Technical Analysis: Part 3 (Terminologies)

 Following terms are used in technical analysis.

• Volume
• Open Interest
• Support & Resistance
• Trend

 What does Volume means?

• The number of shares or contract traded during the period is known as volume. Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. It is related with the price of the security. For e.g. If A bought 1000 shares of APPLE & B sold 1000 shares of APPLE, then the volume of APPLE share will be 2000 shares.

 What does Open Interest means?

• The total number of contracts which are outstanding ( ie. exercised, closed, or expired) is called as Open Interest. Open interest is totally different from Volume. Below is the example of open interest.

 -On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
-On January 2, C and D create trading volume of 5 and there are also five more options left open.
-On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1.
-On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.

What does Support & Resistance means?

•  Support: A support level is a price level where the price tends to find support as it is going down. This is the level at which buyers are expected enter the market. When the volume are high at support level, the price moves up. Volume is important indicator in Support & Resistance.

• Resistance: A resistance level is opposite to support level.  It is where the price tends to find resistance as it is going up. In this level sellers are expected to enter the market.

Role Reversal

Once the support or resistance level is broken, its role is reversed. When the price falls below support level, that level becomes resistance & When price rises above a resistance level, it will often become support.

What does trend means?
The trend in simple terms is general direction of a market or of the price of an security ie moving upward, downward & sideways.Trends are classified by their time frames as long-term, medium-term & short-term trends.

There are three types of trend.

• Upward  Trend: In this trend the stock makes continuous higher tops & higher bottoms. This type of trend is good for buying delivery. 
• Downward Trend: In this trend the stock makes  lower tops & lower bottoms, good for short-selling the stock.
• Sideways Trend: This trend is also known as flat market. The sideways trend shows no major difference in the stock price from beginning to the end of a specific period. Traders avoids such type of trend. In this trend chances of loosing money is more.

In Part 4, we will see Identification of Support & Resistance, Trend line, Blow-off & Channels.