Trading Made Easy For Beginners – Technical Analysis Approach
Posted in Finance Articles, Total Reads: 2736
, Published on 16 July 2012
Leave the Fundamental Analysis of the market to those who want to work hard for their money. If you want to make money in a much smarter way as compared to your ‘Fundamentalists’ friends, you would like to be very familiar with the Technical analysis of the price movements.
Technical analysis is ‘forecasting of future price levels based on past price movements’. These price movements are due to certain market factors and hence, Technical analysis takes account of every factor that may have an impact on price levels.
I will be putting down some tricks of the trait in the order you should be going for it. Remember, these can be implemented equally for intra-day, short term or long term trading.
1.) Trendlines: There are two kinds of trendlines: Uptrend and Downtrend’.An Up-trendline is a straight line drawn up joining three or more successive market lows over a period. I have made the below diagram to make it more comprehensive.
A down-trendline is a straight line drawn down joining three or more successive market highs.
Takeaway: Remember the longer the trendline continues, the more credible it becomes and whenever an older trendline is broken, it is broken decisively i.e. price moves considerably in the direction opposite to the trend . Refer to the diag. below to make this concept clear.
2.) Support and Resistance levels: These up-trendlines serve as support level while down-trendline serve as resistance level. Support is the price level below which buying pressure is more than the selling pressure. Resistance is the price level above which selling pressure on the trader is more than the buying pressure.
Takeaway: Buy at support levels and sell at resistance levels. Once broken decisively, broken support becomes new resistance level and broken resistance level becomes new support level.
As you can see in the above fig., the broken resistance level becomes a new support level.
3.) Price Reversal Patterns: Price reversal patterns indicate the reversal in the current movement of the price. These are:
(i) Head and shoulders: The shape of this pattern is like two shoulders on either side of a higher head. The appearance of this pattern indicates the reversal of price trend.
As in above figure, the head and shoulders pattern reverses the down trend and prices start rising up.
As in above figure, the uptrend reverses and price begin to fall following the head and shoulders pattern.
ii) Double and triple top and bottom: Three consecutive prominent peaks makes a Triple top.It is a reversal pattern and appearance of triple top in an uptrend indicates that prices are about to move down. Similarly, three consecutive prominent troughs makes a Triple bottom. Appearance of triple bottom in a downtrend indicates affinity of price levels to move up.
As you can see, prices sunk down immediately following a Triple top in an uptrend.
Double top and bottom are similar as triple top and bottom except there are two prominent consecutive top and bottom.
4.) Price Continuation Patterns: Continuation patterns indicate that the current price trend should continue in the same direction. These are:
i) Triangles: There are three types of triangles: symmetric, ascending and descending triangles.
Above is the example of a symmetric triangle pattern. As you can see, the uptrend continues following a symmetric triangle pattern.
Ascending triangle has a flat upper line and rising lower line while Descending triangle has a flat lower line and declining upper line
ii) Flags: The flag resembles a parallelogram that slopes against the current price trend. Thus, in an uptrend, flag will slope downward while in a downtrend, flag will slope upward.
As you can see in the above fig., in an uptrend the price movement continues in the same direction following a little consolidation after down sloping flag.
5.) Interpretation of Volume : Volume is the number of units traded in a given period. As a rule, it must be kept in mind that heavier volume should be traded in the direction of the current trend. Thus, in an uptrend, heavier volume should be traded during the market rallies and lower volume during the downward price corrections. Similarly, in a downtrend, heavier volume should be traded during market dips and lower volume during an upward price correction.
Above fig drawn depicts heavier volume traded during market dips and smaller volume traded during upward price corrections.
If there is deviation from this normal behavior and heavier volume is traded during the upward price correction in a downtrend, then it is a indication that downtrend of price movement is going to change and price is about to move up. Similarly, in an uptrend, if heavier volume is traded during the downward price correction, then it is an indication that current uptrend of price movements may not continue. A fig. has been drawn below to make this concept more clear and comprehensive:
As it can be seen in the diag., after heavier volume was traded during an upward price correction in a downtrend, the downtrend price movement has been reversed.