You’ll need to understand Technical Analysis It provides the basic rules for many risk control decisions, such as:
- Identify trades that offer low risk and the best potential entry to achieve the best return by identifying the best exit and entry points so that we can buy at a low price and sell at a high price (or vice versa in short trades)
- Set price levels via a stop-loss or partial take profit order if the trade threatens to reverse in the other direction.
- Determine the size of the center and the entry or partial exit points of the center.
Technical analysis tools are mostly applied to charts, which are images of a trader’s behavior over a given period, regardless of what fundamental analysts may speculate about the reason behind this behavior. The first step in learning technical analysis is to read and understand chart patterns.
Technical analysis can be as complex or as simple as you want. The example below represents a simple description of bullish trends.
- General trend: The first step is to identify the general trend. This can be achieved using trend lines, moving averages, or tops/lows analysis. For example, a trend is bullish if the price remains above the bullish trend line or a certain moving average. Similarly, a trend is bullish if troughs form above the trend line at each pullback and peaks above the trend line form at each progress.
- Support: Previous congestion zones and lows below the current price indicate support levels. A breakout below the support level is considered a bearish movement and harmful to the overall trend.
- Resistance: Areas of congestion and previous highs above the current price indicate resistance levels. A breakout above resistance is an upward and positive movement of the general trend.
Technical analysis for beginners Explore the secrets of technical analysis to make effective trading decisions
Technical analysis is a method used to evaluate and predict price movements in financial markets by analyzing historical price charts and trading volume. It is based on the assumption that historical price movements tend to recur, allowing traders to identify possible future trends. Here is an overview for beginners, including popular indicators and patterns:
Candlestick patterns:
- Doji: Refers to market hesitation, with opening and closing at the same level.
- Engulfing patterns: bullish engulfing patterns (buy signal) and bearish engulfing patterns (sell signal).
- Hammer and Hanged Man: indicate possible setbacks.
Trend lines:
- It is plotted to link consecutive lows in an uptrend or highs in a downtrend.
- Uptrend: lows, bearish: highs.
Support and Resistance:
- Support: The price level where the stock tends to stop falling.
- Resistance: The price level at which a stock tends to stop rising.
Moving averages:
- Simple Moving Average (SMA): The average closing prices over a given period.
- Exponential Moving Average (EMA): Gives more weight to recent prices.
Relative Strength Index (RSI):
- It measures the magnitude of recent price changes to assess overbought or oversold conditions.
- Values above 70 indicate overbought, and below 30 indicate oversold.
Convergence and divergence of the Moving Average (MACD):
- It consists of two moving averages: a line MACD and signal line.
- It provides trend follow-up and momentum indicators.
Head and shoulders style:
- A reversal pattern indicates a change in the current trend.
- The head (peak) and shoulders (lower peaks) indicate a reversal.
Double top and double bottom:
- Double Top: A bearish reversal pattern.
- Double Bottom: Bullish reversal pattern.
Remember that technical analysis is subjective, and no indicator or pattern guarantees success. It is necessary to use multiple tools and combine technical analysis with other forms of analysis, such as fundamental analysis and risk management practice.
Technical analysis for beginners and the use of trend lines
Trend lines are valuable tools in technical analysis to identify potential trend reversals. Here’s how to use them:
Draw trend lines:
- To the upside, connect the lows of successive price movements.
- To the downside, correlate the highs of successive price movements.
- The trend line should ideally touch at least three points to check its importance.
Identify possible setbacks:
Breaking the trend line:
- A decisive breakout below the uptrend line or above the downtrend line may indicate a possible trend reversal.
- This break indicates a shift in the balance of power between buyers and sellers.
Change in price behavior:
- Watch for the change in the pattern of higher highs and higher lows in the uptrend or lower highs and lower lows in the downtrend.
- Reversals often coincide with failures to achieve new highs or lows.
Emphasis with other indicators:
- Confirm possible reversals using other technical indicators such as oscillators (RSI, MACD) or chart patterns.
- The difference between price direction and indicator signals can reinforce the reversal signal.
Volume Analysis:
- Analyze the trading volume during the formation or breakout of the trend line.
- An increase in volume during a trend line break may indicate a strong conviction behind the reversal.
Backtest and confirmation:
- Validate potential reversals by observing historical price action around trend lines.
- Multiple instances of price respecting the trend line and then breaking it adds credibility to the reversal signal.
Consider time frames:
- Confirm trend reversals by evaluating the breakout on different timeframes.
- Breaking the trend line on higher timeframes (daily and weekly) can be more important than shorter timeframes.
Remember, although trendlines are valuable, no single indicator guarantees accuracy. Traders often use a range of tools to increase the power of their analysis and confirm potential trend reversals
