Technical Analysis of Financial Markets
Price, trend, and structure
Technical analysis treats price, volume, and open interest as the primary evidence about supply and demand. The foundational idea is that trends persist until a reversal is confirmed. Structure is read through swing points: an uptrend prints higher highs and higher lows, a downtrend lower highs and lower lows, and a break of the most recent swing point is the first objective warning of change. Support and resistance are zones rather than lines, and once broken they tend to reverse roles. Dow theory adds the notions of three trend horizons (primary, secondary, minor), three phases (accumulation, participation, distribution), and confirmation between related averages.
Indicators and the classic traps
Distinguish trend-following tools (moving averages, MACD, ADX) from bounded oscillators (RSI, stochastic). Oscillators describe conditions inside a trend and are most useful for divergence; using an overbought reading as a standalone sell signal in a strong uptrend is a standard exam trap. Other frequent traps: drawing trendlines with hindsight so that they fit history; reading a long-horizon chart on an arithmetic scale when large percentage moves demand a log scale; assuming a moving-average crossover leads price when it is inherently lagging; and stacking several highly correlated indicators and calling it confirmation.
Worked example
A stock trading at 40 breaks a multi-month range top at 42 on volume 1.8x its 20-day average, with the 50-day SMA above the 200-day SMA. A rule of thumb: treat the breakout as valid only if volume expands to at least 1.5x average and price closes outside the range; set the invalidation level back inside the range (say 41), and size the position so that a stop at 41 risks no more than a fixed fraction of capital. The volume filter and the defined invalidation point, not the pattern's name, carry the analytical weight.