Get on top of your trading from the jump by mastering Technical Analysis for Beginners.
Technical Analysis for Beginners is the best place to start if you are new to trading or if you need to brush up on your skills.
The art of Technical Analysis is only really learned through countless hours spent sitting in front of the charts tweaking and checking them as the price moves around day after day, month after month. That is to say, there is no replacement for hours of experience honing your craft. However, as this takes time to acquire, we have compiled this comprehensive guide to Technical Analysis for Beginners so that you can save yourself hours and hours of trying to figure this information out for yourself.
We begin with the most simple and work our way through to the more complex. Let’s begin!
Don’t miss our other posts on Technical Analysis.
Don’t miss our other articles on Fundamental Analysis.
Price Action Technical Analysis
The first thing too become familiar with when learning Technical Analysis For Beginners is Price Action, also known as ‘Naked Trading’ depends only on the price movements of an asset as seen on the chart.
It focuses on the historical data and does away with fundamental analysis and technical indicators, however, it is a form of technical analysis.
They focus on things like trend lines, price bands, high and low swings, technical levels of support, resistance and consolidation.
They will use things like simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels.
Because of the interpretive nature of naked trading, no two traders will trade price action in the same way.
Let’s take a more detailed look into this style of trading:
Support and Resistance Zones
Support and resistance zones are the naked traders most valued form of analysis.
Zones are slightly different to support and resistance lines because they are not a particular price point, but an area, and therefore shouldn’t need to be adjusted.
They are significant because they have been tested and tested over time and have a historical tendency to cause a reversal of the trend and thus become better with time.
These zones can seem to be a little bit tricky for people to find who are new to trading, so there are a few tips to help with that:
- Use a high timeframe, do weekly, daily charts.
- Using a line chart, instead of a candlestick chart as a line chart will show the closing price.
- Don’t focus on minor areas.
Trendlines
Trendlines are essentially the same as support and resistance levels, however, they are continuous and on a diagonal trajectory.
It is generally accepted that three touches on a line are required to confirm the trend, however, two touches is the minimum to establish the trend.
The more times the trend line is tested, the stronger the trend becomes.
- Uptrend – when the price is consistently displaying higher highs and higher lows.
- Downtrend – when the price is consistently displaying lower highs and lower lows.
- Consolidation – when the market is moving in a set range, neither making higher highs nor higher lows.
Channels
Channels area very similar to trend lines, however, they are a set of two lines which run exactly parallel to each other offering support and resistance to a trending asset.
As with trend lines, there are three kinds of channels:
- Ascending Channel – when the price is consistently displaying higher highs and higher lows in a parallel range.
- Descending Channel – when the price is consistently displaying lower highs and lower lows in a parallel range.
- Horizontal Channel when the market is moving in a set range, neither making higher highs nor higher lows in a parallel range.
Please see the below short video on Support and Resistance levels to explain further:
Candlestick and Chart Patterns
The second area of Technical Analysis For Beginners to become familiar with is Chart Patterns. Chart patterns can be broken down into a few categories. There are candlestick patterns, which focuses on the intentions of the market based on one or tree candle sticks.
There are also more comprehensive Chart Patterns which look a much larger periods of time of an asset.
Both pattern types are interpreted as being potential signals of one of three future movements of an asset; reversal, continuation or bilateral.
However, before we are able to analyse a candlestick pattern, first we need to be sure that we understand the formation of the candlestick price indicator itself.
When you think about it, the chart is a visual representation of the decision to sell, buy or hold on the part of the plethora of investors in a particular asset at a given point in time. Depending on the timeframe that the charts are set to, such as four hourly (4H), (1H) hourly or (1D) daily. The timeframe selected will signify that each candlestick will encapsulate that time period’s worth of price data. The will be the open, the close and the range moved within the time selected represented as indicated below:
Once we are happy with understanding the actual candlestick itself as a representation of data, then we can move onto looking at what kinds of candlestick shapes we tend to see in the charts and what their attributed significance tends to be by technical analysists.
Candlestick Patterns
Candlestick Patterns is the art of being eagle eyed on the charts and looking for ‘sign-posts’ that are a visual representation of how the market (the buyers and sellers within that market) are feeling regarding a particular asset. It is a way of attempting to interpret what the market might do in the future, based on what it has been doing in the recent past and the present.
The main formations that Technical Analysts look for are as follows:
Single Candlestick Patterns
The intrepretation of these formations is as follows:
- Spinning Top: Indecision, possible reversal.
- Marubozu: Either very bullish or very bearish depending on direction.
- Doji: Sign of indecision, (only really significant when by a Marubozu as it indication that the buyers/ sellers are becoming exhausted).
- Hammer Bullish: potential reversal.
- Hanging Man Bearish: potential reversal.
- Inverted Hammer Bullish: possible reversal.
- Shooting Star Bearish: possible reversal.
Multiple Candlestick patterns
- Engulfing Candle: Either bullish or bearish depending on the direction. It is actually a two-candle stick pattern as it depends on the previous candle being completely engulfed by the ensuing one, however, in the opposite direction, signifying a potential change in direction
- Tweezer bottoms / tops: This is another combination pattern that is made up of two candlesticks. It is actually a hammer and hanging man combination, or, an inverted hammer and shooting star combination. It is seen as being an indication that a reversal may soon occur.
- Evening and Morning Stars: These are triple candlestick patterns that can indicate the end of a trend and a potential reversal.
- Three White Soldiers and Black Crows Three: candlestick pattern, reversal confirming.
- Three Inside and Down: This is also a three-candlestick pattern, end of a trend and reversal confirmation pattern.
Chart Patterns
- Double Top Bearish: Indication of reversal. Comprised of two touches at a resistance point that cannot be broken by the buying power. Generally, appears after a strong upward move or trend.
Double Bottom Bullish: Indication of a reversal. As with the double top, it comprised of two touches but this time at a support level. The sellers cannot break below. Generally, appears after a downtrend or strong downward move.
Head and Shoulders: Bearish reversal pattern. Comes after a uptrend. Made up of three peaks, with the central peak being higher than the other two. Most reliable when the angle of the neckline is sloping downwards, meaning that the last low is lower than the first and second lows.
Inverse Head and Shoulders: Bullish reversal pattern. The opposite of the above head and shoulders pattern. The central trough is lower than the outer two. Comes after a downtrend.
Diamond: A reversal Pattern. Diamonds are a variation of the Head and Shoulders chart pattern. While it is extremely rare, this pattern signals a break in trend much more quickly than a head and shoulders pattern. To use, take the distance between the highest and lowest point in the diamond formation and add it to the breakout point.
Rising Wedge Bearish: It can be an indication of a reversal or continuation of a trend depending on the preceding trend. The key with a wedge is that it is a form of consolidation. It is different from a channel because the trajectories that the lines are tracking are not parallel, but converging.
Falling Wedge: The same but opposite to a rising wedge. Bullish. It can be an indication of a reversal or continuation depending on the preceding trend.
Rectangles: Can be bearish or bullish. A ranging market. A period of consolidation before a continuation. Essentially a horizonal channel where the asset is caged in by certain support and resistance points.
Pennants: Trend continuation indication. Can be bullish or bearish depending on the preceding trend direction. It is a short period of consolidation before a continuation.
Symmetrical Triangles: Bilateral chart formation. It is a period of consolidation and is characterised by lower highs and higher lows. It is an indication that the price is preparing to make a break.
Ascending/ Descending Triangle: As above, is a period of consolidation and will have either horizontal support or resistance. It is an indication that the price is preparing to make a break, however, that could be in either direction.
Technical Analysis Indicators
What most people think of when they are researching Technical Analysis For Beginners are Technical Indicators. This is because they are probably the most talked about when considering trade set up and also there is a concept that you are going to be able to predict the markets when using Technical Indicators, however, as we will see, this is never the case. (Predicting the market isn’t possible especially with using Technical Indicators).
The first thing that you need to know when thinking about Technical Analysis is that this really means discussing the visual representation of the price of an asset as a chart, and the study of that visual.
Moreover, as most people use some kind or indicator in order to assist them by providing context to these charts, it is important to understand that there are different kinds of indicators. Typically there are two kinds of indicators, Leading and Lagging.
As the names would indicate a leading indicator gives a signal before the new trend occurs, and conversely, the lagging indicator provides a later signal after the trend has started. Each has positives and negatives, one is delayed (lagging) but the other will give ‘fake’ indications (leading).
Generally speaking, leading indicators are oscillators and lagging indicators are trend following or momentum indicators.
Simple Moving Average (SMA)
Probably the most useful and easiest indicators to understand are the moving average indicators. They
Nature
Trend indicator as a line chart. Moving averages are a way of using a line chart to view the average of the closing price for a set period, on a continuous basis.
Common times are 20, 50 and 200. (See Crossover in Part 4 – Strategy)
The larger the period included, the less responsive the indicator becomes.
Pros
They can also offer dynamic support and resistance lines. They smooth out the price so that you can see a clear indication of direction.
Cons
As they as based past data and therefore their response is delayed.
Exponential Moving Average (EMA)
Nature
Trend indicator as a line chart. As above: Moving averages are a way of using a line chart to view the average of the closing price for a set period, on a continuous basis.
Common times are 20, 50 and 200.
Pros
The larger the period included, the less responsive the indicator becomes.
Cons
They can also offer dynamic support and resistance lines. Unlike SMAs, EPAs smooth out any one-time spikes caused by a price surge from a news release or similar event. This is because they weight the most recent periods where SMAs will give each time period equal weight. EMAs can cause ‘fake’ indications as they can be too responsive.
Trading Tip: MAs are only useful when use in combination of 2 or 3 at one time. A combination of SMAs and EMAs may be used on the same timeframe, or a combination of either SMAs or EMAs on different time frames as indicated above. This will create the ‘Cross Over’ strategy.
Bollinger Bands
Nature
A volatility measure. Appears as line charts. Calculated price and volatility over a set period of time inclusive of standard deviations.
They represent a maximum and minimum moving average. The more volatility the wider the bands are apart (loud), or less volatility when the bands are further apart (quiet).
Pros
Can be used to trade the ‘Bollinger Bounce’. They are simple, reliable and don’t dazzle the eye too much to detract from the underlying charts movements.
Cons
Only a small piece of the puzzle, while knowing and understanding volumes is very helpful, you cannot rely on it alone.
Moving Average Convergence Divergence (MACD)
Nature
Momentum indicator in a trend. Line chart and histogram. Made up of 3 measures, a fast-moving average, a slower moving average and the difference between the two displayed as a histogram. Normally, 12, 26 and 9.
Though the formation can on occasion be similar to a sign-wave formation, more often than not, it will not take this formation.
Pros
Only gives signal once the trend has been established.
Cons
Can be delayed.
Parabolic SAR (Stop and Reversal)
Nature
Oscillator signals the end of a trend or a reversal. They indicate an exit point for a currently running trade.
Pros
Very easy to understand and use.
Cons
As with many other indicators, it us best used in a trending market otherwise it can just give ‘fake’ indications.
Please see the below short video on Trend Following Indicators to explain further:
Stochastic
Nature
Oscillator indicator used to signal the end of a trend. It is a line chart. Measures if an asset is overbought or oversold. Made up of a faster and slower measure. Gives a reading in the range between 0 to 100, with over 80 being considered overbought territory, and under 20 being considered oversold territory.
Generally, moves in an irregular sign curve formation.
Pros
Creates a condition called divergence, which is a trade set up.
Cons
Markets can linger in overbought or oversold territory for extended periods, during which time the price can continue to extend further in that direction.
Relative Strength Index (RSI)
Nature
Oscillator to signal the end of a trend. Displayed as a line chart. Similar to a stochastic, identifies overbought and oversold territory of an asset. However, while it also ranges from 0 to 100, distinctly, it uses levels of 70 and 30 to indicate overbought or oversold territory respectively.
Pros
Creates a condition called divergence, which is a trade set up.
Cons
Markets can linger in overbought or oversold territory for extended periods, during which time the price can continue to extend further in that direction.
Please see the below short video on Momentum Indicators to explain further:
Don’t miss out other articles on Technical Analysis here.
As always, if you have any questions, we would love to hear from you in the comments box below. Happy trading!
