Who amongst us, fellow traders and investors, have never heard of a head and shoulders figure, of resistance becoming support or of bullish divergence?
It’s true, we’ve all heard about it, the common point in all this? These names are all part of what we call technical analysis. What is technical analysis and why is it important? That’s a great question we’re going to answer today!
Before we get into the specifics of technical analysis, it is important to note that for the traders, technical analysis is used to evaluate trading opportunities in price trends and patterns. While for the investors, technical analysis is most often used to evaluate the potential of investments.
Disclaimer: Our content is intended to be used and must be used for informational purposes only. It is very important to do your own research and analysis before making any investment based on your personal circumstances.
What is Technical Analysis?
Technical analysis is a method that studies the history of courses to predict their evolution. It applies to all types of markets: stocks, indices, commodities, futures, etc. It can be used for any tradable instruments. In technical analysis, time horizons can vary considerably: from intraday trends to long-term trends, i.e., over several years.
Why is this important?
Technical analysis is important for several reasons! First, for the shortest time horizons, fundamental analysis will be of limited use and practitioners will use technical analysis instead.
Second, even if long-term fundamental analysis gives us a buy signal because a stock is undervalued, it does not mean that it cannot remain undervalued for a long period of time, sometimes years.
Finally, technical analysis, although criticized in the academic world, really works for those who will take the trouble to learn and master this particular art.
Can technical analysis help control emotions?
Technical analysis, once you have mastered it and back tested your strategy, will help you define a trading plan. In this sense, if you are able to follow it to the “T”, it will allow you to manage your emotions and execute only what is planned. Just like what we have always said: “Plan the trade, trade the plan!”
Unfortunately, it’s not that simple but neither is it impossible! Knowing the indicators or chartist configuration will not help you to control your emotions overnight. This will be one of the most difficult tests of your trading life, but the benefits are very rewarding.
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Candlesticks 101 : The basics
Your favorite tool, among other indicators and moving averages, will undoubtedly be the Japanese Chandelier itself. It is a representation of the price of an asset including the opening price, the closing price, the highest as well as the lowest reached during this candle.
As shown in the image above, when the closing price is higher than the opening price, then the candle will be colored green (customizable), while the opposite will be represented by the color red. The highest and lowest points of the candle are represented by what will be called wicks.
The importance of timeframes
One cannot approach the subject of Japanese Candlestick without mentioning the notion of time frames. You have all already heard about the daily timeframe or the 4-hour time horizon.
The meaning behind this is simple. On a daily time frame, the candle will represent 24 hours of quotes. In the case of Bitcoin which never closes, while on a 5min time frame, the candle will represent the last 5 minutes of quotes.
Now that we know what a Japanese Chandelier looks like, let’s look at a few simple notions of technical analysis: Supports and resistances and indicators.
Supports and Resistances
To make it extremely simple, we will represent the prices as evolving in an apartment, on one floor of a building. On this level you have the floor, which supports the prices, and the ceiling, which resists the prices and prevents them from going higher.
This is a deliberately simplistic metaphor, but it allows you to get a clear picture directly. As can be seen in the graph above, a support or resistance is most often materialized by an area rather than a specific level.
An area of support, when broken, may flip to an area of resistance, with the reverse being true as well.
Technical indicators are also widely used in technical analysis, and we will take the example of Relative Strength Index (RSI) here. First of all, remember never to take anything for granted and always test your strategy on historical price data before using it in real life.
The RSI is a fairly simple technical indicator, when it drops below the 30 level and rises above it again, it is a buy signal. When it rises above the 70 level and falls below, it is a sell or short signal.
Understanding technical analysis
While the above may sound complex and perhaps even overwhelming to those who are new to technical analysis, over time, with learning and practices, you will find that the art of technical analysis isn’t impossible. In fact, quite the contrary!
We created 4C Learning for this purpose – to help you learn and master the art of technical analysis so that can benefit in the trading and investing game. You’ll be learning from our team of expert traders with proven results at your own pace and time!
Regardless whether you’re a holder or trader, mastering technical analysis could save you some costly decisions that you may end up regretting. In the case of a sudden market fluctuation, technical analysis will give you an idea of where the market is heading and how it is behaving and hopefully, you won’t make the mistake of panic buying or selling.
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