Hello Traders, I'm Luke from disciplined trader.
This video is part of the trading basics series and in this one we will be looking at Technical
Analysis.
We will look at what constitutes technical analysis and its different forms.
So typically a trader either takes a technical approach to trading or a fundamental approach.
Some traders do like to try and incorporate both these approaches into their trading but
more often than not a trader will prefer one over the other.
So what's the difference!?
Well most fundamental traders attempt to gauge the intrinsic value of a particular product
or market based on their analysis of the related qualitative and quantitative factors.
They do this with a goal of comparing the value they derive from their analysis to the
current market price of that product or market.
If they feel that a product or market is under or overvalued when this comparison is made,
they may trade that product or market on the back of their analysis, predicting that in
some point in the future, the value they've derived will become the market value.
If a trader was analysing a particular currency pair on the forex market for example, these
factors could be things such as any economic or financial news announcements specific to
those currencies, any economic or financial statistics specific to those currencies or
any macroeconomic data which they feel may have an effect on the value of that currency
pair.
Purely technical traders on the other hand don't really use any of these techniques.
Technical traders work on the assumption that all available information in relation to a
product or market is already factored into the current market price and so this price
already represents the intrinsic value of the product or market.
Technical traders also believe that price movement within a market is not purely random,
but instead moves in repeatable and identifiable patterns that can be utilised to gain a profitable
edge in the market when paired with the good risk management rules.
I fall into this category and although I do not trade with a fundamental approach, as
mentioned in previous videos, I am aware of any potential high impact news announcements
on the days I'm trading as I don't want to get caught in any news induced volatility.
So in a nutshell, technical analysis is a analytical approach a trader uses to forecast
where they think the price of a particular market may move to.
Through this analysis, they identify potential entry and exits points for any trading opportunities
that their analysis highlights.
So how do they do this?
Well there is a vast array of tools and analytical methods technical analysts use and I want
to introduce you to the basics of the most common methods in this short video.
Lets start with trend analysis.
Put simply, the market trend is essentially the general direction a market is heading.
A market can trend in three directions, up, down and sideways.
A market that is said to be in an uptrend typically will be making higher highs and
higher lows.
As a market is a downtrend will be making lower highs and lower lows.
A market trending sideways will typically not be making any significant progress higher
or lower.
The trend of a market is very important to some traders as they will only trade in the
direction of the trend.
They do this as they work on the assumption the trend will continue so there is likely
going be more progress to the direction of the trend than against it.
Any trades that are taken against the trend of a market are referred to as counter trend
trades.
Some traders even specialise as counter trend traders and look to take advantage of the
price pull backs within a trending market.
Usually counter trend traders are working with the concept of mean reversion which basically
means that they expect the price to always revert back to a long term average at some
point.
They build their strategy around forecasting the most successful mean reversion opportunities.
The next analytical method I want to introduce you to is the analysis of candlestick and
chart patterns.
Candlestick patterns are specific patterns of one or more candles that form in such a
way as to give the trader an indication of the market sentiment.
Some examples of candlestick patterns are the:
Doji candle Engulfing candle (bullish & bearish)
Hammer candle Shooting star candle
Piercing pattern (bullish & bearish) Harami candles (bullish & bearish)
Tweezers (tops and bottoms) All these candlestick patterns are used to
give clues as to the balance of supply and demand after their formation.
The shooting star candle pattern for example, is often a sign to a trader that selling has
come into the market at that level and overtook the buying, meaning price may stat to sell
off from this point.
Whereas the Doji candle is often interpreted as both the buyers and sellers matching each
other in equal volume as the price has moved up and down but finished where it originally
started.
Moving on to chart patterns and this form of analysis is similar to candlestick patterns
in that the pattern that forms is indicative of where the price may move next.
However, these patterns care less what the individual candles look like and more what
the overall path of the price movement looks like.
Some of the most commonly known and used patterns are:
Double tops / bottoms Head and shoulders
Ascending/descending triangles Flag patterns
Channels These patterns typically fall into one of
two categories, either reversal or continuation patterns.
As suggested, the pattern indicates whether a trend will expire and start to reverse on
completion of the pattern or whether the trend will continue in its original direction.
Identifying these patterns can be somewhat subjective as they rarely look as clean cut
as they do in the text books.
I would highly recommend spending some time looking at historical charts and practicing
identifying these patterns if it's something you might want to incorporate into your own
trading.
I will be making a more in depth video on candlestick and chart patterns so subscribe
to the channel if you want to be notified when that is uploaded.
Next on the list is support & resistance and this form of analysis is the foundation of
my own trading approach.
Support and resistance refers to price levels within a market where the potential for a
reaction is higher than other levels.
It works on the principle that what happened in the past, is likely to happen again in
the future.
So it's possible to identify levels of support and resistance by looking at the past price
action and identifying where price had a strong reaction.
Then when price approaches these levels again in the future, you can look for price to react
at these levels.
A key characteristic of support and resistance levels is once a level is broken, it becomes
the opposite to what it was before.
What I mean by this is if a strong level of resistance is broken and price moves past
it, when price returns to this level, there is a good chance that the level will act as
a strong area of support for price.
And vice versa.
Areas of support and resistance identified from previous price data at fixed levels are
called static support and resistance.
There are also forms of dynamic support and resistance whose price level changes on factors
such as time and price movement.
A good example of this would be trend lines or trend channels.
Trend lines are sloping lines of support and resistance that tend to connect a series of
highs or a series of lows.
Trend channels are simply two parallel sloping trend lines that tend to encapsulate a trending
price move.
However as with the static lines of support and resistance, if a line is broken, they
quite often can become the opposite of what it was before.
I have made a much more in depth video on support and resistance if you are interested,
I will leave a link to it in the description below.
The last analytical method I want to introduce you to is the use of technical indicators.
As I'm sure you noticed from the last section, identifying patterns and support or resistance
levels can be somewhat subjective.
Technical indicators use the market data and specific formulas to display that market data
from another perspective that allows a trader to analyse a market more objectively.
One of the most commonly used indicators is the moving average.
A moving average plots a line over the price data showing how the average price has changed
over time.
The most commonly used time period for a moving average is probably the 200 moving average.
This takes the average closing price of the previous 200 candles for each point in time
and connects all these points to make a smooth line.
Traders can then use this line to help ascertain the trend of a market or use it as a dynamic
form of support and resistance.
Other common technical indicators include the Relative Strength Index (RSI), Stochastics
Oscillator, Bollinger Bands and the Moving Average Convergence Divergence (MACD)
I will also be making a more depth video on technical indicators, so please subscribe
to the channel to be notified when this is uploaded.
So that really only covers a taster into the world of technical analysis.
It's worth noting that it is very unlikely that using any method of technical analysis
in isolation would result in profitable long term trading.
The aim of a technical trader is to gain an edge in the market through multiple streams
of analysis coming together to highlight high probability trading opportunities.
If that trader can then act on that edge in a consistent and disciplined manner, they
should be able to profit from the market edge over the long term.
So that wraps up this introduction to technical analysis, I hope you have found it useful.
If you enjoyed the video, please feel free to drop a like on it.
If you have any questions or want me to cover any other topics in future videos, please
let me know in the comments below.
Also subscribe to the channel for more videos like this one.
I will be continuing this trading basics series to provide new traders with all the knowledge
they need to get started.
Thank you very much for watching and I hope you all have a good trading week.