Fast Travel
As mentioned in Post 001, technical analysis is all about examining price charts and using past price movements to predict future trends.
As a technical trader, your chart, regardless of the instrument you're trading, is your blank canvas, and you are the artist. Before we get into your artistic techniques, let's take a look at our blank canvas.
So, what does a blank chart consist of?
🕯Candle Sticks 🕯
Candles are the building blocks of charts. Each printed candle represents a specific unit of time. Charting platforms like TradingView, let you view candles across various timeframes— Monthly, Weekly, Daily, 4-hour, 1-hour, 30-minute, 15-minute, 5-minute, and 1-minute.
Once a candle is printed, it tells you what happened to the price throughout its formation. Regardless of the timeframe, candles all look the same. A green (bull) candle shows that the price went up during that period, while a red (bear) candle indicates that the price went down.
Open — The price at which a candle opens during its forming period (it is also where the previous candle closed)
Highest Point — The top of the candle, which is the highest point of price during that period
Lowest Point — The bottom of the candle, which is the lowest point of price during that period
Close — the last price at which a candle is traded during its forming period
Wicks — The thin stick from the candle’s highest point to the body (Upper Wick) and the lowest point to the body (Lower Wick)
Green Candles are typically Bullish | Red Candles are typically Bearish
🕯Wicks 🕯
The thin sticks above and below the main body of the candle are known as ‘wicks’. The upper wick is the highest point the candle reached during that time frame, while the lower wick shows the lowest point. Wick’s usually mean one thing:
Price Rejection: When a wick touches a strong support or resistance level (don’t worry if you’re not familiar with these terms yet, you’ll learn soon), but the candle body doesn’t close beyond it, this indicates price rejection at that level. The more wicks you see at a particular price level, the stronger the rejection is.
Now that you understand candles and their anatomy, let’s dive into how to add numerical values to them.
🕯How Candles Are Measured 📏
The unit used to measure the movement of candles is called a PIP. A 'PIP' stands for percentage in point. The formula for a PIP is Pip value = (0.0001 x trade amount) / spot price, but don’t worry—you won’t need to memorize that. When talking to traders, you’ll often hear them mention how many 'Pips' they gained or lost. We have tools to measure PIPs on TradingView. Check this POST out to find out how to use such tools.
It’s also important to note that indices (like US30, NASDAQ, & SP500), commodities (gold, silver), and JPY-ending pairs (like GBP/JPY) are measured differently.
Forex (Foreign Currencies)
For most currency pairs, one pip is equal to 0.0001 (1/100th of a cent). However, for currency pairs involving the Japanese yen, one pip is equal to 0.01 (1/100th of a yen).
Indices
Definition of a Pip: In indices trading, a pip can often be referred to as a point. The value of a point can vary depending on the index in question. One pip is typically one point, but the value of a point can vary depending on the index.
Commodities
Definition of a Pip: Commodities like gold, oil, and silver have their own standard units of measurement. For instance, gold is usually measured in dollars per ounce. One pip can be a cent or other small increment depending on the commodity.
Cryptocurrencies
Definition of a Pip: In the cryptocurrency market, pips can vary significantly because the price movements can be very large, and the decimal place can extend much further. One pip can vary widely due to the high volatility and price range of cryptocurrencies, often measured in larger increments than traditional markets.
🕯Market structure 🕯
Trends
The market only moves in three directions. Up👆, Down👇, and Sideways🫱 Let's delve into the three main types of market trends: uptrend, downtrend, and ranging/consolidation.
1. Uptrend 📈
Definition: An uptrend is characterized by higher highs and higher lows, indicating a period of rising prices.
Higher Highs: Each successive peak is higher than the previous one.
Higher Lows: Each successive trough is higher than the previous one.
Bullish Sentiment: Indicates strong buying interest and positive market sentiment.
2. Downtrend 📉
Definition: A downtrend is characterized by lower highs and lower lows, indicating a period of falling prices.
Lower Highs: Each successive peak is lower than the previous one.
Lower Lows: Each successive trough is lower than the previous one.
Bearish Sentiment: Indicates strong selling pressure and negative market sentiment.
3. Ranging/Consolidation 📈📉📈📉📈📉
Definition: A ranging market, also known as consolidation, occurs when prices move sideways within a specific range, showing no clear trend direction.
Support and Resistance Levels: The price bounces between a defined support level (bottom) and resistance level (top).
Neutral Sentiment: Indicates indecision among traders, with neither buyers nor sellers having the upper hand.
Trends don’t ALWAYS align even on the closest time frames — you’ll often find the daily isn’t always matching up to the trend of the weekly or the hourly time frame moving differently to the 4-hour. This is because a trend change starts on the lowest time-frame and works its way up the time scale.
Support and Resistance Levels
When thinking about Support and Resistance levels(S&R), I like to imagine a home. Support is the Floor and Resistance is the Ceiling/Roof of the home.
Support: Identified as a price level on charts where significant buying interest is anticipated. This level prevents the price from declining further, indicating a surplus of demand over supply. It's often where the price finds a "floor" and bounces back up.
Resistance: Opposite of support, this is where price tends to find a ceiling or the roof. Here, selling interest overcomes buying pressure and the price struggles to rise further. It’s a level where traders expect potential sell-offs and price reversals downward.
This analogy can be applied to an Up Trend as well.
Using past data on the chart S&R levels can be formed, giving some insight as to where the market will go. S&R levels can be spotted from psychological levels and added indicators like Moving Average or Fibonacci. Examples can be found further Here.
Candle/Chart Patterns
You have probably heard/ read by now hat the market always repeats itself. Well its true. These repetitions can be called patterns.
Japanese Candle sticks: Candles like doji, hammer, and engulfing can confirm support and resistance levels.
Candle patterns consist of 1 - 4 more candles forming a specific formation that would indicate a specific reversal or continuation of an overall higher time frame (HTF) direction. Typically can be analyzed candle to candle.
Chart patterns are a zoomed out view of multiple candles that would indicate a specific reversal or continuation of an overall higher time frame (HTF) direction.
Each candlestick tells a story; mastering their language is key to a consistent and profitable trading strategy. Now, do you think you can predict the next market move based on the candlesticks presented?
Drawing Tools
Each of these tools aids in technical analysis by making it easier to mark, measure, and track price movements on charts
Rectangles/Boxes:
These are useful for marking support and resistance zones. Traders often use them to highlight price ranges where the market consolidates or to visualize breakouts.Circles/Ellipses:
These tools can help identify rounded patterns in the market, like rounded tops or bottoms. They’re great for marking areas where price movements form circular or oval-shaped trends over time. I only use this tool to mark missed entries or to highlight consolidation that i got caught in.
Horizontal lines:
Are often used to draw support and resistance levels, helping traders easily visualize key price levels that the market tends to respect or reject.
Vertical lines:
Are typically used to mark specific points in time, such as significant events, news releases, or key periods in the chart.
Trend Lines:
A trend line connects two or more price points, providing visual cues of the market’s direction. Traders use these lines to confirm the direction of a trend or to mark a breakout when price action crosses the line.
Fibonacci Retracement Tool:
Are horizontal lines that indicate potential support and resistance levels based on the Fibonacci sequence. These levels are drawn by identifying a major price move and then dividing the vertical distance by the key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 100%).
Indicators
Indicators are mathematical calculations applied to price data (such as closing price, volume, or high-low range) to help traders analyze market trends, momentum, and volatility. Indicators provide insights into the strength of trends, potential price reversals, and overbought or oversold conditions. They are essential tools for technical analysis, assisting traders in making informed decisions. Below are a few of the indicators that I learned immediately when i started my journey.
Ichimoku Cloud:
A comprehensive indicator used to identify trends, momentum, and support/resistance levels. It consists of several components:
Kumo (Cloud): Represents dynamic support and resistance.
Tenkan-sen (Conversion Line): A short-term indicator of momentum.
Kijun-sen (Base Line): A medium-term trend indicator.
Chikou Span (Lagging Line): Helps confirm trends by comparing current price to past price. This indicator helps traders assess the overall market condition at a glance, highlighting trends and potential reversals.
Moving Average (MA):
A simple but effective indicator that smooths out price data over a specified period. There are two common types:
Simple Moving Average (SMA): Averages the closing prices over a set period. It's great for identifying trends and smoothing out price fluctuations.
Exponential Moving Average (EMA): Gives more weight to recent prices, making it more responsive to new price movements. It's often preferred for short-term trend identification. Moving averages are widely used for trend-following strategies, helping traders confirm the direction of the market.
Bollinger Bands:
This volatility indicator consists of three lines:
Middle Band: A simple moving average (usually a 20-period SMA).
Upper Band: The middle band plus two standard deviations.
Lower Band: The middle band minus two standard deviations.
Bollinger Bands help traders assess volatility and potential price reversals:
When the price moves close to or touches the upper band, the market may be overbought.
When the price moves close to or touches the lower band, the market may be oversold.
Tightening bands suggest low volatility, which often precedes significant price moves (breakouts).
Widening bands signal increased volatility, typically following strong price movements.
Relative Strength Index (RSI):
A momentum oscillator that measures the speed and change of price movements. RSI ranges from 0 to 100 and is typically used to identify overbought or oversold conditions:
Above 70: The market is considered overbought and might be due for a pullback.
Below 30: The market is considered oversold, signaling a potential buying opportunity. Traders use RSI to gauge whether an asset is likely to reverse its current trend, based on its recent price momentum.
🕯Top Down Analysis 🕯
Top down analysis is a method of analyzing charts by working your way down from the higher time frames. By first looking at the bigger picture of price direction, (the overall trend) and then zooming down to the smaller time frames to find exact areas for ideal setups.
Daily Timeframe Observation: Starting at the daily timeframe to observe overall market trends and significant resistance or support levels.
Identifying Candlestick Patterns: Observing specific candlestick formations that indicate potential market movements.
Refining Entry Points: As the analysis moves to lower timeframes (1-hour, 30-minute), further signs of market sentiment like liquidity grabs and seller dominance are noted, aiding in refining entry points for trades.
Risk and Reward Assessment: Using risk-reward tools to set up potential short positions, considering the observed resistance and predicted market movement to establish stop loss and take profit levels effectively.
Execution and Review: Execute the trade based on the abundance of evidence you’ve gathered from various timeframes and then review the outcomes on higher timeframes to confirm the analysis’s accuracy.
🥛 Don Leche’s Takeaways 🥛
At the beginning of my journey the heavy reliance on indicators was crazy. I had about 3-4 indicators on my charts and at the time, I thought I was going to uncover the ultimate secret to profiting. The more time I spent with the charts, the more I realized that less is more. Price action with one SMA carried me through to profitability. There are 1,000,000 ways to make money trading, but at the end of the day, I suggest using what you like. So long you’re making money, you’re doing something right! At that point, you just have to fine tune what’s working and eliminate what is not.
Disclaimer:
I am not a licensed financial expert. The content I share is based on my personal experience and should not be considered financial advice. Trading in financial markets involves significant risk, and it is crucial to use proper risk management and conduct your own research before making any trading decisions. I am not responsible or liable for any financial losses you may incur from following the information provided. Always trade responsibly, and remember that past performance does not guarantee future results.