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What is Technical Analysis?
Technical Analysis is the study of past action of the price of an asset in order to make trading decisions.
Though how the price behaved in the past isn’t a reflection of the future, studying the past helps predict the future.
Technical analysis thus forms a significant part of trading.
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Trade History
Most traders use the technique to derive trade setups and signals.
The study of prior behavior of the price is wide and varied.
It has everything to do with candlestick patterns, chart patterns, drawing, and technical indicators.
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All those are things you might have come across in your trading journey but didn’t understand where they fall.
In this post, I will walk you through the basics of technical analysis.
Expect to learn a thing or two about candlestick and chart patterns, drawing tools, and technical indicators.
Technical Analysis Trading.
How then is technical analysis trading done?
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By the application of knowledge about drawing tools, candlestick patterns, chart patterns, and indicators.
If you don’t know what these tools are, don’t fret.
They are trading tools readily available on your trading platform and majorly used to define entry and exit, which are the determinants of winning in asset trading.
1. Drawing Tools.
What are drawing tools?
These are tools available on your trading interface which can be applied at the click of a few buttons, useful in drawing significant price levels on the chart.
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Drawing tools are such as the trend line, horizontal line, vertical line, and ray.
Fibonacci levels and the Fibonacci fan are also classified as drawing tools because they are also used to draw key levels in the price of a traded instrument.
- The Trend line is a drawing tool that runs diagonally across the price chart.
It is useful in marking significant levels in the price of an asset such as support, resistance, and consequently price ranges.
It can also be drawn along pivot points to determine the overall trend.
- A horizontal line on the other hand is a drawing tool that runs across the price chart from left to right.
The line is significant in identifying important levels of the price such as support and resistance.
- Also, there is a vertical line which is a drawing tool running vertically on the price chart.
It is used to mark significant points along the price of an asset.
These points may be such as certain significant times important to the trader.
- The Ray is a drawing tool that runs diagonally across the price chart.
It has one endpoint while the other side goes on to infinity.
It is used to draw support and resistance as well as showing the overall trend of the market.
- Fibonacci levels and fans are drawing tools used on the price chart to mark significant price reversal levels in relation to significant swing highs and swing lows.
Prices tend to reverse at levels whose intervals are determined using Fibonacci ratios.
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Candlestick Patterns.
Candlestick patterns are sets of candlesticks or single candlesticks which form definite shapes.
The shapes the candlesticks form are associated with upward or downward price movements.
Here are some of the bullish candlestick patterns.
They mostly occur near the end of downtrends to signify a bullish reversal.
They may also occur along uptrends to signify uptrend continuation.
- Bullish engulfing – formed by a short bearish candlestick completely engulfed by a larger bullish candlestick. The bullish candlestick must gap down to open below the close of the bearish candlestick, then close above the open of the same candlestick.
- Hammer – formed by one candlestick with a short body and a long lower tail. The tail must be more than twice the height of the body.
- Inverse hammer – formed by one candlestick with a short body, a long upper tail, and very short or no lower tail.
- Three white soldiers – formed by three consecutive bullish candlesticks with small wicks. From the second, each candlestick must open and close higher than the previous.
- Piercing line – formed by a long bearish candlestick followed by a long bullish candlestick. The bullish candlestick must gap down to open below the close of the bearish candlestick, then close at or above the middle of the body of the bearish candlestick.
- Morning star – formed by a long bearish candlestick followed by a gap down then a short-bodied candlestick or a doji, a gap up then and a long bullish candlestick.
Here are some of the bearish candlestick patterns.
They mostly occur near the end of uptrends to signify a bearish reversal. They may also occur along downtrends to signify downtrend continuation.
- Bearish engulfing – formed by a short bullish candlestick completely engulfed by a larger bearish candlestick. The bearish candlestick must gap up to open above the close of the bullish candlestick, then close below the open of the same candlestick.
- Hanging man – formed by one candlestick with a short body and a long lower tail. The tail must be more than twice the height of the body. Its difference with the hammer is that it occurs near the end of an uptrend.
- Shooting star – formed by one candlestick with a short body, a long upper tail and very short or no lower tail. Its difference with the inverse hammer is the uptrend.
- Three black crows – formed by three consecutive bearish candlesticks with small wicks. From the second, each candlestick must open and close lower than the previous.
- Dark cloud cover – formed by a long bullish candlestick followed by a long bearish candlestick. The bearish candlestick must gap up to open above the close of the bullish candlestick, then close at or below the middle of the body of the bullish candlestick.
- Evening star – formed by a long bullish candlestick followed by a gap up then a short bodied candlestick or a doji, a gap down then, and a long bearish candlestick.
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Chart Patterns.
Chart patterns are patterns on the price of an asset formed by several candlesticks after a long time.
Unlike candlestick patterns, chart patterns are sets of candlesticks forming definite shapes and take longer to form fully.
Patience is therefore essential here.
Here are some of the bullish chart patterns.
They mostly occur near the end of downtrends to signify a bullish reversal. They may also occur along uptrends to signify uptrend continuation.
- Ascending triangle – candlesticks form a triangle whose apex inclines upwards. A breakout occurs upwards above the upper side of the triangle.
- Bull flag – candlesticks form a flag post of a strong price momentum upwards, then a downwardly inclined pattern resembling a flag. A breakout occurs upwards above the upper side of the flag.
- Cup and handle – candlesticks first form a U shape like a cup, then a downward pattern like a handle. A breakout occurs upwards above the upper side of the handle.
Here are some of the bearish chart patterns.
They mostly occur near the end of uptrends to signify a bearish reversal.
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They may also occur along downtrends to signify downtrend continuation.
- Head and shoulders – candlesticks form a swing high which is followed by a higher swing high then a lower one, almost at the same level as the first. The price breaks downwards below the neckline.
- Bear flag – candlesticks form a flag post of strong downward price momentum, then an upwardly inclined pattern resembling a flag. A breakout occurs downwards below the lower side of the flag.
- Descending triangle – candlesticks form a triangle whose apex inclines downwards. A breakout occurs downwards below the lower side of the triangle.
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Technical Indicators.
Technical indicators are chart analysis tools used to show possible entry points of the market as the price proceeds.
They move along the price of an asset showing how the price is changing on a smaller scale and therefore give hints on where the price might move next.
Here are some of the technical indicators:
- Moving Averages – One of the ways to trade Moving Averages is MA Crossovers.
Apply two MAs of different periods.
Trade in the direction the short period MA crosses over the long period MA.
Another method is the Price Bounce Back.
Apply one MA say MA 20.
Wait for the price to cross the MA upwards or downwards.
Let the price remain in the direction it has crossed to, falling or rising to hit the MA, and retest it successfully without breaking downwards or upwards past the MA.
Trade in the direction of price bounce back.
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The last alternative is trading the Trend.
MAs point in the direction of the general trend. Regardless of how many MAs you use, trade in the direction they point.
- Moving Average Convergence and Divergence (MACD) – Trade-up if the fast MACD MA crosses over the slow MACD MA upwards.
You can also consider trading down if the fast MACD MA crosses over the slow MACD MA downwards.
Additionally, trade up if the MACD MAs and the oscillating histogram/curve/area shift from below to above the zero line.
Opposite conditions call for a down trade.
- Donchian Chanel – Trade the trend by trading up when the price crosses the middle line upwards and the channel is inclined upwards.
On the contrary, trade down if the price crosses the middle line downwards and the channels point down.
Donchian Channel breakouts are identified by the price touching either the upper or lower band.
Trade up if the price touches the upper band and down if the price touches the lower band.
Conclusion.
Take note that we have not covered all drawing tools, candlestick patterns, chart patterns, and technical indicators in this guide.
They are so many to be covered in a single guide.
- Start trading with $1
- Earn up to 95% profits
- Fast payments
- $10 minimum deposit
- $10 minimum withdrawal
Therefore, find out more about drawing tools, candlestick patterns, chart patterns, and technical indicators in our other posts.
They are the basic components of technical analysis trading, and technical analysis is the backbone of asset trading.
Happy Trading!
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