one point is drawn for each time frame, which is either the open or the close or an average of the high and low or the mean of all four values. Historical data records spanning many decades are available.
If all points are drawn, two types of presentation are popular:
1. the bar, which shows high and low plus the close or both open and close;
2. the candlestick, where different colours show if the close is above or below the open.
In the following pages, we shall discuss various aspects of technical analysis, starting with trendlines.
Back to invest or speculate Proceed to trendline analysis
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