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Technical Analysis

Charts and Trends

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Technical Analysis Summary

Technical analysis is the practice of using past pricing information on charts to predict future pricing trends. A chartist attempts to predict the future from an evidence based viewpoint, taking positions based on signals suggesting a trend will continue or reverse in the future. This is more of an art form than a science performed in hopes of deriving the marketplace’s viewpoint towards the asset’s underlying fundamentals. Note that sentence says the viewpoint of the fundamentals, and not the fundamentals themselves. Technical analysis can also be viewed as an attempt to interpret market psychology.

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Technical Analysis Basics

Technical analysis is the practice of using past pricing information on charts to predict future pricing trends. A chartist attempts to predict the future from an evidence-based viewpoint, taking positions based on signals suggesting a trend will continue or reverse in the future. This is more of an art form than a science performed in hopes of deriving the marketplace’s viewpoint towards the asset’s underlying fundamentals. Note that sentence says the viewpoint of the fundamentals, and not the fundamentals themselves. Technical analysis can also be viewed as an attempt to interpret market psychology.

Fundamental & Technical Analysis

Technical analysis should not be seen as a sole generator for your investment or trade ideas. Technical analysis is often used by people completely unfamiliar with an asset to select an asset to trade, presuming they have a substantial amount about the underlying fundamentals simply from viewing price charts. Studying technical indicators of an asset without studying the underlying asset’s fundamentals or studying how the asset is affected by economic cycles is not recommended. The economic impact on underlying companies and trends in firm fundamentals should determine what you trade, while technicals should help control entries and exits.

Charts Basics

Charts are the basic instrument used in technical analysis. Your skill reading these charts determines your success with technical analysis. Your charts can come in multiple formats, including bar charts, candlestick charts, line charts, and more.

In all cases, you have two chart axis. The vertical axis indicates the current price of the security. The horizontal axes signify the passage of time.

Each type of price chart has a multitude of different features embedded on it. Learning how to read each one properly is important, as is knowing the different potential settings for the chart and how to manipulate them to your benefit. No matter what strategy you have, learning these features can be the difference between gains and losses.

Price Axis and Scale Settings

Price Axis and Scale Settings

There are two axes for technical charts. The first axis measures the price’s distance from zero market value. The second measures the passage of time measured in periods, transactions or issues traded depending on your chart configuration.

The bottom to top axis (or the “y” axis) is the price of an asset, increasing rising towards the top of the chart. The price axis can be scaled in arithmetic or logarithmic values. The chart’s appearance will change depending on the selection, and each has different benefits and problems.

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Time Axis

Time Axis

There are two axes for technical charts. The first axis measures the price’s distance from zero market value. The second measures the passage of time measured in periods, transactions or issues traded depending on your chart configuration.

The left to right axis (or the “x” axis) shows the passage of time. The settings for this axis controls the rate price bars will be printed. Past time action is shown towards the left and recent price movements prints on the right.

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Time Bars or Time Charts

Time Bars or Time Charts

Time bars will always print after a certain period of time selected by the chart viewer. If you want each printed bar to represent minutes, hours, days, weeks, or months of transactions per bar, simply select the price bar’s time period. Each bar will represent the selected time frame.

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Tick Bars or Tick Charts

Tick Bars or Tick Charts

Instead of printing bars based on a time period, tick bars print based on the amount of transactions per bar. New bars are completed only after a set number of trades. A 1000 tick bar prints after 1000 trades. You can use any tick number, but Fibonacci numbers are common.

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Range Bars

Range Bars

Range bars exist to compress sideways action in charts and allow the user to focus on trends, directional breakouts, and timing of trades on entry and exit. These price bars differ from Time, Tick, and Volume bars. These bars were created to filter out noise in the market, and are purely and only based on price. Each bar requires a change in price to print, and this change is configured by the user.

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Multiple Time Frame Analysis

Multiple Time Frame Analysis

The proper order of chart and technical analysis is absolutely essential. A technical analyst entering a new market should always act in a specific order. Long term technical analysis is first, followed with midterm technical analysis, and finally short term technical analysis. The reason for analysis execution in this specific order is simple: if you started with short term data and moved outwards, you would constantly have to revise your pricing data and expectations. Moving towards the short term expands the detail provided by your data instead of forcing you to constantly revise it.

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Reading Price

There is a complex relationship between supply, demand, price, and the success of your trading positions. Understanding these relationships is essential for acquiring profit.

Supply, Demand, & Price

Supply, Demand, & Price

Price action within the marketplace is always determined by supply and demand. Supply consists of people selling or desiring to sell an asset. Demand consists of people purchasing or desiring to purchase an asset. When the supply exceeds demand, the price will fall until an equilibrium between the two is restored. If demand exceeds supply, the price will rise until the equilibrium point.

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Support

Support & Resistance

There are two variations to supporte. The first is a level, which consists of a generally specific price that support and resistance takes effect. The second is a zone, which is a general area or chart region that support or resistance take effect. Support areas stop price from falling due to support and demand imbalances.

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Resist

Resistance

There are two variations to resistance. The first is a level, which consists of a generally specific price that support and resistance takes effect. The second is a zone, which is a general area or chart region that support or resistance take effect. Resistance areas stop price from rising due to support and demand imbalances.

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Support Resist Swaps

Support Resist Swaps

A previous support level that is broken can become a new resistance level. The same is true in reverse, a previous resistance level that is broken can become a new support level. These occur on a fundamental and psychological level. A resistance or support level is perceived as a price limitation due to reasons related to fundamentals or future earnings expectations generally indicating a range of security value. Once those reasons change, price moves beyond the support or resistance level of that range.

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Overbought & Oversold

Overbought & Oversold

Panics and Manias, and possibly lesser analytical extremes, will push prices to extreme conditions known as overbought and oversold. An “overbought” asset has been purchased to an upper extreme. The price now exceeds what demand is willing to pay, and supply is extremely willing to make sales at the higher price. A reversal is likely to occur as a result, and price will begin a downwards trend.

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Retracement

Retracement

A price can move too far and be due for a retracement, also known as a pullback. In all of these cases the price stops moving in its trending direction, and moves in the opposite direction to the trend for a short period of time. This commonly occurs in overbought or oversold conditions or after a trend.

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Seasonality, Seasons

Seasonality, Seasons

Prices in certain markets often affected by seasons. There are many economic reasons for these events. Prices are based on supply and demand, and both supply and demand for assets change based on the year. As a result, each will perform best or worst depending on the time of the year.

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Gaps

Gaps

A Price gap occurs where no trades executed. The result is a visibly empty vertical gap between two price bars. Buyers and sellers could not agree on prices, resulting in zero transactions. The distance between the last bar and the new bar is the distance traders had to move to find an opposing party to their proposed transactions. If prices gap upwards, demand had to rise their offering prices to find sellers. An upward gap displays strength in the underlying asset that is worthy of investigation. If prices gap downwards, supply had to lower their offering prices to find buyers. These gaps show a poor or deteriorating marketplace. Gaps between bars should never be measured until the bar after the gap closes. Bars which open after a gap can retrace the gap to fill the empty space.

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Price Trends

Trends are the direction of price movement over a period of time. If the price is steadily moving upwards over a period of time, the trend is said to be rising, or an uptrend. If the trend is moving down over a period of time, the trend is said to be declining, or a downtrend.

Note that trends are not a straight line, but consists of minor movements which create peaks and valleys. An uptrend consists of each new peak being higher than the previous one. The same must be occurring for valleys within the uptrend. A downtrend consists of each successive peak being lower, alongside each valley.

Price Trend Basics

Price Trends

Price trends are the direction of price movement over a period of time. Trends split into three time categories, which may be defined differently in different markets or amongst different investors. The long term price trend is also known as the “Major trend” and is measured in years. The medium term trend is alternatively called the “secondary trend” or “intermediate trend”, and is measured in months. The short-term price trend is commonly also called the “near term trend”. It consists of a few weeks and is measured in days or hours. Each of these trends is a part of the larger trend and is comprised from multiple lesser trends.

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Uptrend

Uptrend

Note that trends are not a straight line, but consists of minor movements which create peaks and valleys. If the price is steadily moving upwards over a period of time, the trend is said to be rising, or an uptrend. An uptrend consists of each new peak being higher than the previous one. The same must be occurring for price dips, “valleys”, within the uptrend. Each should be rising. Note that uptrends require the majority of price bar’s closing values to be both higher than the close preceding it and above the open.

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Downtrend

Downtrend

If the trend is moving down over a period of time, the trend is said to be declining, or a downtrend. A downtrend consists of each successive peak being lower than before, alongside each valley being lower than each previous valley. The lower highs confirm the downtrend indicated by lower lows. Note that downtrends require the majority of price bar’s closing values to be both lower than the close preceding it and below the open.

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Drawing Trendlines

Drawing Trendlines

Trend lines are drawn by a technical analyst and display the slope of a trend from the beginning location until the end of the trend line. A basic trend line is better than estimating the slope of a trend. Trend lines which slope up confirm uptrends, and those which slope down confirm downtrends. If the trend line is broken or the slope changes, the old line should be discarded and redrawn.

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Support Trendlines

Support Trendlines

Upwards sloping trendlines drawn beneath trending price action are also known as “support” trend lines. When accurately drawn, these trendlines mirror trendlines drawn by multiple institutional and retail traders. When the asset price reaches the trendline, both groups of traders purchasing shares increasing demand and price. This results in the trendline “supporting” the price. The more times price hits the trendline without breaking, the higher the significance and validity of the trendline.

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Resistance Trend Lines

Resistance Trendlines

Downward sloping trendlines drawn above trending price action are also known as “resistance” trend lines. When accurately drawn, these trendlines mirror trendlines drawn by multiple institutional and retail traders. When the asset price reaches the trendline, both groups of traders selling shares increasing supply and price. This results in the trendline “resisting” the price. The more times price hits the trendline without breaking, the higher the significance and validity of the trendline.

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Linear Regression Trend Lines

Linear Regression Trend Lines

Linear Regression Trend lines are systemized trend lines that typically are automatically drawn by your charting platform. Regression trend line are mathematically calculated trendlines drawn through the middle of the trend, so it cannot function as a supportive trend line or a resistance trend line.

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Channel Lines

Channel Lines

Channels lines slope in the same direction as trendlines but contain price movement. While a trendline requires two points to draw a trendline, the channel line requires only parallelism to the trendline while being touched once or more.

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Fibonacci Retracements

Fibonacci Retracements

Fibonacci Retracements are based on the Fibonacci Number Sequence. It is used to find potential (but not definite) support and resistance levels during a retracement of a trend. The Fibonacci sequence is a number series where each number is the sum of the previous two numbers before it: 1+1+2+3+5+8+13… and so on.

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Price Pattern Basics

Human trading psychology typically repeats itself across investment assets. As a result, the pattern of prices typically also repeats as traders absorb economic, sentiment and fundamental news in the same way across thousands of assets. Patterns are the result of these psychological patterns repeating.

Reversal Price Patterns

A reversal pattern occurs before the major trend reverses. An existing trend will begin to weaken, losing momentum. The reversal pattern will consist of multiple attempts to continue in the prior trend direction. After making consistent effort, traders resign from pushing the trend in the existing direction. Price begins a new trend in the opposite direction.

Reversal Pattern Basics

Reversal Pattern Basics

A reversal pattern occurs before the major trend reverses. An existing trend will begin to weaken, losing momentum. The reversal pattern will consist of multiple attempts to continue in the prior trend direction. After making consistent effort, traders resign from pushing the trend in the existing direction. Price begins a new trend in the opposite direction.

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Double & Triple Tops

Double & Triple Tops

Double Tops are also called “M’s” in common parlance. They are reverse patterns that occur at the end of uptrends, and create short opportunities or short signals. They feature two consecutive peaks (two swing highs) that are at approximately equal heights. They do not have to be exactly equal. After the second peak, price should fall below the trough in between them, completing the pattern.

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Double & Triple Bottoms

Double & Triple Bottoms

Double Bottoms are also called “W’s” in common parlance. They are reversal patterns that occur at the end of downtrends, and create buy opportunities. They feature two consecutive troughs (two swing lows) that are at approximately equal depths with a peak between them. They do not have to be exactly equal. After the second trough, price should rise above the peak between them, completing the pattern and falling.

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Head and Shoulders

Head and Shoulders

A Head and Shoulders pattern has a swing high, a higher swing high, and a 3rd swing high equal to the first. Two troughs separate each of the three peaks. They form only during uptrends as a reversal pattern into a downwards trend. An up sloping line can be drawn between the first peak and second peak. A down sloping line can be drawn between the second peak and third peak. Another trendline can be drawn between the two troughs, called the neckline. The neckline should eventually be broken, after price falls.

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Inverse Head and Shoulders

Inverse Head and Shoulders

An inverse head and shoulder’s patterns consist of a swing low, a lower swing low, and a 3rd swing low equal to the first. Two peaks/swing highs separate each of the three troughs. The middle trough is lowest. This pattern appears only at the end of a downtrend and into a reversal uptrend. A down sloping line can be drawn from the first trough to the second trough. An up sloping line can be drawn from the second trough to the third trough. Another trendline can be drawn between the two peaks, called the neckline. The neckline will eventually be broken.

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Saucers

Saucers

Saucers don’t have the normal peaks/troughs layout typically found in reversal patterns. Saucers come in bullish saucer bottoms and bearish saucer tops. Both of these consist of rounding. Saucers literally appear like “bowls” in the price action. They slowly turn over a long period of time.

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Continuation Price Patterns

Continuation patterns indicate a trend will “continue”. The trend takes a pause for a price formation before resuming the previous trend. This usually consists of sideways price action before the resumption, appearing like a small consolidation before again moving in the prior trend’s direction. These trends are substantially shorter than reversal patterns.

Continuation Pattern Basics

Continuation Pattern Basics

Continuation patterns indicate a trend will “continue”. The trend takes a pause for a price formation before resuming the previous trend. This usually consists of sideways price action before the resumption, appearing like a small consolidation before again moving in the prior trend’s direction. These trends are substantially shorter than reversal patterns.

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Flags

Flags

Flags are slanted rectangles that slope against the prior price trend. It is essentially a brief consolidation pattern before the trend continues in the previous direction, a quick forming continuation pattern.  If sloped down it is a Bullish flag and breakout should occur to the top, if sloped up it is a bearish flag and breakout should occur to the bottom. Entry occurs at the breakout, and the stop is at the last swing low if a bullish flag, and the last swing high if a bearish flag.

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Triangles & Pennants

Triangles & Pennants

Triangles usually are continuation patterns indicating a trend will continue up or down, but they can also be reversal patterns. Triangles are either symmetrical, right angled ascending, or right angled descending. All triangles rely on breakouts to trigger entry, and typically have breakouts halfway to 3/4ths of the way through the pattern. A triangle will become a reversal pattern if the breakout occurs to the same side: if it begins from the bottom and breaks out to the bottom, it’s a bearish reversal triangle. They always occur before the apex, or the pattern is invalidated and becomes a consolidation.

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Broadening Formations

Broadening Formations

The broadening formation is the opposite of the triangle formation. Instead of narrowing over time, the broadening formation widens over its formation. Trendlines drawn on the formation will divergence from each other, moving away over the long term.

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Bearish/Rising Wedge Pattern

Bearish/Rising Wedge Pattern

A Rising Wedge is a bearish pattern that uses two highs to form an upwards sloping resistance line and 2 lows to form an upward sloping support line. The lines should be converging. It is important to know that the distance between the swing lows and the swing highs will narrow, even though the price is rising. This implies weakening demand. When price breaks the lower support a short sale is signaled. A high-risk entry is waiting for the price to break the up sloping lower trendline and entering. For a low-risk entry wait for the smallest or most recent trough before the break of the lower trendline to be broken before entering. The stop should be on the far side of the rising wedge, above the most recent swing high.

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Bullish/Falling Wedge Pattern

Bullish/Falling Wedge Pattern

A Rising Wedge is a bearish pattern that uses two highs to form an upwards sloping resistance line and 2 lows to form an upward sloping support line. The lines should be converging. It is important to know that the distance between the swing lows and the swing highs will narrow, even though the price is rising. This implies weakening demand. When price breaks the lower support a short sale is signaled.

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Rectangle Pattern

Rectangle Pattern

Rectangles are continuation patterns that are created when price trades within a range during a pause in a longer-term trend. Drawing rectangles requires a consolidation area with 2 roughly equivalent swing highs and 2 roughly equivalent swing lows. More touches at either trendline strengthen the likeliness of a rectangle pattern existing. The price level lines will form straight lines horizontally, giving the technical structure the appearance of a rectangle. You should also be able to use the rectangle tool to draw a rectangle over price action.

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Diamonds

Diamonds

A diamond pattern is essentially two symmetrical triangles, one expanding triangle followed by one contracting triangle. There may be head and shoulders triangles patterns inside of the triangles, or be similar to head and shoulders. Diamonds are usually reversal formations, but they can also be continuation patterns.

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Measured Move

Measured Move

Measured moves are a technical way of selecting potential price targets. The logic behind measure moves is simple: Price often moves an equal distance multiple times, which means measuring the length of one move may give you the potential target of multiple other moves in the future.

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Continuation Head and Shoulders

Continuation Head and Shoulders

The head and shoulders is usually a reversal but can also appear as a continuation pattern. It appears exactly the same as it does in a reversal, but the previous trend will seem out of place in comparison to a reversal head and shoulders.

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Volume

Volume bars show the amount of the security traded for the length of the bar. The security can be equities, futures contracts, or any other volume tracked security, but volume always shows the total amount traded.

Reading Volume

Reading Volume

Volume bars show the amount of the security traded for the length of the bar. The security can be equities, futures contracts or any other volume tracked security, but volume always shows the total amount traded. The chart displays vertical bars at the bottom of your chart, possibly isolated in a separate section. A higher volume bar indicates high trading volume, while small volume bars indicates light amounts of the security were traded. The volume also essentially measures emotions. Greater trading volume equates to more intensity within the marketplace, and a higher need to acquire or liquidate holdings by market participants. Volume has its own peaks and valleys and moves up and down. Changes in the amount of volume are normal, but increasing volume may have a news or event oriented significance that should be investigated.

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On Balance Volume

On Balance Volume

On balance volume displays volume as a line which increases and decreases based on price interactions with volume. The line increases on days where price closes higher than its opening by adding volume to the previous value. The line decreases on days where price closed lower than its opening by subtracting volume from its previous value. In this sense, the line attempts to more accurately attribute volume to price increases or decreases. Additionally, changes in the On Balance Volume line often occur before a change in the price level.

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Open Interest

Open Interest is an active count of the day’s open, or “outstanding”, futures contracts. Note that it shows the long side or the short side, but not both. There’s a specific reason: All contracts have one buyer and one seller, which means that you only need to be aware of one side’s number. Open Interest, Price, and Volume all result in the overall picture of price action. Price moves according to supply and demand, while open interest and volume confirm price trends or warn of incoming divergences and trend reversals.

Bar Charts

Price bars are thin displays of price created from 3 lines. Each line has a purpose and they display the 4 essential components of price in tandem over a specified series of time. The first component displayed per time period is the open, the second is the highest price, the third is the lowest price, and the last is the close. Utilizing bar charts helps display all four crucial components of price in a simple and obvious fashion.

Bar Chart Patterns

Bar charts display the psychology of the crowd which indirectly sets prices. This moves beyond the simple above open optimism and below open pessimism previously displayed. Series of bars can reveal price patterns that show changes in psychology over the defined time period, regardless of whether it is minutes, hours, days, weeks, or months.

Inside Bars & Outside Bars

Inside Bars & Outside Bars

An inside bar has a high-low range that is lower than the high-low range of the previous bar. This places the bar “inside” the bar before. This indicates an inability of market participants to determine the future price direction. Buyers and sellers didn’t participate enough to move price or kept the price in a lower range than their previous actions.

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Bars Closing at Open

Bars Closing at Open

Occasionally bars will close at their open during a trading period. They often move to a high or to a low before returning. Occasionally they will move to a high and a low.

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False Bars

False Bars

False bars give a fake display of price growth or contraction. These bars break above a resistance line, or below a support line, then revert back to the other side for their close. Note they complete back on the same side of the resistance, support, or trendline that they opened. At the time, it will seem like a breakout, but they will lose energy or momentum in that direction before the close, which is why post close bars are the best sources for interpretation of prices.

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Bar Spikes

Bar Spikes

A bar spike occurs when the price has an incredibly high range between the bar’s highest and lowest point. The interpretation of these bars is based almost completely on the closing point and the bars which follow afterward. If the previous trend is an uptrend, an upward bar spike with a close to the top and further bars thereafter confirm the uptrend. A bar spike downward with a close to the bottom indicate a potential reversal. A series of bars trending lower thereafter can be a potential confirmation.

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Double Bar Reversals

Double Bar Reversals

Double Bar Reversal patterns contain 2 bars, just like their name implies. The first bar in a Double Bar Reversal pattern opens near the close the bar before it. This bar will confirm the previous trend, closing toward the top if in an uptrend or towards the bottom if in a downtrend. The second bar opens close to the first bar’s close, but this bar will be the reversal which turns against the trend. This bar often cancels most or all of the first bar’s progress in the trend.

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Key Reversal Bars

Key Reversal Bars

Key Reversals are single bars which define a change in the trend. They usually won’t be obvious as the key reversal point until much further into the future after the new trend is obvious. These bars always come after a strong trend in either direction, either uptrends or downtrends.

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Exhaustion Bars

Exhaustion Bars

An exhaustion bar represents exactly what it sounds: the complete exhaustion of buying or selling pressure driving a trend. These bars usually have a gap in the prior trend’s direction preceding them. The gap, if it exists, indicates all the traders who wanted to support the trend piling in to continue driving it forward.

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Japanese Candlesticks

Japanese Candlesticks originated in Japan in the 1800s to assist in the trade of agricultural products. They have multiple benefits that make them slightly better than normal bar charts. The first is the short term candlestick formations which are easy to recognize. The second is a wider selection of pattern formations. Candlesticks are built from two specific parts. The wick is a thin line that runs from the high to the low of the trading period. The body is a wider section candle that runs from the open to the close. Candlesticks display the OHLC (Open, High, Low, and Close) information in a different format than bar charts.

Candle Body

Candle Body

A candlestick’s body displays the distance from the chart’s open to the close, and also controls the color of the bar displayed. There are 2 potential color combinations for a candle body, based on green and red or black and white.

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Candlestick Wick

Candlestick Wick

The “Shadow” or “Wick” runs from the top of the candlestick to the bottom. The tallest point represents the high, the bottom represents the low. The candle wick’s format delivers more information on the overall candlestick format. The wick is especially important if it is overly long or incredibly short, or non-existent.

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Doji

Doji

A Doji is a candlestick with an open and close price at the same level. Shadows can exist on either side of the body and can be long or short. You should always look at the Doji’s shadows, placement in a trend, and color.

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Japanese Candle Patterns

Candlestick patterns display a longer term view of what is happening in the stock market. Each individual candle displays the course of price over a short-term time period, while candlestick patterns display interactions over a period of time. Candlestick patterns split into two categories, Reversal and Continuation patterns.

Candlestick Pattern Basics

Candlestick Pattern Basics

Candlestick patterns display a longer term showing of what is happening in the stock market. Each individual candle displays the course of price over a short-term time period, while candlestick patterns display interactions over a period of time. Candlestick patterns split into two categories, Reversal and Continuation patterns. Reversal patterns indicate the trend will reverse while Continuation patterns indicate the trend will continue.

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Hammer & Hanging Man

Hammer & Hanging Man

The Hammer or Hanging man is a one candle pattern that occasionally appears as a transition point warning. The appearance of this candlestick should be interpreted based on the position of its appearance. The hammer is a bullish reversal signal, while the hanging man is a bearish reversal signal.

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Harami

Harami

Harami patterns are two bar patterns. The first bar is a large bar which usually has no wick or shadow. The second bar is a smaller bar that may be a doji, and typically gaps from the first day’s close. The gap will be up from the close if a bullish reversal and down from the close if a bearish.  They are typically bullish (green/white) on the second day if the first was bearish (red/black), or bearish on the second day if the first was bullish.

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Engulfing Reversal

Reversal Candle Patterns

The engulfing candlestick pattern is a common reversal. They come in bearish and bullish varieties, but they both have one similar feature: the second bar in the pattern is larger than the first, and the opposite color. A bullish engulfing candle’s first bar will be a black or red bar, usually with a smaller height. It indicates the sellers barely had control over the day. The second bar will be green or hollow, and substantially longer, indicating the buyers firmly overcame selling pressure on the second day. This pattern normally occurs near the low of a trend, but you should look for all the normal technical analysis signs, like support and resistance.

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Shooting Star

Shooting Star

The shooting star is a bearish reversal pattern. The first bar shows a substantial increase in the asset’s value, closing substantially above the open, and usually near the day’s high. The second day features a rise to a high after the open, a failure to maintain the price, and a crash below the day’s open to close.

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Inverted Hammer

Inverted Hammer

The inverted hammer is a bullish reversal pattern. It’s essentially an upside down shooting star. The inverted hammer is a small candle body at the bottom of a long candle wick. It can be bearish, but it’s better serving if you see a bullish colored candle.

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Evening Star

Evening Star

The evening star is a bearish reversal pattern which occurs over 3 days. The first candlestick features a long white or green candle, which shows the buyers are firmly in control of the overall trend. This bar closes and features a gap up to the next open, which is a small bearish candlestick that closes the day below the open, often after establishing a high. The second day represents market indecision on the price continuing higher.

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Morning Star

Morning Star

The morning star is a bullish reversal pattern which occurs over 3 days. The first candlestick features a long black or red candle, which shows the sellers are firmly in control of the overall trend. The first bar closes and prices gap down to the next open, which is a small bullish candlestick that closes the day above the open but below the high. This represents market indecision on market value.

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Dark Cloud Cover

Dark Cloud Cover

The dark cloud cover is a 2 candle pattern with a possible 3rd candle confirmation. The first candle is a continuation of the preexisting uptrend, appearing as a long hollow white or green candlestick. This candle shows buy side control over price. There is an upward gap following the first bar, displaying more buy side power.

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Piercing Line

Piercing Line

The Piercing Line is a 2 candle pattern with a possible 3rd candle confirmation. The first candle is a continuation of the preexisting downtrend, appearing as a black or red candlestick. This candle shows sell side control over price. There is a downward gap following the first bar, displaying more sell side power.

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Rising Three Methods

Rising Three Methods

The rising three methods is a four to five-day continuation pattern that only appears in an uptrend. The first day features a long white body, displaying strong gains. The second day is a small black body, followed by another small black body, and possibly another small black body. The fourth or fifth day is a long white body that pushes upwards. After that day, price resumes rising above the closing of the last day of the pattern. This confirms the pattern.

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Falling Three Methods

Falling Three Methods

The falling three methods is the inverse of the rising three methods, a five-day continuation pattern that only appears in a downtrend. The first day is a long black body, displaying a downturn in share price. The next two to four days are small white candles, rising in share price. The last day is another long black candle. After that day, the price resumes downward movement, confirming the pattern.

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Rising Window & Falling Window

Rising Window & Falling Window

The rising window and falling window are simple continuation patterns containing gaps. The rising window contains a white candle, followed by an upward gap and another white candle. The falling window displays a black candle, followed by a downward gap and another black candle. Note that in both cases, the gap should be between the wicks of the candle, and not the body.

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Three White Soldiers & Three Black Crows

Three White Soldiers/Black Crows

The Three White Soldiers pattern is a simple continuation uptrend pattern displaying three long white candles. The bearish alternative is three black crows, displaying three long black candles. Both patterns should be followed by the trend, an uptrend with white soldiers and a downtrend with black crows.

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Line Charts

The line chart is the simplest type of chart. It consists of a single continuous line, which connects only closing prices. It smooths out fluctuations and lets you see the raw trend. This makes it great for visualizing a trend over a period of time. Since it does not include highs, lows, or opens, it is poor for analysis. You won’t have any wicks with which to draw accurate trend lines, or Fibonacci points. This makes any actually underlying studying of the psychology behind price difficult to review and inspect.

Indicators

Indicators are technical analysis tools which study price action and use mathematical formulas to display additional information about price. Indicators only indicate potential changes in the nature of price, they do not signal that you should take action. They should only be used as a filtering technique or confluence indication, and never be revered as a primary reason for action. They exist to alert, confirm, and predict.

Indicator Basics

Indicator Basics

Indicators are technical analysis tools which study price action and use mathematical formulas to display additional information about price. Indicators only indicate potential changes in the nature of price, they do not signal that you should take action. They should only be used as a filtering technique or confluence indication, and never be revered as a primary reason for action. They exist to alert, confirm, and predict.

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Moving Averages

Moving Averages

Moving Averages are trend following indicators that show lines representing a smoothened lagging average of price past action. There’s many types, but typically a simple or exponential moving average is used. The most important setting is the time frame. They are typically used in multiples of 5 or 10. Most frequently used settings are 5, 20, 50, 100, and 200. Higher periods have less noise, but are slower to give crossover signals.

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Bollinger Bands

Bollinger Bands

Bollinger Bands are volatility measurements based on the simple moving average of closing prices. Standard deviations bands are created above and below the moving average. These bands adjust in distance based on the volatility. The bands narrow in low volatility. The bands widen in high volatility.

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Oscillator Basics

Oscillator Basics

Oscillators fluctuate between levels or in relation to a centerline. If centered, they fluctuate above and below a central line. These lines are best for analyzing and identifying strength or direction of price movement. If banded they fluctuate above and below two lines marking “extreme” points.

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Divergences

Divergences

Divergences are differences between the slopes of peaks and troughs in an indicator and the slope of peaks and troughs in price action. Divergences come in bullish and bearish varieties. They are early warnings of a change in the trend and often accompany reversal patterns.

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Momentum

Momentum

All oscillators are based to some degree on the concept of momentum. As momentum increases the oscillator accelerates in movements in the direction of the movement. As the momentum decreases the oscillator slows in the direction of the movement. Momentum measures the rates of change in the trend.

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Commodity Channel Index

Commodity Channel Index

The Commodity Channel Index (also called CCI) is a banded oscillator that ranges from 100 to -100 and centers around zero. When used in its original design, Long positions are taken in assets over 100. Short positions are taken in assets under -100. The default length setting for the Commodity Channel Index is 20 periods. Lower settings increase the sensitivity and false signals, higher settings reduce sensitivity and false signals.

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Relative Strength Index

Relative Strength Index

The RSI Oscillator is a banded oscillator which ranges from zero to 100. It attempts to display overbought and oversold zones of price action markets. A level over 70 is typically overbought. A level under 30 is typically oversold. When the RSI price line moves into these zones, the indicator shows an actually overbought or oversold reading.

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Fast & Slow Stochastics

Fast & Slow Stochastics

Stochastics also displays overbought and oversold conditions. Stochastic Indicators have 2 lines, the first is known as %K and the other is %D. These lines move in between the ranges of 0 and 100. %D is the moving average of %K. %D also develops better signals and is ultimately more important. Stochastics is a banded indicator, a reading over 80 is overbought, a reading below 20 is oversold. Typical settings are 14/3, 17/9, and 5/3.

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Moving Average Convergence Divergence

Moving Average Convergence Divergence

The Moving Average Convergence Divergence (MACD) indicator is a lower study which contains 2 moving average lines. The first line is a signal line and the second line is a MACD line. The difference between the lines is the moving average time period. The MACD line is the difference in two lines. The signal or trigger line is a periodic exponential moving average of that difference. The usual settings are 12 for fast, 26 for slow, and 9 for MACD. An 8/17/9 combination is also frequent.

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ADX Line & Directional Movement Index

ADX Line & Directional Movement Index

The ADX is properly called the Average Directional Index. This is used to measure the strength of a current trend. It has no directional bias. It simply measures the trending strength of price. When combined with the direction index, the indicator becomes “DMI and ADX”.

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Parabolic SAR

Parabolic SAR

Parabolic SAR helps trade an established trend while providing long and short trailing stop positions. The “SAR” stands for “Stop and Reverse”. It does not work in sideways markets or consolidations, and should not be relied on in those markets. Only use it during strong uptrends or downtrends. Ignore it otherwise.

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Technical Analysis

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups

Technical Analysis

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

Technical Analysis

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Financial & Trading Software.

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