Technical Analysis Notes

Technical Analysis Fundamentals

  • Technical Analysis combines art and science to align with market forces (buyers vs sellers).
  • No method works 100% of the time; predicting future prices is not the goal.
  • Understand dominant forces (supply & demand) to make informed decisions.

Market Trends

  • Dow Theory identifies three types of market trends:
    • Uptrend: Higher highs (HH), higher lows (HL).
    • Downtrend: Lower highs (LH), lower lows (LL).
    • Sideways trend: Prices move within a horizontal range.
  • Trend integrity: A trend remains intact until there is a clear indication it has ended.
  • Prices exhibit fractal behavior - concepts applicable across all time frames.

Candlestick Patterns

  • Candlestick patterns signal potential buy/sell opportunities.
  1. Doji: Small body, long wicks; indicates indecision.
  2. Spinning Tops: Small body, long wicks.
  3. Harami: Two-candle pattern signaling potential reversal (color matters).
  4. Morning Star: Features a gap down and closes above the first candle.
  5. Evening Star: Gap up formation that indicates a bearish reversal.
  6. Hammer: Bullish signal found at the bottom; Hanging Man at the top is bearish.
  7. Inverted Hammer/Shooting Star: Indicates potential reversals at tops of trends.

Volume Confirmation

  • Volume validates the strength of price movements; a trend is confirmed by increasing volume.
  • Breakouts: Price above resistance with increased volume = bullish.
  • Breakdowns: Price below support with increased volume = bearish.

Support and Resistance (S&R) Levels

  • Support and resistance are key price levels where buying/selling pressure is expected.
  • Support Lines: Connect at least 2 higher lows; significant if touched by multiple prices.
  • Resistance Lines: Connect at least 2 lower highs.
  • Once breached, previous support becomes resistance and vice versa.

Moving Averages (MA)

  • Moving averages smooth price data to identify trends.
    • Simple Moving Average (SMA): Averages a set number of past prices.
    • Exponential Moving Average (EMA): Gives more weight to recent prices.
  • Typical periods: 5 EMA (short-term), 13 EMA (medium-term), 26 EMA (long-term).
  • Crossovers signal buy/sell opportunities:
    • Positive Crossover (PCO): Shorter EMA crosses above longer EMA = buy.
    • Negative Crossover (NCO): Shorter EMA crosses below = sell.

Fibonacci Retracement

  • Fibonacci levels help identify potential price retracement levels:
    • Key Fibonacci retracement levels: 23.6%, 38.2%, 50%, 61.8%.
  • Use during price retracements to gauge possible reversal points.

Reversal Patterns and Continuation Patterns

  1. Reversal Patterns: Indicate a potential change in trend direction (e.g. Head and Shoulders, Double Tops, Inverse Head & Shoulders).
  2. Continuation Patterns: Suggest that the trend prior will continue (e.g. Flags, Pennants).

Technical Indicators

  • Lagging Indicators: Slow to respond but provide clear signals post-event (e.g., Moving Averages, MACD).
  • Leading Indicators: Provide early signals (e.g., Stochastic Oscillator).
  • Divergences: Indicate when price action and indicator movement do not align, indicating possible trend reversals.

Risk Management and Trading Psychology

  • Focus on risk/reward ratios: aim for 1:3.
  • Placement of stop-loss orders to manage potential losses (2% max loss on any trade).
  • Emotional discipline is crucial; track performance to understand strengths and weaknesses.

Double Screen Strategy

  • Confirm setups by analyzing higher time frames in conjunction with lower time frames.
  • Integrate all learned concepts for a holistic view; wait for confirmation signals before entering trades.

Practical Application & Homework

  • Identify 5 bullish and 5 bearish examples in monthly charts.
  • Draw trend lines on different timeframes, checking for convergence and significant candles.