Test
In technical analysis and trading, a test is when a stock’s price approaches an established support or resistance level set by the market. The Wilcoxon test, which can refer to either the Rank Sum test or the Signed Rank test version, is a nonparametric statistical test that compares two paired groups. In technical analysis and trading, a test is when a stock’s price approaches an established support or resistance level set by the market. A stock can test support and resistance levels in both a range-bound market and trending market. Popular technical indicators that traders and investors use to test support and resistance levels include trend lines, moving averages, and round numbers.
What Is a Test?
In technical analysis and trading, a test is when a stock’s price approaches an established support or resistance level set by the market. If the stock stays within the support and resistance levels, the test passes. However, if the stock price reaches new lows and/or new highs, the test fails. In other words, for technical analysis, price levels are tested to see if patterns or signals are accurate.
A test may also refer to one or more statistical techniques used to evaluate differences or similarities between estimated values from models or variables found in data. Examples include the t-test and z-test.
Understanding Tests
Popular technical indicators that traders and investors use to test support and resistance levels include trend lines, moving averages, and round numbers.
For example, many investors pay close attention to the price action of major stock indexes, such as the Standard & Poor's 500 Index (S&P 500), Dow Jones Industrial Average (DJIA), and Nasdaq Composite when they test their 200-day moving average or a long-term trendline. More advanced techniques used to test support and resistance levels include using pivot points, Fibonacci retracement levels, and Gann angles.
The historical price chart below shows the S&P 500 testing its 200-day moving average:
Image by Sabrina Jiang © Investopedia 2021
Traders should monitor volume closely when a stock’s price approaches key support and resistance areas. If the volume is increasing, there is a higher probability that the price will fail when it tests these levels due to increased interest in the issue. Declining volume, on the other hand, suggests the test may pass as the stock may not have enough participation to break out to a new level.
A stock can test support and resistance levels in both a range-bound market and trending market.
Range-Bound Market Test
When a stock is range-bound, price frequently tests the trading range’s upper and lower boundaries. If traders are using a strategy that buys support and sells resistance, they should wait for several tests of these boundaries to confirm price respects them before entering a trade.
Once in a position, traders should place a stop-loss order in case the next test of support or resistance fails.
Trending Market Test
In an up-trending market, previous resistance becomes support, while in a down-trending market, past support becomes resistance. Once price breaks out to a new high or low, it often retraces to test these levels before resuming in the direction of the trend. Momentum traders can use the test of a previous swing high or swing low to enter a position at a more favorable price than if they would have chased the initial breakout.
A stop-loss order should be placed directly below the test area to close the trade if the trend unexpectedly reverses.
Statistical Tests
Inferential statistics uses the properties of data to test hypotheses and draw conclusions. Hypothesis testing allows one to test an idea using a data sample with regard to a population parameter. The methodology employed by the analyst depends on the nature of the data used and the reason for the analysis. In particular, one seeks to reject the null hypothesis, or the notion that one or more random variables have no effect on another. If this can be rejected, the variables are likely to be associated with one another.
There are several tools used to conduct hypothesis testing, some of which include:
Related terms:
Alpha Risk
Alpha risk is the risk in a statistical test of rejecting a null hypothesis when it is actually true. read more
Bonferroni Test
A Bonferroni Test is a type of multiple comparison test used in statistical analysis. read more
Breakout and Example
A breakout is the movement of the price of an asset through an identified level of support or resistance. Breakouts are used by some traders to signal a buying or selling opportunity. read more
Chi-Square (χ2) Statistic
A chi-square (χ2) statistic is a test that measures how expectations compare to actual observed data (or model results). read more
Entry Point
Entry point refers to the price at which an investor buys or sells a security. read more
Fibonacci Retracement Levels
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. read more
Goodness-of-Fit
A goodness-of-fit test helps you see if your sample data is accurate or somehow skewed. Discover how the popular chi-square goodness-of-fit test works. read more
Hypothesis Testing
Hypothesis testing is the process that an analyst uses to test a statistical hypothesis. The methodology employed by the analyst depends on the nature of the data used and the reason for the analysis. read more
Mutually Exclusive
Mutually exclusive is a statistical term describing two or more events that cannot occur simultaneously. read more
Null Hypothesis : Testing & Examples
A null hypothesis is a type of hypothesis used in statistics that proposes that no statistical significance exists in a set of given observations. read more