TECHNICAL ANALYSIS
CHARTS Bar Line Candlestick Charts are the basis of technical analysis They are a graphic display of price action Candlestick charts have become the industry standard for technical traders.
CANDLESTICK CHART Most charts will have down candles as red, which means that the price opened higher than it closed. Conversely, up candles usually shown as blue or green which means that the price opened lower than it closed. Therefore, a downtrend will be made up of mainly red candles whereas an uptrend is made up of mainly green candles.
HOW CANDLESTICKS WORK The body of the candle is the difference between the open price and close price. The high or low price is displayed as the wick (thin line) on the top or bottom of the body.
RESISTANCE AND SUPPORT Resistance, the high point, is the price level where the supply starts to become greater than the demand. Sellers step in and resist the rise in prices. Essentially, the sellers are taking over from the buyers. Support is the price level where demand starts to become greater than the supply Buyers step in and support the price from going lower. Here there are more buyers than sellers. Resistance is the recent high price, relative to the current price. The support is the recent low price relative to the current price. How far back to look for support or resistance must depend on the time frame. So, when looking at a 5 minute chart then look back to the start of the session, Asian, European or North American session. When looking at the hourly chart, you can go back to the start of the trading day, i.e. the recent 5pm EST
DRAWING RESISTANCE AND SUPPORT LINES Find the clear/obvious price levels which were previous turning points. Either high points (resistance) or low points (support). Majority rules if you re not sure, neither will anyone else be.
DRAWING RESISTANCE AND SUPPORT CONTINUED The most important lines to note, are those where support becomes resistance (or resistance becomes support). Include the wicks (the high and low) when drawing in resistance and support levels. If the price could not go higher than a certain price previously then we assume that it will not go higher than that same level when it is approached again. The same would apply at a support level and if a price could not go below that price on it s previous attempt, it will not go below when tested again. When a resistance has been a previous support, or a support has been a previous resistance, these levels will usually prove to be significant and therefore effective when using these levels in you strategy.
WHAT ARE TRENDS? Trend lines are basically resistance and support lines Trends will differ depending on the time frame on which you are working There are three kinds of trend: Uptrends Downtrends Sideways Trends The trend is the direction in which the pair is moving. Whether the price is getting higher: an uptrend, or going lower: a downtrend, or levelling off with neither buyers or sellers dominating: a sideways trend.
UPTREND A pattern/trend consisting of higher highs and higher lows in sequence This indicates more buyers than sellers, thus the price is going up.
DOWNTREND A pattern/trend consisting of lower highs and lower lows in sequence This indicates that there are more sellers and less buyers. Thus, the price will move lower or go down.
SIDEWAYS TREND No obvious direction Neither highs or lows are dominating. Therefore the trend does not go upwards or downwards. The trend will be sideways when the buyers and sellers are the same and there aren't more buyers or sellers to make an uptrend or downtrend. There are always buyers and sellers in each currency pair. E.g. in the EUR/USD pair, there are people buying the euro and selling the USD; at the same time there are people buying the USD and selling the EUR. The trend will be determined by which is dominating. If neither dominates, the trend is sideways.
TRADING RANGE VS. TRADING BREAKOUTS When price action is contained within resistance and support we call this a range. Range traders will trade within this channel, expecting that buyers will buy off support levels until the price reaches resistance. Then, sellers will take over and the price should come down until it reaches support. Hence, trading within the range between resistance and support. The other strategy is waiting until the price breaks through the resistance or support levels (after the range) i.e. buying after price breaks above resistance or selling when the price breaks below support breakout trading strategy.
TWO TYPES OF CANDLESTICK PATTERNS Candlestick patterns either signal trend reversals or trend continuations To identify the pattern we look at the preceding trend/direction leading up to the pattern. This determines whether the formation is signalling that the pre-existing trend will continue or reverse and change directions. Candlesticks often reflect the sentiment of traders and the patterns which they form will signal the direction we expect the trend to move in.
REVERSAL: HANGING MAN, HAMMER, SHOOTING STAR When there is a long tail/wick following a strong trend, and then a sharp reversal in the opposite direction. The logic is that the pre-existing trend has run its course and there are no longer any sellers (if a preceding downtrend) or no longer any buyers (if a preceding uptrend).
REVERSAL: ENGULFING Following a strong trend, e.g. downtrend and succession of red candles, a big green candle which is higher and lower than the last red candle it engulfs the red candle signals a reversal and an uptrend expected to now begin. Alternatively, after a strong uptrend and succession of green candles, a big red candle then engulfs the last green candle (meaning it has a higher high and lower low) and a downtrend is expected to follow. Bearish Bullish
REVERSAL: DOUBLE TOP The Double Top is a very strong reversal pattern when the price reaches a high point (resistance), comes down and then tries again without breaking the resistance (so comes down again). This double top emphasizes that the resistance is strong and after trying for a second, or even third time (triple top) the signal is for a trend reversal in the opposite direction.
REVERSAL: DOUBLE BOTTOM The Double Bottom is the same logic except it follows a preceding downtrend attempting support level twice and being rejected, and then a reversal of the downtrend and a new uptrend expected to begin.
TRIANGLE PATTERNS A Triangle is usually a slower forming pattern and needs a number of candlesticks to develop. This situation is great as it gives the trader time to watch the pattern develop and plan the expected move/trend which will follow. Triangles are continuation patterns (as opposed to reversals), meaning we expect the preceding trend to continue. Triangle pattern recognition requires a more subtle and nuanced understanding as the timeframe and range boundaries are variable..
CONTINUATION: ASCENDING TRIANGLE Resistance gives way Breakout Here we see an uptrend develop with higher lows being formed. However the price is unable to make higher highs and resistance does not give in and allow higher highs to be formed. The trader is expecting a break above the resistance as we see the ascending triangle being formed. A preceding uptrend would add strength to the pattern. Support levels are rising (uptrend)
CONTINUATION: DESCENDING TRIANGLE Resistance levels are dropping (downtrend) This is the opposite scenario the formation of a downtrend with lower highs, but the lows don t get lower as support holds strong. The trader is waiting for support to give way as the descending triangle is being formed. Support gives way Breakout
CONTINUATION: SYMMETRICAL TRIANGLE Resistance Here the trader sees the candles getting smaller and price action getting tighter... waiting for a breakout in either direction Breakout can go either way Support
TIME FRAMES AND POSITIONS Daily 4 hour 1 hour Multiple time frame analysis Mixing up or confusing time frames is probably the single biggest and most common mistake of all traders We usually scale down from the longest period to the shortest Although the live price will be the same on all time frames, the trends will differ The shorter time frames will pick up all of the noise There is no more important lesson for traders to learn: stick to the timeframe which signalled the trade and don t look at all different time frames once in the trade. The amount of time to stay in a trade should match with the timeframe on the chart. If the trade was taken looking at a 5min chart, stay in the trade for a number of 5 min periods (roughly 6). If the trade was taken looking at an hourly chart, stay in the trade for a number of hours (roughly 6). Be sure to understand this concept in order to trade successfully.