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Hello, tradeologists. In this part of the Big Picture, we're going to talk a little bit further about technical analysis, and exactly how you can use it in order to help determine where prices might go.
In other words, we're not trying to predict where prices are going to go. All we are trying to do is get an idea of the probability of prices moving in a certain direction. Does it mean that they are always going to move in the direction of the highest probability? No.
Many times, prices will act contrary to what logic would dictate. In other words, if we believe there is a high probability that the market will move up, and it reverses and goes down instead, that is a significant event. Also, we can use different tools in order to determine where prices might go, and might not go. Again, with the idea of determining the probability of the prices moving in that direction.
There is just no way that we are going to be able to predict future prices. It just can't happen with any degree of certainty. There are so many different factors in the market, that would determine where that price actually will go, when it happens. The only thing we can do - I'm going to emphasize this as much as we possibly can - we only look at the probabilities of the price moving in a certain direction.
We have a couple of different tools that we utilize, in order to make that determination. I have already told you about some of them, which are support and resistance points. The important things to remember about support and resistance points are, if it's hit a point, and it bounced off it dramatically, that is either a significant support or resistance point.
I have the weekly chart of the Dow Jones Industrial Average here. Let me go do a daily chart here. I do most of my analysis on the daily charts. The little red circles here that you see are points at which the market had moved to, and then bounced dramatically off of. Those points become significant, the next time that the prices come to that level.
Sometimes, more than others. For example, on this particular point, it did come back up here, but it didn't drop significantly. It actually rallied through to the other side. This point has become significant here, a number of times over the future of the price movement. In other words, this happened back in early December. That particular price support level became resistance here, here, here, and here again. It turned out to be a rather significant price level.
This was also a very significant price level. Prices bounced off of this as support. After it broke through, it eventually came back up again twice, to this very same price level. Prices dropped dramatically from there. That turned out to be a significant price level.
The important thing to remember is that prices do become more interesting, more supportive, or more resistant, at certain prices. For some reason, they hit certain points in the market, and then bounce off of those. If you can identify those ahead of time, you'll have a lot easier time determining the probability of future market direction.
If I was going into the stock market, how do I really determine the general trend of the market? First of all, I look at a couple of different things. I look to find out whether or not the index, or the stock that I'm looking at, is making higher highs, and lower lows. If it is, then I have determined that the market is in an uptrend. I have to have at least 2 higher highs, and at least 2 lower lows, before determining that the market is in an uptrend.
For example, we would not have had a higher low, if it weren't for this low. We had one higher low here. Then, we have a high. I don't know if that's a higher high yet, because I have only had one of those. I do have 2 higher lows. Now, I'm looking for a higher high.
After the market had rallied up to this point, I do have my higher high.
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