What is technical analysis?
Technical analysis studies historical market patterns (market statistics) to predict future price movements in financial markets.
Applicable to all markets, including Forex, Cryptocurrency, Stock, etc.
Technical Analysis (TA) vs. Fundamental Analysis (FA)
- TA: Predict price movement based on chart data studies
- FA: Predict price movement based on economic, political, and social data studies
Chart type
It is up to you which one to use. Most traders like to use candlestick charts because they show more information than others.
- Candlestick chart
- Bar chart
- Line chart
Time Frame
Candlestick
Candlestick Anatomy
1. Body
- Long body = strong sentiment
- Short body = weak sentiment
2. Shadow
- Long shadow = strong rejection
- Short shadow = weak rejection
- Equally long or short = buyer and seller are equally strong or weak.
3. Open
- Starting price for each candlestick.
4. Close
- Bullish CS close must be above.
- Bearish CS close must be below.
- The duration of CS formation depends on the time frame used.
5. High
- The highest price has been achieved.
6. Low
- The lowest price has been reached.
Candlesticks Pattern & Psychology
- Hammer (Bullish Pinbar)
- Shooting Star (Bearish Pinbar)
- Dark Cloud Cover
- Piercing Pattern
- Bullish Engulfing (Bullish Outside Bar)
- Bearish Engulfing (Bearish Outside Bar)
- Morning Star
- Evening Star
Other candlestick patterns:
- Hanging Man
- Inverted Hammer
- Doji
- Harami (Inside Bar)
- And more…
Trend
If observed roughly, the trend looks like a staircase where price moves in one direction as a whole in stages.
- H = High
- L = Low
- HH = Higher High
- LL = Lower Low
- HL = Higher Low
- LH = Lower High
Uptrend
- During the uptrend, the price always makes a new high (HH) and a higher low (HL).
Downtrend
- During the downtrend, the price always makes a new low (LL) and lower high (LH).
Sideways
- No direction, flat movement.
- The amount of increase is about the same as the decrease.
- Uneven high and low.
Support & Resistant
Support & Resistance is a zone, not specific levels. Price tends to retest this level, whether it can survive or not.
The strength of S&R can be measured by looking at the frequency of price retests in that zone. The more often it retests, the less likely it is to hold and tend to break out.
- Support = Zone below the market price (Low).
- Resistance = Zone above the market price (High).
This S&R area is what we are waiting for to trade because the price likes to reject this zone. History has proven it.
So what is the position to trade if the price retests this level?
Buy low, Sell high
- Buy at support
- Sell at resistance
S&R Flip
The occurrence of a breakout will change the role (role reversal) of S&R to the opposite. The S&R flip zone is also known as the Price Pivot Zone (PPZ).
- Resistance becomes Support
- Support becomes Resistance
Chart Pattern
Chart patterns are divided into two types:
Continuation chart pattern
- Bullish Rectangle
- Bearish Rectangle
- Symmetrical Triangle
- Ascending Triangle
- Descending Triangle
- Head and Shoulder Continuation
- Cup and Handle
Reversal chart pattern
- Head and Shoulder Top
- Head and Shoulder Bottom
- Parabolic
There are other interesting chart patterns worth looking at, such as Rising Wedge & Falling Wedge, Flags & Pennants, and more.
Basic indicator
Indicators are just an aid to trading. It’s okay even if you don’t want to use it.
The fact is that the indicator deceives many people because they rely too much on it.
The nature of the indicator is lagging (slow) because it requires the market price to calculate and generate a signal. Usually, the data source is from the open, close, high or low candlestick.
Indicators have their uses, and each has its weaknesses. Some are only suitable when the market is trending, and some are only suitable when the market is ranging.
There are too many indicators to list here.
Among the popular indicators:
Divergence
Divergence analysis is to measure market momentum, whether it is weakening or strengthening.
Divergence is a leading indicator because we can identify early signs of changes in market momentum.
To find a divergence, you can use oscillators such as RSI, MACD, stochastic, CCI or others.
If the price goes up or down, the oscillator should follow suit. Otherwise, divergence will occur.
Divergence = Difference between price and oscillator.
There are two types of divergence:
Regular divergence (reversal)
Hidden divergence (continuation)
Breakout vs. Fakeout
1. Breakouts
- A lot happens when the market is trending.
- Breakouts happen quickly at S&R levels.
- You can identify a breakout by looking at a long candlestick body slash the S&R level.
2. Fakeout
- A lot happens when the market is sideways.
- Several attempts to break the S&R level with only a tiny change and the price reject the level.
- You can identify fake out by looking at the spike (shadow) of the candlestick.
Round number
The round number is a psychological level that can act as support & resistance (decision level). This level is where there are many orders or reactions from traders.
Why it’s important? Because we are naturally more alert to round numbers, which are simple and easy to identify. The same goes for other market traders because they are human beings like us.
We can use the round number as a confluence with other methods in technical analysis.
For example:
Further readings: