Technical analysis for beginners
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts. Before starting it is imperative to get an understanding of candlestick charts.
Candles
Before we look at the charts themselves, let us understand what is a candle in investing.
Depending on the timeframe each candle represents a certain amount of time. So for example, In a 10-minute chart, each candle represents 10 mins. A green candle would therefore represent the amount that the price went up in the given timeframe (In this case 10 mins). And a red would represent how much the stock went down in the given timeframe.
Let me explain high, low, open and close. Let's say a candle opened at 12:30 pm the price at which it opened or when the candle started is called the “open”. The price at which it closed at the end of the timeframe(in this case 12:40) is referred to as the “close”. The highest price during that timeframe is the “high”(represented by the line also called the wick) and similarly, the lowest price is the “low”.
Now that we have understood candles let's see how many of these can help us predict trends.
How do you identify trends in markets?
I will be explaining 2 main types of trends — uptrend and downtrend.
Put a simple candidate stick…3 days…highs
If a candlestick chart is making new highs followed by higher lows followed by higher highs and so on it is said to be in an upward trend.
In this image as you can see as the high is followed by a low. Now after this the price moves up again breaking the high, the low that follows is also higher than the previous low it is said to be in an upward trend.
Let me give you a better way to identify these. As the stock increases and breaks its highs, it's called an impulsive move. usually, after an impulsive move, the market tends to recede a little(called a pullback). If the low of the price is not broken after the highest high is broken it is considered to be in an upward trend.
Conversely, we can predict downtrends if a candlestick chart is making new lows followed by lower highs followed by lower lows and so on. Now using this info we have an objective way to predict trends.
Support and resistance
Support and resistance are areas in the market that price is likely to react from.
Support is where the price is likely to bounce up from and resistance is an area is where the price is likely to fall. These can be used to spot entry points in the market. I'll be talking about how to use support and resistance in trending markets.
One of the best ways to look for support and resistance trades is to look at previous levels of resistance to be broken to then become the support. So for example in an upward trending market.
As you can see by using the resistance points we can predict potential support points as well.
Similarly, we can use the same strategy in downward trending markets.
Now let's take a look at how we can use this to predict targets. So as you can see in the picture below the profit is placed at the resistance. Since we established this is an upward trend we can say that the price is likely to go higher than the previous resistance. We also know that if the low goes under the previous support the upward trend is broken. So we can place our stop loses and profits in line with the support and resistance rectangles to give a good risk to reward ratio.
Indicators
For this section, I won't be going into much depth since there are 1000s of indicators to choose from. I'll talk briefly about 2.
- ATR indicator or the Average true range indicator. This indicator gives the average movement in the price of the last 14 candles. It adds up the price movement of the last 14 candles and divides it by 14 to give the average movement.
- Moving average In simple words, a moving average is an indicator that shows the average value of a stock’s price over a period. This is useful to predict trends. For example, if the current price is higher than say a moving average of 20 candles, We can say it is in an upward trend.
*Disclaimer: This is not financial advice, for educational purposes only.
