1.Right Sight - What Should a Novice Remember of?
2.Basics of Analysis - Simply about Tough!
2.1.3 Pillars of Technical Analysis
2.3.Kinds of Charts
3.Technical Analysis Elements - How to Forecast Price Movement?
3.2.How to Build Correct Technical Analysis for Novices?
4.Technical Analysis Figures – How to Catch a Trend Change?
4.1.Double bottom or double top
4.2.Triple bottom or top
4.3.Head and shoulders
4.4.Flag, pennant and triangle
5.What Do Japanese Candlesticks Hide?
5.1.Three white soldiers and three crows
5.2.Bullish and bearish merger
5.3.Star and hammer
6.As for the Conclusion
The market is the alive organism. As any organism, it can contain some patterns, but it doesn't always match them fully. Many factors affect any price. Technical analysis for novices starts from realizing this simple truth. All technical figures, lines are landmarks but not the exact instruction for your actions. But again, do not perceive it literally, market remembers the past, and we'll use it. Having read my article, you will learn to see regularities in price movements, will be able to fearlessly dive into this outstanding world of currencies and charts.
Price considers everything - just in this very moment, the asset price already contains all available data.
There is always a trend at the market - even if movement looks like flat at the working (major) timeframe, it can be a stable trend at minor timeframes.
And again - market is people, and people like to repeat their actions.
Three basics affirmed long time ago, are successfully being used nowadays. The base of the market is people who trade. Because of our nature, we are very conservative, and if something works, we just don't touch it while it does.
2 important principles also lie in the basement of technical analysis:
the current trend is more likely to continue than to get changed to the opposite;
trend is actual until it weakens and shows signs of turn.
These principles should be written down at a sheet and learned by heart. Most ignore them, harming their trading.
Trend is the price movement in the direction that can be defined approximately, or using a trend line.
Flat (consolidation zone) is the situation when the price moves between fixed borders. At the chart, it is also defined by eye, as the passage movement, or using a horizontal line depicting this passage.
Timeframe is the time period when the price is displayed. This is time looks like time at the X axis of chart. M - minutes, H - hours, D - days, W - weeks, MN - months. The digital value near its letter stands for the number of minutes, hours, days and weeks.
Gap is the price movement on holidays and weekends. At the chart it's displayed a empty area, if the price remained the same by the end of free time.
Defining lines is the divided topic and will be discussed further.
Selecting the type of the chart is made in the top bar with three buttons - their place is highlighted in red in the picture. They can be changed in settings of the working screen (F8).
It's convenient to define trend and lines, as the chart is not overloaded by information toward a bar. At the same time, info can be get if you look at stripes at the left (opening price) and at the right (closing price).
Information about the direction of the candlestick is displayed with color. Standard colors are: white candlestick - up, black candlestick - down (you can change them). Also, this type of chart lets use notice candlestick patterns.
Chart selection is always up to you, but I recommend using either bars, or candlesticks. As for me, I prefer bars, as it's more comfortable to work with them. But, I was starting with candlesticks, as others. When I look at them, I have the feeling of diving into the market, and it passed with time and now I freely work with any of them.
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In my communication with the market, I always use lines. There are three kinds in the terminal to select:
- horizontal line
- vertical line
I use trendline for depicting the tendency. Initially, define the direction approximately, and then confirm it with a straight line.
Tip: remove the tick "ray" in line settings - this way, you will be able to control the length of the line. Firstly, it can seem to be insignificant, but then, multitude of lines (often not working already) starts annoying and disturbing. And then it takes some time to erase them.
Usually, I use just illustrating of trend support, as I always trade with trend (recall two important principles of technical analysis), so I rarely use trend resistance. For the full picture, it can be set - just push CTRL and move the copy of the line up.
Horizontal line is accepted to be used for displaying support and resistance lines. For simple understanding - perceive them as concrete barriers. Price can touch them, beat them, bounce off like a ball or break through. But I often use trend line for illustrating them at the chart. Due to the same reasons, in order to prevent their overloading at my chart, I remove "ray" function in trendline settings.
Vertical line at my chart pictures periods of time that I need, which don't always match the selected timeframe. Further, I will tell you in details about how I use them.
I start analysis of any currency from drawing lines at several timeframes. You can select the line in the top bar on the left (marked in the image). Now I will explain how to do it.
Start with the week-long timeframe (W1). Attentively look at the chart of recent 1-1.5 years and search for all trends in it. For your comfort, use vertical line and sit it at the border of analysis (1-1.5 years ago). You should choose a color (I got red) for a vertical line and for others. It will greatly help you in future.
Once you’ve found and displayed all trends, move to lining the chart at levels of resistance/support. The level remains working only if it had 4-5 bounces from it for the selected period of time. Also, make sure the market sees this level up to the current moment – there mustn’t be any calm or frequent breakthroughs of this level. When done, move to the D1 timeframe, choose another color (for example, blue) for lines and repeat the procedure. At this time, the period of time that we need is 6-8 months. We also have to set a vertical line, outline trends and set levels. IMPORTANT: make sure the color of new lines differs from the one of previous (at the W1 chart).
Now, repeat all the stuff for the H4 chart. Choose a color again (green), differing from the previous. Time period should be of 3-4 months.
And it’s almost the end. Repeat all actions at the H1 chart (3-4 weeks), change the color (for example, to pink).
Levels of resistance/support matching at several timeframes are very strong. The same is with trends. And now you can see the “matryoshka” of the market. Each trend on the bigger timeframe contains several trends of smaller timeframes. At the same time, the trend at the smaller timeframe contains several trends of the yet smaller timeframe…and so on till the last one.
Traders have notices that price movement is regular. Some templates and regularities repeat and create specific figures:
Years of using and human psychology stand behind each of these models. Technical analysis for novices obliges us to use these figures, for their actuality and productivity. First three points are turning figures, the last one stands for figures of trend continuation. Let’s look into each of them and realize why they work.
If you look from the psychological point of view, then there is a conflict between traders betting on the continuation of the trend and those who see turning. Two tops or two bottoms are enclosed between lines of resistance and support, and also a pushing trendline. To call the figure formed, price must break the trendline and then resistance line. You can enter the order after the confirmed touch of the broken level. Statistically, price passes the height of the top or bottom in most cases.
It is not the flat yet, but not a trend already – some kind of transition state. In case when the price hinges between levels, we get sideways movement. But if the model is formed (for that, price must break through resistance level), then we enter after the affirming hit at the broken level.
Psychologically, there are no differences between double and triple top – it’s just struggling prolonged for another top.
It’s more interesting figure. It’s formed quite frequently, either originally, or in turned upside down way. Having looked at it, we can see the gradual decrease of trend strength (1st head and shoulder) and its breakthrough (head and the second shoulder).
It’s important to draw a neck line correctly – its breakthrough announces the freshly formed figure and the signal to work. Average stroke after this model is the height of the head (from the neck level). To distinguish this figure from the triple top, take a glance at the middle top – it must be higher than neighboring.
These figures tell us the trend continues.
Flag has even structure, doesn’t contract or widen. It’s just a flat with slight slope against the major trend. The indispensable condition is the availability of a flagpole – a swift and strong movement toward trend and the following stop. At this moment, the market take a short rest and gains new volumes for another dash. You can work either from the bottom level of the flag itself, or when the top one is broken.
There are several kinds of it: even, falling and rising. And there is a curious thing. If we remove a flagpole of pennant and flag, we’ll have something similar to triangle. Now you realize why those three formations are examined together. It doesn’t matter how you look at them – the picture is the same. They are quite clear figures and it’s not complicated to notice them at the chart.
Tip: for searching for figures, use bar chart. We need to see price movement at a large period of time, and the direction of an exact bar is not important for us. Best timeframes to use are H1 and higher.
As you can understand from the name, they are founded in Japan. Candlesticks were created by Homma Munehisa, for more informative displaying of price for rice during the specific period of time (opening/closing and minimum/maximum). But he didn’t notice any patterns (that’s strange), or just didn’t tell anybody about them. Traders notices that after some candlesticks, further movement often repeats, and started using it. Using them in original way is almost impossible for use, as they were formed at the market working just in daytime, and our market works 24 hours. And the part of the formation has the gap in its base, which is rarely met at our market.
There are very many models of patterns nowadays, and in different variations, but technical analysis for novices shouldn’t be overloaded, so we’ll figure out some most common and noticeable:
These three formations are met very frequently and they can be easily noticed, and you will learn others further. I’ve combined similar models in one group, for better understanding. For the same picture, you need to change the color scheme of the chart to “Black on White”. It can be done, if you click with right mouse button at any point of the chart, then select “Properties” (or just press F8). And above the thumbnail of the chart, in the column “Color Scheme”, choose the needed layout. In the column on the right, you can set up preferable colors.
Three soldiers are white candlesticks, growth pattern, and can be met only in bullish trend. Three crows are black candlesticks, decrease pattern, met in bearish trend. These are all their differences. They are formed in the same way, but have different colors. For us, they demonstrate the steady movement toward trend.
Bullish merger comes when the white candlestick covers the previous black. Bearish merger takes place when a black candlestick fully covers the previous white.
They also signalize the turn. For more simplicity, you’d better just remember their form. They are not exactly Doji (the body of candlestick absents, or it’s very small, with long shadow), but close to it, candlestick must have a body. But the most important thing is the presence of the long one-sided shadow. As they are patterns of turn, there must be a trend before they appear.
“Hangman” and “falling star” have the white body and signalize about the bullish trend turn.
“Hammer” and “turned hammer” have the black body, tell us about the bearish trend turn.
We have looked into the technical analysis for novices and its basics. The full diving into technical analysis requires more time and gives more information about market movement. But these basics are enough for you to see the structure among the chaos of price movement. In future, you should learn tools of graphical analysis created by famous traders:
Each of them learned basics in the beginning of the way, as you do now. They didn’t listen to jealous. And time after time surprise them and the whole world with their discoveries. They were not genius but simple, sometimes even poor people. So for what should you believe those who say you can’t do anything? You know what you exactly want, time to claim yours. Now, you have enough knowledge to dive into the interesting world of financial markets and exchanges. What for to doubt in yourself and wait for a moment like skeptics do? No, you have skills and knowledge now – time to get experienced. Try, and I’m sure you’ll succeed.
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