Glossary of Technical Trading Terms

The Advance/Decline is a widely used indicator used to measure the breadth of a stock market advance or decline. Each day, the number of advancing stocks is compared to the number of declining stocks. If advances outnumber declines, the net total is added to the previous cumulative total. If declines outnumber advances, the net difference is subtracted from the previous cumulative total. The advance/decline line is then compared to the stock average, such as the ASX200. They should trend in the same direction. When the advance/decline line begins to diverge from the stock average, an early indication is given of a possible trend reversal.

Price data can be displayed in many different ways, from a simple line chart, to the traditional bar charts, to more complex forms such as Point and Figure charts. We will typically use Japanese Candlesticks when displaying price charts.

Candlesticks use the same data available for a standard bar chart, i.e. the open, high, low and close price.

The body of the candle represents the difference between the open and the close price, and will either be white, or shaded black. White candles indicate that prices closed higher than the opening price, whereas a black candle indicates that the prices closed lower than the opening price. The lines above and below the body of the candles are known as wicks or shadows. These lines represent the daily high and low price.

Depending on the shape and colour of the candle, we are able to gauge the current market sentiment for the given timeframe.

The image to on the right (click to enlarge) is an example of a candlestick chart, using the AUD/USD currency pair. As shown, the candle from the 6th of May is black, indicating that the closing price (0.8851) was below the open (0.9062). Furthermore, the long lower shadow shows prices closed well off the intraday low of 0.8716.

Although we have used a daily chart in the above example, candlestick charts can also be used to represent other timeframes, such weeks, and months.

The CRB Commodity Index is an arithmetic average of 19 different commodity futures prices. Since inception in 1957, this index has been widely recognised as the leading measure of commodity price direction. This index has undergone numerous revisions over the past 50 years, with the current index weighted heavily to crude oil. The constituent commodities and their respective weights can be seen in the pie chart on the right (click to enlarge).

This price pattern displays two prominent peaks. The reversal is complete when the middle trough is broken. The double bottom is the mirror image of the double top.

On the right (click to enlarge) is an example of a double top on the weekly chart of the AUDUSD currency pair.

A flag is a small consolidation range which forms counter to the prevailing trend. 

The chart on the right (click to enlarge) shows an example of a bearish flag on the GBPUSD currency pair.

In an uptrend, this one day pattern occurs when prices open at new highs, and then close below the previous day’s closing price. In a downtrend, prices open lower and close higher. The wider the price-range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.

The image to on the right (click to enlarge) is a key reversal bar on the weekly sugar futures chart.

MACD stands for Moving Average Convergence/Divergence. Although you will only see 2 lines on the chart, the MACD uses three lines in its calculation. The faster (black) line is the difference between two exponentially smoothed moving averages of closing prices, usually a 12 and 26 period. The slower (red) line is called the signal line as is a nine period exponentially smoothed average of the MACD line.

Buy and sell signals are given when the two lines cross, resembling a dual moving-average crossover method. However, the MACD also fluctuates above and below a zero line, like an oscillator. The best buy signals are generated when the prices are well below the zero line (oversold), while the best sell signals when prices are well above the zero line (overbought). Buy signals are shown with a Blue arrow and sell signals in red.

The MACD can also be used for signs of momentum divergence, a technique we will explain in greater depth below. 

There are three types of momentum divergence, type A, B, and C. Type A is the strongest and typically the only type we will use to trade with.

Type-A divergence occurs when a new price extreme is accompanied by a lower swing high on a momentum indicator. It is used to identify trend exhaustion, and potential trend changes, prior to price confirmation.

The chart on the right (click to enlarge) is an example of Type-A bullish divergence. As shown, the recent price low at the end of November was accompanied by a higher low on the slow stochastic. This is used to pick a potential trend change prior to price confirmation, which would only occur on a break above the recent high at 4687. As a reminder, for an uptrend, we need a series of higher lows and higher highs.

Resistance is simply the opposite of support. It is a level or region where prices have been unable to move above in the past. It is where selling pressure outweighs buying demand. Using the copper price, long-term resistance is found in the US$4.16 to US$4.27 range. 

The RSI is a popular oscillator developed by Welles Wilder Jr. and described in his self published 1978 book, New Concepts in Technical Trading Systems. The RSI is plotted on a vertical scale from 0 to 100. Values above 70 are considered to be overbought and values below 30, oversold. When prices are over 70 or below 30 and diverge from price action, a warning is given of a possible trend reversal. The RSI usually employs 14 time periods in its calculations.

Support is a level or region where prices have been unable to move below in the past. It is where buying demand for a security outweighs selling pressure. Current support for the USD/JPY currency is in the 88.56 to 88.14 range.

Being able to identify the current trend is a cornerstone of technical analysis. In short, an uptrend is defined as a series of higher lows and higher highs, while a downtrend is a series of lower highs and lower lows. Trend analysis is fractal, meaning that trends can be found within trends of a larger degree. To explain this concept in a little more detail, prices may currently be in short-term downtrend, which is simply a corrective move of a larger degree uptrend.

In addition to determining the direction of the trend, we need to also ascertain the strength of the trend. There are several indicators that we can use for this which we will discuss later, however based purely on price action, overlapping waves indicate that the trend is weak, while impulsive waves indicate the trend is strong.

The image to on the right (click to enlarge) is a weekly chart of the US Dollar Index. As shown, the series of higher lows and higher highs suggest prices are currently in an uptrend.

Triangles come in several different variations, including symmetrical, descending, and ascending. Prices typically break out in the direction of the broader trend.

The chart on the right (click to enlarge) is of the ASX200 depicts an example of a symmetrical triangle.

Volume is simply the number of shares traded within a given time period. Although we mainly focus on price, we use volume as a supportive indicator. Typically, volume should expand in the direction of the trend, while contract when prices are correcting or trading within a range. As an example, we would view a high closing white candle on high volume more bullish than a high closing white candle on low to medium volume.

Volume is displayed on the right (click to enlarge) the price chart as a histogram. Blue volume bars coincide with an ‘up bar’ or white candle, while red volume bars coincide with ‘down bars’ or black candles.

Wave charts are designed to filter price movements by linking intermediate highs and lows based on a set percentage move. They enable us to easily see the current direction and strength of the market trend. 

The Crude Oil candlestick chart on the right (click to enlarge) has been overlaid with a 5% wave chart.