Technical Analysis

Introduction

Technical analysis is the core of making educated trading decisions, without it you cannot consistently make a profit, but with it you can make more educated predictions about where a market might go and how profitable a position can be.

Trending Markets

Analyzing the trend of the market is the process of determining whether a market is in the process of moving up or down via utilizing trend lines and other such indicators.

Up-trends

Up-trends are nothing more than when a Candlestick chart is consistently making new highs and then higher lows Followed by new higher highs new higher lows new higher highs new higher lows new higher highs New higher lows and so forth This higher high and higher lows situation is what is referred to as a trending market in this particular situation would be an uptrend Now the reason we utilize a trending market is because it gives us more accuracy on our trades

The above market has a very clear uptrend as the candlestick charts are continually making new higher highs and higher lows. However just looking at the way the price seems to be moving is not optimal for identifying trends; there are much more objective identifiers for a trending market. We want to look at what are known as impulsive moves, and pullbacks.

Impulsive moves and Pullbacks

Impulsive Moves are when the market makes a large climb upward in a relatively short period of time. Impulsive moves are followed by a pullback wherein the market will take a breather from the previous large upwards jump in price and fall back down in price. These pullbacks are usually followed by yet another Impulsive move.

So the objective way to identify trends are the lowest low of the pullback cannot be broken for the market to stay in an uptrend. So once we have this move that breaks and closes above our previous high. Once we have that impulsive move breaking into new higher highs, which is what we're looking for in an uptrend This market is still considered in an uptrend until it breaks or closes below the lowest low of the previous pullback. When the market breaks above this high right here when this market breaks above this high with the new Impulsive move making a new higher high; then this market is still considered to be in an uptrend until or unless the market breaks and closes below what the lowest low of the pullback.

Downtrends

Downtrends are the opposite of up trends indicative of the fact that the asset is decreasing in value over time, and in order to identify a downtrend the inverse of the uptrend identification strategy is used. The impulsive moves are now pushing the asset downwards in price; whereas the pullbacks are causing the asset to ascend in price. As the market continues to trend downward we should be looking for opportunities to sell

Support and Resistance

Support and resistance are simply areas in the market that price is likely to react from Support is an area in the market that price is likely to have a bounce up from or be supported by; whereas Resistance is an area in the market where the price of an asset is likely to fall or drop down from these areas are based on historic price and based on other areas of Support and resistance

These lines of support and resistance are determined via historic market data. Support and resistance can not only help a trader determine when assets are due for a reversal, but they can also help identify good locations for stops and targets. For example if placing a stop-limit sell

One strategy to identify support is to look at the previous level of Resistance that was broken to become support this is how traders use support and resistance for entry points in a trend continuation model and in a trending market is by using that previous level of resistance as Possible support.

In this example the market broke to a new higher high during it's impulsive move, and upon entering the pullback it stopped at the location of the previousl highest high. Thus the previous resistance has now become support; generally speaking whenever a market breaks through either support or resistance they will flip, for example.

Here we have a bearish example where what was previously support has now become resistance, and if this line of resistance were to be broken through again by the market then it is highly likely it would once again become support.

Support resistance strategy

The first step is to identify the level of support, which can be visualized as a box or a line. This level is crucial for setting your stop loss, which should be placed below this support level. This strategy ensures that your potential losses are minimized if the market moves against your prediction. Now, let's talk about setting targets. If you're anticipating a trend continuation, you would look at the previous high of the market. If the pullback hasn't broken below the low of the previous pullback, it's likely that the market will break above these highs and continue in an uptrend. Therefore, a reasonable strategy would be to set your targets at the previous high, as the market is likely to continue rising. This is where the resistance level comes into play. Your target would be based on this resistance level.

Support Resistance Summation

In an upward trending market, we look for a resistance level to break. After this break, we anticipate a pullback that returns to the broken resistance level. This level then often becomes a new support level in the continued uptrend.

Conversely, in a downward trending market, we look for a support level to break. After this break, we expect a pullback that returns to the broken support level. This level then often becomes a new resistance level in the continued downtrend.

When it comes to setting stops and targets, we use these identified levels. Our stop-loss should be set beyond the identified support or resistance level.

When setting targets, we need to look left and ensure our targets are not close to a resistance level for a buy trade, or a support level for a sell trade.

For a buy trade, we don't want our target to be beyond a major resistance level, as this could push the market down. Therefore, we should aim to take profits or at least move our stop-loss to break even before the market reaches this resistance level.

For a sell trade, we want the market to go lower, but not beyond a level of support. This is because a support level could push the market up, which is not favorable for a sell trade. Therefore, we should aim to take profits or at least move our stop-loss to break even before the market reaches this support level.

Indicators

Trading indicators