New Trader U

Empowering Your Financial Journey

Elegance that lasts lifetime

Ad

Jaquar World
VISIT SITE
Elegance that lasts lifetime

Technical Analysis For Beginners (The

Ultimate Guide)
By Steve Burns

Technical analysis is the art and science of reading charts to quantify the trend or trading
range price is in, the path of least resistance for the next directional move, the area of value
on the chart, and create good risk/reward ratios by defining key technical levels.

There are two major schools of thought within technical analysis: predictive technical
analysis and reactive technical analysis.

Shopee No.1 Marketplace

Shopee

Predictive technical analysis is practiced when traders project what will happen next in price
movement based on a current chart pattern. They look for the clues of volume, trendlines,
and the levels of support and resistance to project the probabilities of the future price
movement. It’s an attempt to predict the future price action based on the current and past
price action.
Reactive technical analysis is practiced when a trader’s entries and exits are based on
current price signals that backtest as profitable by creating good risk/reward ratios. Their
quantified price signals tell them when to get in for a good probability of success and where
to get out with a small loss or to lock in a profit. Reactive traders rely on trade management
as the price action plays out to minimize losses and maximize gains for profitability. They
rely on quantified systems to make money in the markets, not knowing the future.
There are four primary trading tools used in technical analysis for identifying entry and exit
signals.

Drawing Tools
Candlestick patterns
Chart Patterns
Technical Indicators

A trader must understand the purpose each tool is used for so they are implemented
correctly.

NEW

Shopee Coins Cashback…

Shopee

How Are Drawing Tools Used In Trading?

Most charting platforms have drawing tools that allow a trader to draw their own trendlines
directly on a chart and create trend channels to track the momentum of a trend, with peaks
(or highs) frequently respecting the upper trend channel; and troughs (or lows) respecting
the lower channel.

A trader can project Fibonacci extension levels from a present trend and also project
Fibonacci retracement levels from an existing trend.

Technical Analysis For Beginners (The Ultimate Guide)

Image Courtesy of TrendSpider.com

Technical Analysis Methods

Drawing tools also allow the creation of captions to highlight buy and sell signals and record
your observations on the chart.

Trendlines are the identifiers and connectors of resistance and support in chart patterns.

Trendlines are ways to measure and quantify the path of least resistance for a chart in your
time frame.

Trendlines are identifiers of the trend in your trading time frame.

Vertical trend lines must be drawn from left to right to identify one of the following:
A trend of higher highs signaling an uptrend.
A trend of higher lows for support in an uptrend.
A trend of lower lows signaling a downtrend.
A trend of lower highs for resistance in a downtrend.

Horizontal trend lines must be drawn straight from left to right to identify price levels of
resistance based on repeating high prices that can’t be broken or levels of support based
on repeating lows that hold.

Trend lines can connect end of day prices or the full daily range of prices. For candlestick
charts the wicks represent intra-day prices that were outside the open or the close. Both
are viable options for trend lines.

Trend lines should connect at least two price levels in a direct path to be considered viable.
The more connections that a trend line makes the more meaningful it is.

Trend lines must be updated daily to ensure a trend is still in place. You want to see a
connection and trend of prices in your timeframe.

A break out of price through your connecting trend line can indicate the beginning of a
change in trend or market environment. A market could be going from an uptrend or
downtrend to a sideways range as your trend line breaks or reversing in trend completely.

The vertical red lines on this chart represents the two downtrends that $XLE went through
for weeks making lower highs day after day for much of the downtrend.

The green lines on the $XLE chart represent vertical support of higher lows as $XLE trends
up twice on this chart. Notice that the red downtrend line was broken both times before the
next uptrend began.

Technical Analysis For Beginners (The Ultimate Guide)

Chart courtesy of StockCharts.com

Chart Summary: Trendlines are visual ways to measure, identify, and track the trends on a
chart by connecting vertical or horizontal support and resistance on a chart.

Price channels can be: up, down, or sideways.

There are uptrend, downtrend, and range bound price channels.

Here is an example of an up trending price channel:

Technical Analysis For Beginners (The Ultimate Guide)

Chart Courtesy of TrendSpider.com.

Here is what a range bound trading channel looks like:

Technical Analysis For Beginners (The Ultimate Guide)

Many times after a break out of resistance, old resistance can become new support: (Or
vice versa).

Technical Analysis For Beginners (The Ultimate Guide)

Image via ColibriTrader.com

Chart Facts:

A trading channel can be vertical or horizontal and is defined by trendlines.

Vertical ascending up trend channels is defined by parallel higher highs and higher
lows.
Vertical down trend channels are defined by parallel lower highs and lower lows.
Horizontal descending trendlines are defined by parallel lines that have price
resistance around the same area of a high price level and price support around a
similar lower area of price.
Resistance lines in a chart pattern is where buyers are absent at higher prices and
selling pressure at those prices set in.
Support lines in a chart pattern are where buyers step in to buy at a price level to
prevent prices from going lower overcoming the selling pressure.
Buyers and sellers are always equal in any trade the variance is in what price that the
trade will take place.
Many times when a horizontal price channel is broken higher the old resistance
becomes the new support.
Many times when a horizontal price channel is broken lower the old support becomes
the new resistance.
Channels are for identifying where buyers and sellers are located.
Momentum and trend signals are given when a well defined price channel is broken.
Another name for a horizontal price chart pattern is a rectangle. The break out of the
range in either direction is the signal to enter a trade in the direction of the break.

This $SMH chart shows examples of three ascending channels during the uptrend in this
chart. The lower trend lines held up well in real time tracking and connecting on this chart.
The upper trend line continued to set higher highs which was bullish. You also want to see
the lower ascending support line continue to set higher lows by the close each day to keep
reconnecting your lower trend line for ascending support.

Technical Analysis For Beginners (The Ultimate Guide)

Chart Courtesy of StockCharts.com

This $PSX chart is an example of a reoccurring horizontal price channel for months. This is
an example of a range bound market. The resistance is near $78.50 and support is near
$74.50 to create a trading range. Notice that breakouts above and below these levels failed
over and over. Returning to the previous price range after a failed break out is a sign of a
range bound market. Trending market should have continuation after a break out is
attempted several times. The best way to look for patterns of support and resistance is to
look at where highs and lows of prices went to the last few times it made short term lows
and highs in price.

Technical Analysis For Beginners (The Ultimate Guide)