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Introduction

Investment in right equity at the right time can bring you a big profit. However the main problem of investing is to choose the right equity and the right time for buying or selling. You can often hear traders to say: buy when the price is low, and sell when it is high. It is really true. If you look at the chart of some equity you will see that prices are moving in waves, and chart consists of a series of peaks and troughs. You need to buy at the bottoms and sell at the tops.

When you are observing price history it is easy to detect points on chart which indicate where you should buy or sell equity. Everything seems logical, but how to determine what to do at the moment when you don't know what will happen tomorrow. In a few days later, when the price moves, most of traders will say: eh I should buy, or should I sell. It is easy to spot places on chart when price already went in some direction, but how to make a decision at the right moment, to predict future price movements?

There are a lot of traders on market, some earn money and some lose. In fact, when you earn money, it usually means that someone has lost it. For example, let's say that price of certain equity increases. Person "A" bought it before the price began to grow and sell it to a person "B" at the moment when the price reached its peak. After that, prices start to fall. Person "A" is happy because of smart decision, but person "B" suffers a loss because the price is now falling. Some of traders win, some of them lose money. In fact only a small number of people win. Others are losing or oscillating around zero profit. It is therefore important to make good analysis before investing in some equity if you want to be person "A" from the example, and to earn money.

Any investment should be preceded by analysis. If someone decides to gamble, most likely will lose everything. But the question is whether there are specific techniques that could be used for the analysis? Of course there are. In 1884 Charles Dow created the index based on prices of specific shares, which he used in analysis. Later, SA Nelson and W. Hamilton created Dow theory based on his work. Dow theory is still basic theory for all technicians, and technical analysis relays on it. Technical analysis is theory which studies price movements in history in order to predict future changes. Why the historical price movements are important? Because the price movements reflect the psychology of traders. History shows how traders behaved in certain situations, the sudden jumps or falling of prices, etc. Since the behavior of people doesn't change, it is likely that people will react to certain phenomena in the same way as they reacted in the past. So it can be assumed that prices will move in the future in same way as it did in the past.

The process of analysis is very hard work. You should take into account all the changes that have happened in the past, spot specific chart patterns, analyze various indicators and so on. The use of computers in analysis is of great importance. Computers can process in just a few seconds very large amount of data, which would take you many hours to do manually. Therefore, there are many applications which could be used for analysis. One of them is chart tool which you can find on this WEB site.

In the following sections I will first explain concepts of technical analysis. After that I will explain some strategies which could be used in trading to reduce investing risk.


FINANCIAL INSTRUMENTS >