Technical Analysis
Technical analysis involves studying price charts and using indicators to predict future price movements. Here's an introduction to some fundamental concepts:
Common Chart Patterns
Chart patterns form when prices create recognizable formations on a chart. These patterns can signal potential continuations or reversals in price trends.
Head and Shoulders
A reversal pattern consisting of three peaks, with the middle peak (head) being higher than the two surrounding peaks (shoulders). It typically signals a bullish-to-bearish trend change.
Double Top/Bottom
Double tops form when price reaches a high twice and fails to break through. Double bottoms occur when price touches a low twice and rebounds. Both signal potential trend reversals.
Triangle Patterns
Triangles form when price consolidates into a tighter range. Ascending, descending, and symmetrical triangles can indicate different potential outcomes for price movements.
Technical Indicators
Technical indicators are mathematical calculations based on price, volume, or open interest of a security. They help traders identify market trends and potential entry/exit points.
Moving Averages (MA)
Calculates the average price over a specified period, smoothing out price data to identify trends. Common periods are 50, 100, and 200 days.
Relative Strength Index (RSI)
Measures the speed and change of price movements on a scale of 0-100. Values above 70 indicate overbought conditions, while values below 30 suggest oversold conditions.
Moving Average Convergence Divergence (MACD)
Shows the relationship between two moving averages of a security's price. The MACD line crossing above the signal line is often considered bullish.
Bollinger Bands
Consists of a middle band (simple moving average) with upper and lower bands based on standard deviations. Helps identify volatility and potential price reversals.
Stochastic Oscillator
Compares a security's closing price to its price range over a specific period. Helps identify overbought/oversold conditions and potential trend reversals.
Fibonacci Retracement
Uses horizontal lines to indicate potential support and resistance levels based on Fibonacci numbers. Commonly used levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.
Note
No indicator works perfectly all the time. It's generally best to use multiple indicators together to confirm signals and reduce false positives.
Candlestick Patterns
Candlestick charts show the open, high, low, and close prices for a specific time period. Certain candlestick formations can indicate potential market reversals or continuations.
Doji
Forms when the opening and closing prices are nearly equal. Represents market indecision and potential trend reversal, especially after a strong up or downtrend.
Hammer & Hanging Man
Both have small bodies and long lower shadows. A hammer appears in downtrends and signals potential reversal, while a hanging man appears in uptrends and indicates weakness.
Engulfing Patterns
Occurs when a candlestick completely "engulfs" the previous day's candle. Bullish engulfing in downtrends suggests reversal up, while bearish engulfing in uptrends signals potential drops.
