Technical Analysis – A Beginner’s Guide

financialtreat – will explain about Technical Analysis – A Beginner’s Guide that you will get in the following article. let’s look at this article carefully! Technical analysis is a tool, or method, used to predict the probable future price movement of security – such as a stock or currency pair – based on market data.

The theory behind the validity of technical analysis is the notion that the collective actions – buying and selling – of all the participants in the market accurately reflect all relevant information pertaining to a traded security, and therefore, continually assign a fair market value to the security.

Past Price as an Indicator of Future Performance

Technical traders believe that current or past price action in the market is the most reliable indicator of future price action.

Technical analysis is not only used by technical traders. Many fundamental traders use fundamental analysis to determine whether to buy into a market, but having made that decision, then use technical analysis to pinpoint good, low-risk buy entry price levels.

Charting on Different Time Frames

Technical traders analyze price charts to attempt to predict price movement. The two primary variables for technical analysis are the time frames considered and the particular technical indicators that a trader chooses to utilize.

The technical analysis time frames shown on charts range from one-minute to monthly, or even yearly, time spans. Popular time frames that technical analysts most frequently examine include:

  • 5-minute chart
  • 15-minute chart
  • Hourly chart
  • 4-hour chart
  • Daily chart

The time frame a trader selects to study is typically determined by that individual trader’s personal trading style. Intra-day traders, traders who open and close trading positions within a single trading day, favor analyzing price movement on shorter time frame charts, such as the 5-minute or 15-minute charts. Long-term traders who hold market positions overnight and for long periods of time are more inclined to analyze markets using hourly, 4-hour, daily, or even weekly charts.

Price movement that occurs within a 15-minute time span may be very significant for an intra-day trader who is looking for an opportunity to realize a profit from price fluctuations occurring during one trading day. However, that same price movement viewed on a daily or weekly chart may not be particularly significant or indicative for long-term trading purposes.

It’s simple to illustrate this by viewing the same price action on different time frame charts.

The following daily chart for silver shows price trading within the same range, from roughly $16 to $18.50, that it’s been in for the past several months. A long-term silver investor might be inclined to look to buy silver based on the fact that the price is fairly near the low of that range.

However, the same price action viewed on an hourly chart (below) shows a steady downtrend that has accelerated somewhat just within the past several hours. A silver investor interested only in making an intra-day trade would likely shy away from buying the precious metal base on the hourly chart price action.

Candlestick charting is the most commonly use method of showing price movement on a chart.

A candlestick is forme from the price action during a single time period for any time frame. Each candlestick on an hourly chart shows the price action for one hour, while each candlestick on a 4-hour chart shows the price action during each 4-hour time period.

Candlesticks are “drawn” / forme as follows: The highest point of a candlestick shows the highest price a security trade at during that time period, and the lowest point of the candlestick indicates the lowest price during that time.

The “body” of a candlestick (the respective red or blue “blocks”, or thicker parts, of each candlestick as shown in the charts above) indicates the opening and closing prices for the time period.

If a blue candlestick body is forme, this indicates that the closing price (top of the candlestick body) was higher than the opening price (bottom of the candlestick body); conversely, if a red candlestick body is forme, then the opening price was higher than the closing price.

Candlestick colors are arbitrary choices. Some traders use white and black candlestick bodies (this is the default color format, and therefore the one most commonly use); other traders may choose to use green and re, or blue and yellow. Whatever colors are chosen, they provide an easy way to determine at a glance whether price close higher or lower at the end of a given time period. Technical analysis using a candlestick charts is often easier than using a standard bar chart, as the analyst receives more visual cues and patterns.

Candlestick Patterns – Dojis

Candlestick patterns, which are forme by either a single candlestick or by a succession of two or three candlesticks, are some of the most widely use technical indicators for identifying potential market reversals or trend change.

Doji candlesticks, for example, indicate indecision in a market that. May be a signal for an impending trend change or market reversal. The singular characteristic of a doji candlestick is that the opening and closing prices are the same. So that the candlestick body is a flat line. The longer the upper and/or lower “shadows”, or “tails”, on a doji candlestick. The part of the candlestick that indicates the low-to-high range for the time period. The stronger the indication of market indecision and potential reversal.

There are several variations of doji candlesticks, each with its own distinctive name, as shown in the illustration below.

The typical doji is the long-legge doji. Where price extends about equally in each direction, opening. And closing in the middle of the price range for the time period. The appearance of the candlestick gives a clear visual indication of indecision in the market. When a doji like this appears after an extende uptrend or downtrend in a market. It is commonly interprete as signaling a possible market reversal. A trend change to the opposite direction.

The dragonfly doji, when appearing after a prolonge downtrend, signals a possible upcoming reversal to the upside. Examination of the price action indicate by the dragonfly doji explains its logical interpretation. The dragonfly shows sellers pushing price substantially lower (the long lower tail). But at the end of the period, price recovers to close at its highest point. The candlestick essentially indicates a rejection of the extende push to the downside.

Read more financial service:

The gravestone doji’s name clearly hints that it represents bad news for buyers.

The opposite of the dragonfly formation. The gravestone doji indicates a strong rejection of an attempt to push market prices higher. And thereby suggests a potential downside reversal may follow.

The rare, four price doji, where the market opens, closes. And in-between conducts all buying and selling at the exact same price throughout the time period. Is the epitome of indecision, a market that shows no inclination to go anywhere in particular.

There are dozens of different candlestick formations, along with several pattern variations.

Probably the most complete resource for identifying and utilizing candlestick patterns is Thomas Bulkowski’s pattern site. Which thoroughly explains each candlestick pattern. And even provides statistics on how often each pattern has historically given a reliable trading signal. It’s certainly helpful to know what a candlestick pattern indicates. But it’s even more helpful to know if that indication has proven to be accurate 80% of the time.

Technical Indicators – Moving Averages

In addition to studying candlestick formations. Technical traders can draw from a virtually endless supply of technical indicators to assist them in making trading decisions.

Moving averages are probably the single most widely-use technical indicator. Many trading strategies utilize one or more moving averages. A simple moving average trading strategy might be something like. “Buy as long as price remains above the 50-period exponential moving average (EMA); Sell as long as price remains below the 50 EMA”.

Moving average crossovers are another frequently employe technical indicator. A crossover trading strategy might be to buy when the 10-period moving average crosses above the 50-period moving average.

The higher a moving average number is, the more significant price movement in relation to it is considere. For example, price crossing above. Or below a 100- or 200-period moving average is usually considere much more significant than price moving above. Or below a 5-period moving average. Thus the article on Technical Analysis – A Beginner’s Guide. Hopefully it will be useful for you and that’s all thanks.

 

Leave a Comment