Market Logic Starts with the Price

Trading takes place around the clock on the financial markets - billions of transactions triggered by algorithms, news or human intuition. But at the end of every movement there is only ever one value: the current price of a stock. For technical analysts, this price is not just the result of supply and demand, but a key to understanding market behaviour itself.

Instead of relying on annual reports or economic indicators, they look solely at what is really happening in the market - at price data, volumes and price movements. They assume that human behaviour is expressed in recurring patterns that can be recognised, analysed and interpreted. This makes technical analysis a tool that is not only relevant for professionals, but can also help beginners to approach decisions systematically and comprehensibly. [1]

But how exactly is this price formed - and how can reliable indications of trends be obtained from seemingly random price movements?

The Mechanics of Pricing

Pricing on the stock exchange follows a market-based auction principle that is very simple at its core, but highly dynamic in its implementation and characterised by many influences. Every security - whether a share, ETF, commodity or derivative - is traded via an order book that lists all buy and sell offers. Buyers enter so-called limit or market orders, as do sellers. A trade is concluded when a buyer is found who is prepared to buy at the price of a seller - or vice versa. The transaction then takes place at this common price, which is the current market price. This price is continuously redetermined depending on how supply and demand change in the order book. It should be noted that external influences such as company figures, macroeconomic data, political events or central bank decisions influence the expectations of market participants and have a significant impact on their buying and selling behaviour. All in all, this results in a complex interplay that is ultimately reflected in the price. [2]

Price Data in Technical Analysis

Technical analysis is all about the price performance of a security. Instead of looking at company figures or news, technical analysts concentrate on historical price data - with the aim of deriving future developments from this. This is based on so-called OHLC values (open, high, low, close), which represent the opening, high, low and closing price of a certain time interval. These compact data points provide information on how buyers and sellers have behaved in the market - and help to recognise important patterns and movements. [1]

The choice of time interval over which the OHLC values are formed is crucial: while daily OHLC values are used for medium to long-term analyses, minute or hourly intervals provide valuable information for short-term strategies. One and the same market can show different trends depending on the interval selected - which is of great importance for the interpretation and application of technical analyses.

What is a trend and why does everyone pay attention to it?

A trend describes the general direction in which a price moves over a certain period of time. A distinction is made between upward trends (rising highs and lows), downward trends (falling highs and lows) and sideways trends, in which the price moves within a narrow range.

Trends are a central element of technical analysis, as they indicate whether the market is characterised by optimism or pessimism. For many traders, ‘the trend is your friend’ - because those who trade in line with the prevailing trend statistically increase their chances of success. Instead of swimming against the tide, you utilise the existing dynamics of the market for your own strategy. [3]

Volume analysis can also provide information about the quality of a trend. A trend that is accompanied by rising trading volumes is considered to be particularly reliable. Falling volume during an ongoing trend, on the other hand, can be a warning signal and indicate an imminent reversal or consolidation.

Trend Visualisation with Candlesticks

Trends are usually visualised using charts. Candlestick charts, which are formed from the OHLC values and provide a particularly intuitive insight into market behaviour, are particularly popular. They not only show the direction in which a price has moved, but also how much it has fluctuated within a period of time. A single candlestick already says a lot about the balance of power between buyers and sellers. Several candlesticks in succession make the price trend appear like a story - with clear phases of upswing, uncertainty or reversal.

How do you interpret a candlestick chart?

In candlestick charts, valuable conclusions about the behaviour of market participants can be drawn from the relationship between the body of the candle and the wick. The body of a candlestick is formed by the difference between the opening and closing price. If the closing price is higher, this is referred to as a rising candle - often shown in green or white. A falling price results in a red or black candlestick. A long body signals a clear market movement in one direction: either the buyers dominate (if prices are rising) or the sellers dominate (if prices are falling). Small bodies, on the other hand, where the opening and closing prices are close together, indicate uncertainty or a balance between supply and demand. [4]

The wicks - the lines above and below the body of the candle - show how much the price has deviated from the opening and closing levels within the selected period. A long upper wick indicates that the price has risen sharply at times, but has ultimately fallen again - an indication of declining purchasing power. Conversely, a long lower wick shows that the market initially came under pressure but was supported again by buyers. Such candles, where the body and wick are in a special relationship, can indicate imminent trend changes or reversal points - especially if they occur after a long upward or downward movement. [4]

Visual clarity with trend lines

However, the visualisation of individual price bars or candles is only the first step. Trend lines are often used to make overarching trends even more clearly recognisable. In an upward trend, for example, a trend line is drawn below successive lows and thus visualises the stable rise in the price. In a downward trend, the line runs above the falling highs. These lines help to simplify the trend visually, identify support and resistance zones and recognise possible break points at an early stage.

Trend Chart with Moving Averages

Moving averages are another method of visualising trends. They calculate the average price over a certain period of time - such as 20, 50 or 200 days - and form a line on the chart. These lines smooth out short-term fluctuations and thus make the overriding trend more clearly visible.

The Simple Moving Average (SMA), which weights all price values equally, and the Exponential Moving Average (EMA), which takes more recent prices into account and therefore reacts more sensitively to current market movements, are particularly common. If a moving average rises continuously, this indicates an upward trend. If it falls, a downward trend can be assumed. This method is particularly meaningful when several moving averages are combined - such as a short-term and a long-term moving average - in order to recognise so-called crossover signals.

Example: Recognising a Trend Reversal with the 50-day EMA

Many platforms such as gravitrade make it easy to display moving averages in the chart history, see the following example with a close price history, the 50-day EMA calculated from it and the trading volume.

If the price is below the EMA and the EMA line is pointing downwards, there is much to suggest that the downward trend will continue. In such phases, further price losses are more likely. However, if the price begins to cross the EMA line and it no longer points downwards, but flattens out or even turns slightly upwards, this may indicate an imminent change in direction. As soon as the price remains above the EMA and the line also rises, this is a frequently used signal that a new upward trend may have begun.

Anyone who learns to read the market soon realises that trends are more than just visual progressions - they form the basis for many trading decisions. The tools presented in this article for recognising trends, such as trend lines or moving averages, are not only tools for orientation, but also the basis for many technical indicators. These indicators draw on the behaviour of trends to generate specific buy or sell signals or to confirm existing tendencies. Well-known examples include the MACD (Moving Average Convergence Divergence), the RSI (Relative Strength Index) or Bollinger Bands - they all work with elements such as trend strength, direction or momentum.

Such signals help traders to make decisions systematically instead of being guided solely by gut feeling or short-term market news. At the same time, it is important to understand that no indicator alone makes reliable predictions - they provide clues, but no guarantees. It is therefore worth combining different approaches and critically scrutinising whether a signal really fits the current market situation.

Conclusion

Analysing trends is more than just a theoretical concept - it is a fundamental building block of technical analysis and a key to understanding the language of the markets. Learning to recognise and interpret trends gives you a structured view of what is happening on the markets. Tools such as candlestick charts, trend lines and moving averages help to visualise and understand these movements.

But the journey does not end there. Building on these foundations, many traders use technical indicators to make more precise trading decisions - be it to confirm an existing trend or to identify potential turning points. These mechanisms generate trading signals which, if used correctly, can help to act systematically rather than impulsively.

For newcomers to the stock market in particular, the step from analysis to a real position should be taken with caution. Paper trading offers the opportunity to test theories in practice - without risk, but with a real learning effect. This not only builds confidence in your own strategy, but also in your own actions.

At the end of the day: The market is dynamic, but not chaotic - if you familiarise yourself with trends, signals and strategies, you can navigate it with more clarity and structure. And this is exactly where the basis for sustainable stock market success begins.

Start now on www.gravitrade.at and develop your own strategy with the help of technical indicators. Test your ideas in risk-free paper trading and find out how reliably buy and sell signals work in practice.

References

  • [1] J. J. Murphy, Technische Analyse der Finanzmärkte, FinanzBuch Verlag, 2006.
  • [2] L. Harris, Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, 2002.
  • [3] M. Covel, Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets, Ft Press, 2009.
  • [4] S. Nison, Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East, Prentice Hall Press, 2001.