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Technical Analysis for beginners
What is Technical Analysis?
Technical Analysis is the study of the market through the use of graphs chart in order to anticipate the future direction of prices.
Among the latest definitions:
That technical analysis is the study of psychological behavior of "the traders group"
Philosophy of Technical Analysis
Technical analysis is built on three rules:
1- The market reflects everything on its movement.
2- Prices move in a direction.
3- History repeats itself.
1- The market reflects everything on its movement:
It is important to understand this phrase well as it is the cornerstone of technical analysis, movement in prices, which appear on the chart, reflects the underlying relative strength between offers and demands and usually the news appears and can be seen on the chart before they're announce to the public.
When prices go higher, demand should be more than supply, and the news come positive, and vice versa, when prices are in a bearish trend the supply is more than demand then the negative news come.
News usually comes after the movement of prices
Prices are the leader of the basics, from here comes the value of the phrase "The market reflects everything."
2- Prices move in a direction:
This principle is one of the basics of technical analysis; the prices go in the direction of one of three directions:
• Upward trend "Up Trend"
• Downward trend, "Down Trend"
• Wiggly trend, "Wiggle"
Price maintains its direction until there's reasons to reverse.
(We will detail these trends and how to know them)
3- History repeats itself:
This phrase is found in various sides of life. Some even say "The present is nothing but the past, coming from another gate."
When one of the shapes forms and successes on the chart, we believe that history repeats itself and that the price will go in the same direction of movement every time the same shape forms, because of the success of these forms in the past, so we expect them to success in the future.
Upon the arrival of the market index to its peak, the behavior of traders is very different and unexpected for the next behavior of the index. It marks including:
Unlimited optimism occurs. This optimism is always at the absolute highest peaks.
At this time everyone starts to speak about a new era and the beginning of the development under the current rises, Etc.
A lot of talk about the stock market and shares appears in all different media. Even for non-specialists. You may find talk about it in women, sports and music magazines, as well as from different categories and classes, starting from the children to the elderly, from business men to the property's guard.
The exaggeration in the assessment starts, especially by some companies and people who are entrusted them for their experience.
Traders begin selling their property and taking bank loans to enter into the stock market.
Since technical analysis is a study of market action through chart, we should know the types of chart.
Chart is a graph
The vertical axis represents the time and the horizontal axis represents the price
It is possible to analyze the chart on time frames (15 minutes - 30 minutes - hours – a day - a week...Etc)
Types of charts:
- Line Chart:
It is a set of points connected to each other and every point of them represent the closing price on a specific day
It is the simplest kinds of charts and it can give a simple idea about the direction of the price.
- Bar Chart:
In it every day is represented by a bar
Bar is a vertical line, its top is the highest price traded in the day and its bottom is the lowest price in the day
- The opening price is a little line police on the left, "the past few days"
- The closing price for a little line on the right "the future"
- Candle sticks Chart:
Each candle represents a period of time, whether we choose minutes, or five, quarter of an hour, half hour, an hour…
Candle is formed of a body, "the distance between the opening price and the closing price", a line on top represents the highest price in the day, and another line on bottom represents the lowest price in the day
Green candle represents that the price in this day rose, the opening price is the bottom of the candle's real body and the closing price is the top of the candle's real body
Red candle represents that the price in this day declined, in which the opening price is the top of the candle's real body and the closing price is the bottom of the candle's real body
Note that there's a possibility of changing the colors of the candle, such as white when increasing, and black for the decline instead of green and red.
There are many other representations for charts, but these previous charts are the most popular types of charts used in technical analysis.
There are terms those are important to know, as:
It means the price of the first sale or purchase made in a certain period or the price at the beginning of the day when analyzing the data of a particular share.
It means the highest price of a share in a given period that could be a year or a day. It is the point at which the purchasing power of the buyers is stronger than sellers
It means the lowest price of a share in a given period that could be a year or a day and also refers to the point at which the number of sellers is more than buyers.
It means the closing price, which the price closed at in a particular day or the last price of a stock in a certain period.
It means the number of shares that were traded for a certain period, for example through the day or hour or even minutes a.
And the relationship between price and trading volume is one of the important things for the technical analysts. The price increase is always accompanied by increased trading.
That each candle or bar is representing a trading month
Each candle or bar is representing a full trading week
Each candle represents a trading day. This is the most commonly used
It is the smallest unit. Each candle represents a period of time of (minute, 5, 10, 15, 30, 60 minutes)
It is often used in instant transactions to determine the movement and direction of the arrow in the session.
We mentioned earlier that there are 3 directions for the index
They are very important as we can find out where the beginning of the rise and decline
And can be used for forecasting a decision at the right time.
It is defined by:
A top that is higher than the previous top. (Higher highs)
A bottom that is higher than the previous bottom. (Higher lows)
If these two conditions are true, the trend is an upward trend.
In the previous index chart, we can note how there's a top that is higher than the previous top and a bottom that is higher than the previous bottom, thus achieving the conditions of the upward trend
If the trend is upward, and there has been a decline in the stock or index, and the strategic is investment, this does not mean that it's the end of the upward trend
Because any decline is just a corrective move and the so-called profit-collecting, as long as the condition is still achieved
A top that is higher than the previous top, a bottom that is higher than the previous bottom
This vibration is very useful for daily trader
This trend is achieved by:
A top that is lower than the previous top. (Lower highs)
A bottom that is lower than the previous bottom. (Lower lows)
If these conditions are true, the trend is a down trend
In the previous index chart, we can note how there's a top that is lower than the previous top and a bottom that is lower than the previous bottom, thus achieving the conditions of the down trend
It may seem at first glance there's a lack of reaching to the previous top and achieving a lower bottom than the previous one
That there is weakness in the index, whether in the general market index or the stock
Which make it unable to overcome the first top and then go lower than the previous bottom
The best decision for the investor then is to exit the market
And as for daily trader, being careful from the daily sharp market fluctuations
This trend forms when the index moves in horizontal direction and the top is equal with the previous top
As well as the bottom with the previous bottom
And it has stability
In the previous index chart, it is clear to that the movement is in horizontal direction for a period of time
Only now, after having studied all the basic steps, we can move to levels of resistance and support which is fundamental for reading charts and studying the market movements
Support and resistance levels
Once you understand the true meaning of the trend, it will be easy to know the meaning of support and resistance, especially since those tools is one of the main tools used in technical analysis that tries to follow up the vicious war between buyers and sellers on the resistance or support levels to know the next direction of the price in the financial markets, including currencies market.
As shown in the previous graph, the level of support is a price level that is less than the current market price, a level that is trying to prevent the level of prices -including exchange rates- from continuing to decline as shown by blue arrows. In contrast, the level of resistance is the price level that is higher than the current market price, a level that is trying to prevent prices -including the exchange rates- from continuing to raise, the arrows in red in the previous graph.
Why do levels of support and resistance form?
The support and resistance levels are one of the most important psychological factors that reflect the supply and demand situation in the financial markets, including the currency market, the level of support means that traders tend to buy, while resistance levels mean that psychological trend for traders to sell. In the case of breaking the resistance levels, the mental state associated with the supply and demand levels then differs and thus forming new support and resistance levels.
Whole numbers are used as levels of support and resistance
In addition to the previous tops and bottoms, whole numbers can be used as levels of support and resistance; it is possible to use whole numbers as psychological levels of support and resistance, such as 10, 20, 35, 50, 100, or 1000. As we have noted it is considered as psychological levels of resistance and support more than real levels, but it can be used in trading.
For example, a lot of traders could buy large quantities of a currency when it goes to low levels of about $ 50. On the other hand a lot of traders could sell at that level in the case of higher price in the financial markets, including the currency market to, to a level close to it. In both cases, and as noted before, these figures are psychological levels of support and resistance, but they have impact on traders and thus the decisions then make, thus the price in the financial markets, including currency market, which moves based on them.
Exchanging the roles
Once the support level or resistance level is broken, the level gets another role. For example, in the case of lower levels of prices in financial markets, including the currency market, under a certain levels of support, that support level becomes resistance level after it's broken. And in the case of higher prices in financial markets, including currency market, above a certain level of resistance, the level turns into a support it's broken. This exchange of roles happens due to changing supply and demand equation, which leads to the movement of prices in financial markets, including the currency market, to new bands after breaking through resistance or support levels. But in order to ensure the exchange of roles the price in the financial markets, including the currency market, must move strongly after breaking through.
For example, as shown in the previous graph, the red line represents the level of resistance, but once breaking through that resistance the line shifts to a level of support as shown in the graph above.
It is possible for novices in technical analysis to think that idea is a little tricky, but with repetition it will be understood quickly, especially since this phenomenon occurs consistently and repeatedly, even in high-quality securities. For example, it is possible to view the previous graph which is a graph of a famous American share in stock market, notice the period between 2003 and 2006 and how the level of $ 51 represents a strong support, once breaking through that point, it turned into a resistance level that prices could not rise above again.
Importance of support and resistance levels
Analysis of support and resistance is one of the most important parts of technical analysis and, because it is possible to use these levels in the important investment decisions. For example, when a particular trader is able to determine the strength of a certain support or resistance level that was tested many times, it is possible to use these levels in the trading, where it would be unlikely to overcome a price in financial markets, including the currency market, and through that information he can determine the direction of the deal which he will open.
It is worth mentioning that both support and resistance confirm the trend. For example, in the case of continued trading price in the financial markets, including the currency market, in particular way with the support and resistance levels, the behavior of the price in financial markets did not change, including the currency market, it would be expected that the price will continue in the same direction. It is also not necessary that every breaking through a level of support or resistance to is a change in direction. But for example in the case of breaking the price in financial markets, including the currency market, to a level of resistance that was determined by pricing channel, this may mean higher speed of price rise in the financial markets, including the currency market, in the upward trend.
When following the levels of support and resistance in the light of the above observations, it is possible then to take advantage of them significantly in trading, where it is possible for the trader to put sell and buy orders near those important levels. But we must also note that the rates of vibration affect the relationship of the price with support and resistance. For example, if you want to put a sell or buy order or in the financial markets, including the currency market, you should not put it at the exact value of support or resistance, but we must consider that the price may not reach that level in particular. In that case, when there is a state of optimism in the financial markets, including the currency market, it is possible to buy a little above the level of support, while in the case of strong pessimism, it is possible to place sell order just below the level of resistance.
You finally can now start trading with confidence after you have completed your studies as beginner trader, and knowing the basics of technical trading, and do not forget to abide by our trading advice.
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