In this technical analysis training, you will learn what technical analysis trading is and how you can start trading by learning to trade with technical analysis.
Market analysis is generally classified into two main methods, the first method is fundamental analysis and the second method is technical analysis.
Fundamental analysis requires an analyst to look at the financial statements, business model, macroeconomics, management capabilities and news, among other things, to arrive at a specific fair value.
A fundamental analyst should look at these issues, on the contrary, a technical analysis analyst is not concerned with this issue at all, a technical analyst only looks at the price.
The entire discipline of technical analysis is based on these two data points, price over time and volume. All patterns, indicators, concepts are derived from these two basic data points. Technical analysis is a very interesting subject. This is not a definitive science, rather a probabilistic discipline. In simple terms, it is more of an art than science. There are well known chart patterns or indicators in the market. But nothing works 100% of time. We still follow them because they work more number of times than they fail. Hence emerged the concept of probability, the number of times anything works among the number of times that occur.
This technical analysis tutorial is your stepping stone on your journey to becoming an experienced technical analyst. We encourage you to go through these concepts slowly one by one and look at the diagrams regularly. Look at old charts as well as contemporary live charts. Once you find a pattern or indicator, try to predict the future movement and write down your prediction.
Then, over time, try to match the price action with your prediction. Then analyze why it worked or not. Take notes and improve with tutorial articles and notes. It’s a bit of a long journey, but success is possible and within reach.
Technical analysis training
Charts are two-dimensional representations of price over time. There are many different types of charts available. But the most popular and widely used are line charts, bar charts and candlestick charts. The X axis is the time axis, which is very important. And the Y axis represents the price. The time unit can be months, weeks, days, hours, 5 minutes or seconds. The shorter the time frame, the more detailed the chart will be.
A bar chart is comprised of a series of bars. Every bar has four important price points – open close high and low.
The bars are represented in green or blue color when close is higher than open and red color when close is lower than open. The bar charts are more detailed than the line chart and are good for demonstrating or spotting the classical price patterns.
The concept of candlestick charts came from Japan. That is why they are often referred to as Japanese candlestick charts. These charts are the most versatile and popular form of chart representation.
Price behavior during each time unit is represented in the form of a candle. If the closing price of a stock is higher than open price during a particular time period, then the candle is green, if the close price is below the open price then the candle is red.
Each candle has a body and two wicks. The distance between open to close is represented by the body of a candle and the upper and lower wicks represent the highs and lows of a candle.
Candlestick chart is special not only because it adds a special visual clarity about the price action, but also because often a single candle stick or two or three consecutive candlesticks together form a pattern that indicate reversal of a prior move or give conviction on continuation of the ongoing move. These are called candlestick patterns.
A line chart provides traders with a visual representation of where a stock’s price has moved over a given period. Since line charts usually only use closing prices, they do not show the noise caused by price movements during that trading time, and it is not possible to examine the open, high and low prices in them. Line charts are popular with investors and traders because closing prices are a snapshot of a stock’s activity. And you can see the path taken by the price of a stock with a line chart.
Most market movements occur in the form of trends. A price trend is a continuous or directional price movement in an up or down direction. We call them uptrend and downtrend respectively. Now, if we look at the price action in the market through charts, we realize that no price movement happens in a straight line.
Suppose we are looking at a broader uptrend which is shown as a primary move, we may find intermediate corrections as secondary trends and minor countermovements among the secondary moves which are shown as minor trends. In general, the market behaves like this in both upward and downward trends.
Often an up- trend is represented in the form of a sequence of higher highs and higher lows. Similarly a downtrend is represented as a sequence of lower lows and lower highs. A trend is said to reverse when the sequence is broken.
We should remember a simple point that market is not trending all the time. Often the market consolidates within a small range and goes nowhere. Then suddenly it can break on the upside or downside.
Trendline & Channels
Trendline and Channels are one of the simplest and most practical tools available in the market.
For example: During an uptrend, a trend line is formed by joining periodic corrective lows, which are defined as secondary moves in the previous section.
The upward trend line has a positive slope. And the downward trend line has a negative slope.
More specifically, if we draw an uptrend line below the candles, we need at least two low hits to form a trendline during an uptrend.
A third strike towards the trend line is used to validate the trend line. If the trend line is not broken in the third encounter, it is called the validity of the trend line. It is often seen that the price pulls back towards the trend line and goes higher.
In a rising market, it is often easier to make money if one buys near the trendline and sells higher.
The more times the trend line is validated (hitting the trend line), the more important that trend line becomes. The upward trend line is called the support zone.
Selling pressure here responds with buying pressure, and finally when the buying pressure exceeds the price of the selling pressure, overtime increases.
When a trend line is broken, the market may either reverse the trend, continue the uptrend with less force, or simply move sideways.
Similarly, during a down-trend: a trendline is formed by joining pull-back highs. They slope downwards. Just like an up-trend line a down-trend line is formed by joining two points and then extended in downward direction. More number of times the line is validated, more it grows in importance.
meets the buying pressure here and eventually overtime when selling pressure is higher than buying pressure price sees a decline.
Role Reversal of support and resistance lines
Once a trendline support or resistance is broken, its role is reversed. If the price falls below a support line, that line will become resistance. If the price rises above a resistance line, it will often become support. As the price moves past a line of support or resistance, it is considered that supply and demand have shifted, causing the breached line to reverse its role. For a true reversal to occur, however, it is important that the prices make a strong move through either the support or resistance line.
The concept of channel is very similar to trend lines. We can draw channels when we see balanced movement in parallel in an uptrend or in a downtrend or in a consolidation. Channel boundaries are good points for reversal trades.
When the price breaks out of either side of the channel, the trend or range of the stock is broken.
In this section we introduce the second aspect of charting. This is called volume. Traded volume is the number of quantity of stocks which change hand. The volume is shown as a sub graph in the price-time chart, below the price window. Higher the volume in any particular move, the greater is the conviction in that move to continue greater distance in that direction. However, if volume is on the lower side during a move, the stock is generally bound to lose momentum. Generally, during range bound phases, the volume is low.
The important thing about volume is that transaction volume does not matter in absolute terms.
When we talk about more or less volume, it is relative to the average volume in certain time frames.
Usually, in binary option trading, the volume tool is used alongside the tools and trading strategy.
Classical Chart Patterns
As we have discussed in the previous section, that market can be either in trending phase or in a range-bound phase. No trend generally lasts forever in the market. After prolonged or medium or shorter duration up and downtrend, the market often reverses and a move starts in the opposite direction of the prior move.
Often we find that well defined geometrical patterns are formed in the chart which provides good indication of price reversals.
These patterns are called reversal classical chart patterns. When they are formed as a bullish reversal pattern they are said to be part of accumulation.
On the other hand if they are formed at the top of a price move just before bearish reversal, then they are part of distribution. However, a geometrically shaped consolidation does not necessarily mean price reversal.
Often price resumes the erstwhile trend post the consolidation move. These are called continuation classical chart pattern. We will discuss about few of the classical chart patterns in the following section.
Head and Shoulder & Inverse Head & Shoulder
A head and shoulders pattern is a bearish reversal pattern. This pattern appears after an uptrend. This pattern consists of three consecutive tops, one in the middle is higher than the other two. The top in the middle is called the head and the two side peaks are called the shoulders. Joining the middle depressions, we take the neckline.
In binary option trading: At the final breakout below the collar, we usually enter a sell trade, and set the candle time to 1 minute and the expiration time to 5 minutes.
In forex trading: At the final breakout below the collar, a short trade is usually placed with a stop loss above the nearest shoulder. The target is usually considered to be the distance between the neckline and the head, which protrudes from the breakout point. If the lower volume below the right shoulder is on the higher side and the breakout happens with a lot of volume, the certainty is for a reversal on the higher side.
An Inverse Head and Shoulder is just mirror image of the Head and Shoulder pattern. This should appear after a sustained down trend, the rule of stop loss and target are similar. This often acts as a very effective bullish reversal pattern.
Double Tops and Bottoms
These chart patterns are well-known patterns that signal a trend reversal – these are considered to be one of the most reliable patterns and are commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. These patterns are created when price movement tests support or resistance levels twice and is unable to break through. These patterns are often used to signal intermediate and long-term trend reversals.
You need to identify a double top pattern at the top of the uptrend to trade. It has two almost equal peaks. By joining the posts of the first and second peaks, you get a neck line. The moment the price breaks this line, the pattern is confirmed.
This is a bearish reversal pattern used by many traders. In addition, the price reduction will also be harsh. To predict the price decline, you need to measure the height of the highest peak and subtract it from the collar level.
Three tops pattern
Like the double pattern above, this formation belongs to bearish reversal patterns. At the end, an uptrend develops. It takes longer to create than the double top pattern, so it is more reliable.
It consists of the next three peaks. The distance between them is rarely the same. The neck line is drawn by connecting the lower parts of the formation. Once this support level is broken, the pattern is confirmed and the trend is reversed.
A few rules must be followed to identify the top three pattern:
- The height of all three tops is similar.
- When breaking the collar, its volume increases greatly.
Triangles are one of the most well-known chart patterns used in technical analysis. The three most common types of triangles, which differ in structure and use, are symmetrical triangles, ascending triangles, and descending triangles.
These chart patterns are considered to last from several weeks (ideally over 12 weeks) to several months. These are areas of consolidation after a trend move and are generally continuation patterns, meaning that previous trends resume after a break. However, in certain cases they act as reverse patterns. They can appear in both uptrends and downtrends.
Candlestick Reversal Patterns
When we discussed candlestick charts, we said that they are superior to many other types of charts because of their recognizable chart patterns that are easy to define and work beautifully in the market.
In this section we will discuss some popular chart candlestick patterns. Candlestick patterns provide criteria for entry and stop loss, but there is no target setting in classic chart patterns.
What is a hammer pattern?
A hammer is a single candlestick bullish reversal pattern. This comes after a long downtrend. Ideally there should be a gap to the downside and sellers should be able to push the price down as a continuation of a downtrend. At this stage, the buyers must overcome the sellers and push the price higher and close to the opening price.
The candle formed in this process should have a small body, a large lower shadow and a very small upper shadow. Ideally, the lower shadow should be at least twice the length of the body. The body color can be green or red, but if the body color is green, the hammer is considered slightly more bullish because the buyers were strong enough to close above the open price. The next day or in the next two or three days, ideally a gap should open or the price should be above the high of the hammer candle.
This work is called pattern verification. A hammer, like a candle, has no real significance without credibility. In forex trading, if the price moves above the top of the hammer, a buy trade can be placed with a stop loss below the bottom of the candle.
What is a Shooting Star pattern?
A shooting star is just like the mirror image of a hammer candle. First there must be a sustained uptrend and then a gap must open. Buyers should increase the price at the beginning of the day.
Then, at the end of the day, the sellers have to take control of the stock and drive down the prices. Finally, the closing price should be very close to the opening price, resulting in a candle with a small green or red body, a large upper shadow, and a small or insignificant lower shadow. The upper shadow of the candle should be at least twice the length of the body.
Now if the price breaks below the low of the candle in the next 2-3 candles, the shooting star pattern is confirmed. After confirmation, a short trade should be placed with a stop loss above the high of the candle. A shooting star pattern with a red body is considered slightly more bearish than a pattern with a green body. It is often seen that the shooting star candlestick pattern acts as a bearish reversal pattern, causing a bearish move after an uptrend.
We have come to the end of this tutorial, I hope this tutorial has been useful for you, in the end I need to remind you a few things, traders ideally combine indicators and price patterns to form their trading strategies. . Rarely do professional traders rely on just one indicator or one price pattern. We are ending our short journey to introduce you to the basic concept of graphing. Hopefully this will give you enough clarity and interest in your mind to apply those concepts to live charts.
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