Technical analysis is the art and science of studying charts, analyzing past market data, and predicting future price movements. It’s a tool that can help traders make better decisions, avoid costly mistakes, and ultimately achieve success in the financial markets. But don’t be fooled – mastering technical analysis and charting techniques is not for the faint of heart. This complete guide to charting and technical analysis will teach you everything you need to know in 2023.
Chapter 1: Market Structure
Looking at the above chart you can easily tell the price is moving upward which in the language of traders means that the buyers are dominating or the market is bullish – if it were the other way around – the market would be bearish or the sellers would be dominating. Does the market structure start with defining which side of the market is in control – buyers or sellers?
Uptrend and downtrend
Uptrend means that the buyers are dominating and the price is moving upwards – the price is bullish, and you recognize an uptrend on the chart by drawing something called a higher high or lower low. It is a part of technical analysis.
Using a trendline you can connect higher highs(HH) and higher lows(HL) and this is important because you can see the market is in an uptrend or bull trend just by looking at the charts – however to place a relevant trade buying or selling (long or short respectively) you need something called a trend reversal.
Trend reversal is a phenomenon in which market dominance changes in the favor of buyers if it was in the seller’s favor and vice versa – which can be a trading opportunity.
Trading on trend reversals can allow traders to enter a market early before the new trend becomes established. This can lead to greater potential profits as the trend develops.
In the sideways trend, the market makes equal highs and equal lows – the price does not make a significant movement. If the price breaks out from either side – the phase is over and a trending market resumes. Such a phase is also known as a consolidation phase.
Such phases indicate that both buyers and sellers are fighting hard for dominance and price can break out either way – we will discuss later which side is more likely to break using certain conditions.
FOLLOWING is the latest price chart of the BTC USDT pair on a 4-hour time frame – there is a clear example of price moving in a downtrend followed by a breakout leading to a downtrend and then a consolidation or sideways market where the price does not move much and then another breakout to the upside indicating price movement in the favor of buyers.
TIP – for recognizing a valid uptrend the condition is that each new higher or (swing high must break the level of the previous swing high) as long as this process goes on the market is considered to be in an uptrend
Trend analysis is important because when you take a trade it is very likely that the market shifts its trends or enters a consolidation phase resulting in loss or worse – to recognize when an up-trending market has entered a consolidation phase or it has got slow all you need to do is :
- As you can see the market was making higher highs and higher lows consecutively
- Then after a certain period, the price fails to break the previous swing high (or higher high)
- The market also fails to surpass the previous higher low
- Indicating that the market is going to shift gears and come to a halt
- The same applies when the market makes lower lows and lower highs and then the price fails to pass the test and makes a new higher high or higher low in other words it does not break the previous lower low.
CHAPTER 2: MARKET CYCLES
The market never moves in a single direction – it operates in cycles. A thorough understanding of these cycles and patterns is the key to successful technical analysis and charting techniques.
Accumulation is characterized by increased demand – it usually occurs when the market has fallen enough and buyers are trying to take control. On a chart accumulation occurs after a series of swing lows when sellers are exhausted – then a consolidation phase occurs which is a face-off between buyers and sellers which buyers mostly win as sellers are tired and exhausted this results in buyers’ control and an uptrend
2. Mark up
A markup phase is characterized by buyers gaining control over the market and the price continues to steer upside, price continues to new higher highs and higher lows
The distribution phase occurs when the market has pumped a lot and now enters a sideways and consolation phase – it is characterized by lower tops and flat bottoms.
The markdown phase is when the market breaks out to the downside entering a downtrend as sellers take back control.
How do Predict Price action using Market structure and cycles?
The whole point of teaching you each and every terminology in detail was to equip you with enough knowledge that you can enter the crypto market as a trained veteran and make calculated predictions. My method of trading using the market structure and price action is :
- First of all, recognize what the market is up to right now – is the price in an uptrend, downtrend, is it consolidating, etc?
- Then zooming out from the chart or simply switching to a higher timeframe to understand which was the last phase and then contrasting the two.
- This is the chart of TRB/USDT – here we see that we are currently in a consolidation period which was preceded by a downtrend – what we want is an uptrend – which according to market cycles is the next in line.
- Therefore we wait for the price to break out of the upper resistance area (the blue line) and place our trade.
TIP: PRACTICE AND TOGGLE BETWEEN DIFFERENT COINS AND DIFFERENT CYCLES ON TRADINGVIEW, AND GET A FAIR BIT OF WIN RATE ( SUCCESSFUL PREDICTIONS) BEFORE ACTUALLY PLACING A TRADE
Chapter 3: Support and Resistance
Price often halts at points – it takes correction, and it rests at points known as support and resistance – if you’re diligent enough you can make the most of these corrections through technical analysis and charting techniques
Support is the area where the price stops falling and resistance is the area where the price stops rising, think of support and resistance as the floor and ceiling of the market – to draw support resistance follow these thumb rules
- Look for extreme swing highs and lows
- Pick out the most obvious levels and areas
- rejection(opposite movement and reversal ) is strong
- At Least 2 times the price has rejected if it is to be considered a valid support or resistance ( if the price was rising it rejects when a resistance occurs and if the price were falling it rejects again )
IMPORTANT – REJECTION AND TESTING MEANS THE PRICE GETS PUSHED IN THE OPPOSITE DIRECTION AS SOON AS IT REACHES THAT LEVEL
Trading with support and resistance
Whenever the price reaches a support level it is a buying opportunity as we know the price would be pushed in the opposite direction – however, as a support or resistance gets tested multiple times more likely it is to break. Therefore making a trading decision solely on support and resistance is not advisable – instead, using support and resistance you can mark potential sell-offs and buying opportunities.
TIPS – make support and resistance as areas rather than a single line to avoid fake breakout since in a crypto market you will hardly ever find any perfection – it’s too volatile a market for that, in real time the market would always exceed your levels – just barely disturbing your stop losses.
CHAPTER 4: Candlesticks
Candlesticks reveal a lot about market psychology – they depict the relationship between buyers and sellers very uniquely
BEARISH CANDLESTICK (USUALLY RED) – MEANS THAT THE PRICE OPENED AT A HIGHER PRICE AND CLOSED AT A SMALLER PRICE – VICE VERSA FOR BEARISH
Each candle tells a story about the battle between buyers and sellers – there are bullish candles that indicate bearish moves and bearish candles that indicate bullish moves.
TYPES OF CANDLESTICKS
- If a bullish candle has a long wick at the top and a short body then it means it is a bearish signal (if it was formed at a resistance) – this is because the candle is telling that sellers dominated the candle.
- If a bullish candle occurs at a point of support then it means the sellers got in the candle but buyers drove the price up too, therefore, it is a buy signal.
- If the upper wick is small – there is very little buying pressure
- Long bodies exhibit exceptional strength for bulls or bears – with bodies large and wick small it again shows strength on either side refer to point 3
- A long candle with reference to its trend is an absolute signal – if a long candle appears during an uptrend it means a strong uptrend is coming up
- When a red log candle appears in a downtrend, it strengthens the trend, if it occurs in an uptrend – it indicates a reversal
- Short candlesticks indicate a struggle between buyers and sellers – which might lead to a reversal or sideways
- Doji candle – a candle with almost nobody and wicks on either side or both holds great significance
- If a doji appears at the bottom of a downtrend with a bottom wick- it tells that sellers are dominating but their dominance is short-lived as it opened on a much lower price and buyers have pushed it hard – this indicates a reversal
- If a doji appears at the top of an uptrend with a top wick- it tells that buyers are dominating but their dominance is short-lived as it opened on a much higher price and sellers have pushed it hard – this indicates a reversal
- A candle with large wicks on both sides and a medium body – indicates a consolidation
- Engulfing candles are candlestick patterns that occur when the body of a current candle completely engulfs the body of the previous candle. There are two types of engulfing candles: bullish engulfing and bearish engulfing.
- A bullish engulfing candle occurs when a small bearish candle is followed by a larger bullish candle, and the bullish candle completely engulfs the body of the bearish candle. This pattern indicates that buyers have taken control of the market, and there is a high probability of a trend reversal from bearish to bullish.
- On the other hand, a bearish engulfing candle occurs when a small bullish candle is followed by a larger bearish candle, and the bearish candle completely engulfs the body of the bullish candle. This pattern indicates that sellers have taken control of the market, and there is a high probability of a trend reversal from bullish to bearish.
Pinbar candle has a small body and a large wick – these candles work on the principle that :
TIP – THE WICK MUST BE THREE TIMES THE SIZE OF A CANDLE FOR A VALID PIN BAR.
HOW TO TRADE USING CANDLESTICK ANALYSIS
Each candle tells you a story and this is carried and continued by and from the next and previous candle respectively – you should never analyze a candle in isolation, for a successful trade it is extremely important that you understand the context in which the candle was formed – previous price action is more important the current one, there is always a different story and you have to crack the best one – if it is a bullish market and a pin bar with a lower wick is formed you decode that the sellers stepped in but buyers kept their head up and price moving.
CHAPTER 5: Trendlines
Trendlines are a key component of charting and technical analysis. They are lines drawn on a chart that connect two or more price points and can be used to identify trends in the market. Trendlines can be drawn on any type of chart, including line charts, bar charts, and candlestick charts.
TO DRAW TRENDLINES :
- Ignore the wicks – your trendline should be a join of bodies of candles
- Use area instead of a single line – it is evident from the chart that the trendline we have drawn is much more of an area – this is because stocks and crypto rarely function in an ideal way – in real-time, markets tend to be filled with imperfections so do not let that ruin your trade.
- Embrace the reality that there’s room for imperfections – you will never find perfect higher highs and lower highs to connect
Trading by using trendlines :
- Identify the trend: The first step in using trendlines is to identify the direction of the trend. This can be done by analyzing the price chart and looking for higher highs and higher lows for an uptrend or lower highs and lower lows for a downtrend.
- Draw the trendline: Once you have identified the trend, you can draw a trendline by connecting the highs or lows of the price action. For an uptrend, you would draw a line connecting the higher lows; for a downtrend, you would draw a line connecting the lower highs.
- Confirm the trendline: Once you have drawn the trendline, you need to confirm it by looking for at least two touches on the trendline. The more touches on the trendline, the stronger it is.
- Trade the breakout: Once the trendline is confirmed, you can trade the breakout. A breakout occurs when the price breaks through the trendline in the direction of the trend. For example, if you have drawn an uptrend line, you can buy when the price exceeds the trendline. If you have drawn a downtrend line, you can sell when the price breaks below the trendline.
Final chapter: Chart Patterns
Chart patterns are a visual representation of the movement of a financial instrument’s price over time, which are commonly used in technical analysis to identify potential trading opportunities. Chart patterns can provide valuable information about the market’s sentiment and can help traders make informed decisions about when to enter or exit a trade.
There are two main types of chart patterns: continuation patterns and reversal patterns.
- Reversal patterns: Patterns that indicate that the price is going to change trends and buyers and sellers are going to change hands are known as reversal patterns
- Head and shoulder Pattern: A bearish head and shoulders chart pattern is characterized by 3 essential elements; head, right shoulder, and left shoulder.
First, you will see an uptrend being formed – with classic higher highs and lows that are our left shoulder and head.
Our desired pattern starts to take shape the price is altered and a lower high is formed – this lower high should be (approximately) equal to the second last higher high – these are the two shoulders indicating the price would now be following a downtrend
Continuation patterns are patterns that suggest the current trend will continue. Some examples of continuation patterns include:
1. SYMMETRICAL TRIANGLE
A symmetrical triangle is formed when two trendlines are approaching each other – the price moves in the direction in which it was moving prior to the symmetrical triangle – the two trend lines approaching each other indicate that both buyers and sellers are fighting for dominance
2. ASCENDING TRIANGLE
Ascending triangle is formed when the upper trendline remains steady and the lower trendline is getting closer – in this type of chart pattern, buyers are said to be dominating because they are ready to pick the price from the lower price at each interval – they are consistently buying at higher prices while sellers are just trying to stand firm – there is a fair bit of chance that price would continue in the favor of bulls (buyers).
3. DESCENDING TRIANGLE
A descending triangle is formed when the lower trendline remains steady and the upper trendline is getting closer – in this type of chart pattern, sellers are said to be dominating because they are ready to sell at a lower price at each interval – they are consistently selling at lower prices while buyers are just trying to stand firm – there is a fair bit of chance that price would continue in the favor of bears (sellers).
4. BULL FLAG PATTERN
A bull flag pattern begins with a strong uptrend – which then converts into a downtrend. The uptrend forms the pole and the downtrend forms the flag – this is supposed to be an indication that the price would be moving in the uptrend – or bull trend soon
5. BULLISH WEDGE
A bullish wedge is a chart pattern that signals a potential bullish trend reversal. The bullish wedge pattern is formed by two converging trend lines that are slanting upwards, with the lower trend line being steeper than the upper trend line. The price is expected to move higher after a bullish wedge pattern is formed.
What is Confirmation bias – why do we often see what we want to see?
Confirmation bias is a common psychological phenomenon where individuals tend to see what they want to see and interpret information in a way that supports their pre-existing beliefs and biases. This can occur in many areas of life, including trading and technical analysis.
In technical analysis, traders may have a tendency to see chart patterns that confirm their biases and ignore those that do not. For example, a trader who is bullish on a particular stock may focus only on bullish chart patterns and ignore bearish patterns that suggest a price decline.
To avoid confirmation bias when trading with chart patterns, traders should remain objective and consider all possible outcomes. They should not rely solely on their preconceived biases and should use multiple technical indicators to confirm the pattern they see.
Additionally, traders should always have a trading plan and stick to it. They should set realistic profit targets and stop-loss levels based on their risk management strategy, regardless of whether the chart pattern confirms their biases or not.
By being aware of confirmation bias and taking steps to avoid it, traders can make more informed trading decisions and improve their overall trading performance.
Congratulations on completing this technical analysis complete guide! You now have a solid foundation of knowledge and skills that will serve you well in your trading journey. Technical analysis is a powerful tool for identifying potential trading opportunities and making informed decisions based on market trends and patterns. However, it’s important to remember that no trading strategy can guarantee success and that the markets are always changing. It’s crucial to continually educate yourself and stay up-to-date with the latest market news and trends.
Additionally, risk management is a critical part of any successful trading plan. By utilizing the concepts you have learned in this course, along with proper risk management techniques, you can increase your chances of success in the markets. Best of luck on your trading journey, and never stop learning!