The methods used to analyse securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analysing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach – it is not concerned with the value of a company or commodity. Instead it is only interested in the price movements in the markets.

If you study and understand the benefits of technical analysis it can give you a new set of tools or skills that will enable you to become a better, more disciplined trader or investor. You must also have a plan and follow it rigidly. Treat your trading and investing like a business.

The principles of technical analysis are that everything is discounted and reflected in market prices as all known knowledge pertaining to a share or market is contained within the price action of the product. This includes all economic, political, psychological and other factors. It also means the prevailing price is determined by supply and demand and that prices move in trends, and these trends persist. An uptrend is a series of higher highs and higher lows and a downtrend is a series of lower highs and lower lows.

The key to technical analysis is knowing what trend you are in, then using support and resistance levels to trade in the direction of the trend. If an uptrend is coming to an end look for support levels breaking to confirm this change. If a downtrend is ending you will start to see resistance levels breaking as confirmation. In short, support is the price to which a share or commodity may fall before rising again whereas resistance is the value to which it could rise before dropping back.

The best way to find support and resistance is to look on the chart for areas that have been tested several times in the past and held firm. Some people also like to look for trends by adding a moving average to a chart. As the name suggests, this is simply the average closing price of the instrument as measured over a specified period of time. The moving average changes from one day to the next with the result being plotted as a separate coloured line on the chart. When the market closes above this it is in a rising trend (bullish) – a buy signal. Should it close lower it would be in a falling trend which could persuade someone to go short (sell).

A lot of technical analysts like to use the drawing tools to sketch on their charts as this helps to visualise what is a happening. If you look at a chart properly, it will tell you everything, and there are many charts available on the internet – such as hourly, daily and weekly. You can even get charts that go back 10 years and further.

Traders who are planning to run their trades or positions for several days would tend to use the 20-day moving average, whereas medium- to longer-term traders or investors would use the 40-day moving average.

There are many charting packages available – for example, a website with free subscription, such as futuresource.com; esignal is a competitively priced piece of software; and for short- to medium-term traders futurestechs.co.uk is good, available for a competitively priced monthly subscription. Those readers who are not completely familiar with using charts may wish to read books such as Edwards and Magee's Technical Analysis of Stock Trends, John J Murphy's Technical Analysis of the Financial Markets, or the refreshing and engaging Candlestick Charts by Clive Lambert.

In summary, trendlines define the direction of the trend, can be applied to any timeframe and provide support and resistance levels. Don't be shy about drawing lines on your charts. By doing this you will nurture your skills at this important method of analysis.

The key message should always be the price chart, and what this tells us about changes in sentiment and attitudes towards the product you are viewing or trading. "The trend is your friend" is a very important saying and not just a catchphrase. Remember that technical analysis is a study of price movement. Markets are moved by people (even if it's people programming computers) so effectively it is a study of human psychology.

Finally, do your homework and find the patterns that work well for the chart you use.

Peter Whelan is a trader, technical analyst and commodity and currency expert

Tel: 086 6166583
Email: peterwhelan88@gmail.com