Part II - Technical Analysis

SE TRADINGX - PART II - TECHNICAL ANAYLSIS 

Trading is all about price and the buyers vs sellers. When the buyers are winning you want to be buying and when sellers are winning you want to be selling. But there are 2 things you have to consider before buying or selling, TECHNICAL ANALYSIS and FUNDAMENTAL ANALYSIS.

 

Fundamental analysis is a method used in trading to forecast the direction of price by focusing on major news events for example unemployment rate, national lockdown, rise/fall in GDP, elections etc.

Technical analysis is method used to predict price by looking at past data and market patterns for example double tops, trendlines, support and resistance etc.

 

In this section we will be focusing on technical analysis.

 

Support and Resistance Zones

Support levels are price-lines at which the market had difficulties to break below, signaling that buyers may join the market again if the price falls to a key support level. Resistance levels are quite similar to support levels, only that they form to the upside and signal price-levels at which the market had difficulties to break above.

When the price reaches a key resistance level, sellers may jump into the market and send the price lower again.

 

You can use support and resistance levels to your advantage when selling and buying Nasdaq 100/currencies. As price is moving to the support level, where in the recent past sellers had not sold below this value, it may be a good time to buy Nasdaq/currency pair.

It is very important to realize that support and resistance levels can be broken, and they often are. In addition to this, it may not be a great idea to buy when it is nose-diving towards a support level similar to catching a falling knife. There is always the chance that the price may smash through the support level and continue onto an all-time low, not a great buy. It may be better to ‘ride the bounce’ off the support and resistance levels. What this means is to wait until the price hits and bounces off the support and resistance levels and then immediately buy or sell respectively. 

 

How to identify trend

“The trend is your friend” is one of the oldest sayings in technical analysis. Without trends, technical analysis would be useless, and trades would be random. The goal is to determine whether the financial instrument is currently caught in an uptrend, downtrend, or sideways trend. Profits are rewarded to those that are able to anticipate the beginning and end of trends and trade accordingly.

 

Uptrend

An uptrend signifies that the market is heading in the upward direction, creating a bullish market. It indicates the price rallies often with intermediate periods of consolidation or movement (small downward move) against the major trend.

An upward trend continues until there is some breakdown in the charts (going down below some major support areas). If the market trend is upwards, we need to be cautious to sell (against the overall market trend).

 

Downtrend

A down trend in the forex market is characterized by a price moving lower as it fluctuates over time. In a chart, the price movements indicating a downtrend form a sequence of lower peaks and lower lows.

 

As currency is always traded in pairs, the downtrend in forex market is not much affected as other financial markets. In case of downtrend of a currency pair (USD/ZAR), the fall IN price of USD gives way to a rise in price of ZAR. It means something is always going up even in times of financial or economical downtrend.

In the forex market, trends reflect the average rate of change in price over time. Trends exist in all markets (Equity, FX or commodity) and in all time frames (minutes to multiyear). A trend is one of the most important aspects, which traders need to understand.

The traders should analyze which way the market or security (stock, currency pair) is heading and should take position based on that.

 

Trendlines

Trendlines are simply Support and Resistance Lines but the difference is trendlines are diagonal. They are used to determine where price could possibly bounce off or reject from.

 

How to draw trendlines

To draw the trend lines correctly on your chart you will need to connect at least two major swing points on the chart (swing lows/swing highs). A trendline can be adjusted to get as many touches as possible. Trendlines most of the times are drawn from  left to right. Underneath is an illustration of trendlines with multiple touches.

 

When you are able to draw parallel trend lines you can create a trend channel. This can be very valuable information when you are trading for short periods as with a trend channel you can predict the short term moves in the market. Of course, the price can sometimes move outside of the channel but this is ok as long it stays in the trend the channel is valid.

 

If you combine trend lines or trend channels with support and resistance lines then you have already formed a basic trading strategy. With all these lines on your chart you will be able to predict the market movements on the short and longer term. Please do make sure that these lines are not the Holy Grail. They can help you decide on the right trades but can be influenced by many factors like news or economical events.

 

Chart patterns

Chart patterns are specific patterns that form naturally and repeat over time. There are different patterns like double top, double bottom, flag patterns, head and shoulders etc.

We will be illustrating the most common one’s.

 

Double Top

A double top occurs usually in an uptrend when price hits a certain level that cant be broken then price reverses slightly and tries to break through that level again but fails. This price rejection results in price falling and the trend possibly reversing.

 

Double Bottom

A Double Bottom is just the opposite of a double top, this usually occurs in a down trend when price fails to break through a certain level once then the sellers push down again but fail to break that level and this results in price reversing.

 

Head and Shoulders Pattern & Inverted Head and Shoulders Pattern

The Head and Shoulders(H&S) is a reversal pattern. When a head and shoulders occur you can look for a reversal to take place. A Head and Shoulders occur at a peak of an uptrend which then can cause a bearish movement.

 

The Inverted Head and Shoulders(H&S) is a reversal pattern. When an inverted head and shoulders occur you can look for a reversal to take place. An inverted Head and Shoulders occur at a peak of an downtrend which then can cause a bullish movement.

 

There will be video tutorials in the last SECTION