Sect. 1 – What is Technical Analysis?
Technical analysis is the fluctuation of price and volume for stocks, commodities, forex, or anything that can be traded in the market where prices can rise and fall by the influence of supply and demand.
Despite the fact that traders are constantly using sophisticated mathematical formulas, raw numbers/data, and technical indicators to predict the direction in which the stock will continue trending in the future; technical analysis is really the study of human behavior – a trader’s emotional state of greed, sentiment, and fear. Depending on the self-interests of traders considering their emotional state and the current market conditions for a particular stock; they determine whether the price will go up (if they feel it will rise) or down (if they feel it will fall).
Technical analysis allows traders to anticipate what will most likely occur to the price of a stock over a specific period of time. This can be measured by analyzing different time frames – 1min, 3mins, 5mins, 10mins, 15mins, hourly, daily, weekly, monthly, or even years. By using and combining these time frames with other indicators – Opening Price, Highs/Lows of the Day, Closing Price, or Volume; traders can make a better judgement to anticipate the direction in which the price will continue trending.
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Sect. 2 – The Basic Components of a Chart
Sect. 3 – Introduction to Candlesticks
To create a candlestick chart and analyze a specific time period, traders must have a defined set of data – Opening Price, Highest Price reached, Lowest Price reached, and the Closing Price for the time frame that the trader wants to display and analyze. Candlestick charts are easier to interpret since they provide a better image/visual of the price action. Traders have the opportunity to highlight key data during specific time frames that helps them validate further decisions and accommodate their trading styles/strategies based on the data that they currently have.
The Formation of Candlesticks
Like explained before, in order for a candlestick to form, a trader must first have a defined set of data – Opening Price, Highest Price reached, Lowest Price reached, and the Closing Price. Once this data have been collected, the candlestick may be formed. The following images explain the formation of a green candlestick indicating a bullish sign of prices rising and a red candlestick indicating a bearish sign of prices falling.
Green Candlestick Formation
Red Candlestick Formation
A candlestick represented by a longer body indicates a lot of price movement (strong volatility). Price fluctuation is caused by the strong buying and selling pressure from traders showing interest for the stock to go up or down. A candlestick that has a smaller body represents less trading activity and a period of potential consolidation.
Long-Green Candlesticks: Candlesticks with longer green bodies are indicators of strong buying pressures among bull traders; ultimately rising the prices of the stock as the closing price closes higher from its opening price.
Long-Red Candlesticks: Candlesticks with longer red bodies are indicators of strong selling pressure among bear traders; ultimately dropping the prices of the stock as the closing price closes lower from its opening price.
Understanding Long & Short Shadows
The upper and lower shadows on a candlestick helps traders comprehend how the stock traded during the trading session – who had the upper hand? Which side traded more aggressively, bulls or bears? How far up or down the shadows traded? What was the trading range?
Upper Shadow – It represents the high of the trading session.
Lower Shadow – It represents the low of the trading session.
Short Upper & Lower Shadows – A candlestick with short upper and lower shadows are indicating that the majority of the trading action took place near the opening and the closing price.
Long Upper & Lower Shadows – A candlestick with long upper and lower shadows are indicating that prices went past the opening and the closing price during the trading session.
Longer Upper Shadow – A candlestick that has a longer upper shadow with a short lower shadow is indicating that the buyers dominated (bullish sign) during the trading session; resulting in the price of the stock rising.
Longer Lower Shadow – A candlestick that has a longer lower shadow with a short upper shadow is indicating that the sellers dominated (bearish sign) during the trading session; resulting in the price of the stock dropping.
Understanding Spinning Tops
A spinning top takes place when the candlestick has a long upper and lower shadows with a small real body. This type of candlestick represents uncertainty between the buyers and the sellers for the price direction of the stock. The small real body represents little range in price movement from the opening to the closing price for the trading session.
Understanding Dojis
A doji is a representation of an even-battle between buyers and sellers. A doji is a neutral state that takes place when the opening and the closing price are almost equal. They do not weight more towards a bullish or a bearish trend as this can only be decided and confirmed by followed price action of buying or selling pressure.
Long-legged Doji – This type of doji candlestick has long upper and lower shadows of almost equal length and a small real body. This kind of doji reflects a high level of uncertainty among traders since the price traded above and below the opening price level, but closed equally as closed to where it had first opened.
Dragon Fly Doji – This type of doji candlestick if formed when the opening, high, and the closing price are equal while the low creates a long-legged lower shadow. This doji is an indicator that the sellers have an edge of domination and drove the price of the stock to a lower level.
Gravestone Doji – This type of doji candlestick if formed when the opening, high, and the closing price are equal while the high creates a long-legged upper shadow. This doji is an indicator that the buyers have an edge of domination and drove the prices of the stock to a higher level.
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Sect. 4 – Introduction to Trends & Channels
The formation of trends occurs with the fluctuation of prices (highs and lows) as a result of the supply and demand created by traders. In order for traders to make money trading, there must be a trend to trade from. A trend serves as confirmation of direction to better decide if the trend is a:
- Bullish trend where strong buyers are pushing the stock up as prices rise
- Bearish trend where strong sellers are pushing the stock down as prices fall
- Consolidating trend where neither side is showing aggressiveness as prices remain steady
Understanding Uptrends, Downtrends, and Consolidation Trends
Uptrend Pattern – For bull traders (buyers), this is a positive indicator. This bullish trend consists of the stock making higher highs and higher lows. Buyers would typically wait for assurance if the uptrend is a bullish uptrend after confirming at least two higher highs price points with higher lows before making any further trading decisions.
Downtrend Pattern – For bear traders (sellers), this is a positive indicator. This type of trend consists of the stock making lower highs and lower lows. Sellers would typically wait for assurance if the downtrend is a bearish downtrend by confirming at least two lower highs price points with lower lows before making any further trading decisions.
Consolidation Trend Pattern – This type of sideways trend occurs when there is little price movement (no volatility action). A consolidating trend is also the result of uncertainty among traders as they are unsure if the price direction of the stock will continue trending up or down.
I am new to this game. Any advice on starting my journey to become an independent trader? Should I watch tims dvds before subscribing to the penny stocking silver membership?
@ponyo Good morning, sorry I was already in bed when you posted. Do you currently have any of Tim's DVDs? Have you traded at all, know anything about day trading or you are just getting started? Just trying to better understand where you are standing before giving you any advice.
wow thats a lot of information, this is what i needed! thanks a bunch!
@omega_trader You are very welcome! hahaha good to hear that. Enjoy the information and learn a lot.
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