Several analyses and discipline types have given traders an informed and rational way of making decisions when trading. While trading analyses and disciplines have evolved in the last couple of years, not all have withstood the test of time. They are Technical and fundamental analyses.
Nowadays, almost every decision made by a trader, institution, or retail revolves around the technical and fundamental analysis. Hence, for investors and traders to succeed in trading, you have to know these two disciplines. Here, we will look at technical analysis, its chart patterns, and chart indicators.
Technical Analysis types, chart patterns, and indicators
This is a securities evaluation method that relies on past chart patterns and price trends. Traders can use this method to forecast future security performance. Traders in different asset classes like cryptocurrencies, bonds, Forex, and stocks rely on this analysis to make trading decisions.
There are common statistics that technical analysis uses, like price movement and volume traded. By seeing a security’s past trading activity, investors can get medium or short-term trading signals. These signals are what indicate the security’s future performance.
When it comes to digging deep into the financials of any security, technical analysis won’t do a good a job as fundamental analysis would. This is because there is an assumption that all factors influencing a financial instrument’s price are already included in their price chart.
Technical analysis has different types of charts. They include:
- Line chart: It shows one line linked from the left side to the right side. This line falls or rises based on a metric’s performance, e.g., a stock’s closing price.
- Renko chart: This brick plotting chart indicates if a security’s price has gone down or up that day. Losing streaks are represented by red bricks, while green bricks represent a winning streak.
- Candlestick chart: Here, each entry resembles a candle. A “wax” segment showcases the range between the closing and opening price. The “wick” below or above shows the lows and highs.
- Bar chart: Also called an OHCL (open-high-low-close), it has a bar beginning from the security price day’s low end and outspreads to a high price. The left-located horizontal hash shows the open price, while the closing price is showcased by a hash on the right side.
When technical analysis identifies patterns, they’ll either be reversal patterns or continuation patterns. Continuation patterns indicate momentary trend interruption, while a reversal pattern indicates a prevalent trend’s potential direction reversal.
Continuation patterns include:
- Wedges: This is formed when two trend lines moving in the same direction converge. This pattern is formed when there is a low trade volume, and the predominant trend continues when an uptick is seen in volume.
- Flags: These are parallel lines constructed in the midst of prevailing trends. If the flag is sloping downwards, it is a representation of a long-term uptrend pause. If it’s sloping upwards, it’s a representation of a long-term downtrend pause.
- Pennants: It is formed in a dominant long-term trend’s holding phase. Within Pennants, there’s a convergence of a short-term uptrend line with a short-term downtrend line. The result is the formation of triangular points resembling pennants.
Reversal patterns include:
- Double bottom: This happens when a security’s downward trend support-level breakthrough attempts are denied. It regroups but is rejected once more at that same support level. The result is the formation of a pattern resembling the letter W.
- Double top: This happens when a security’s upward trend’s support level breakthrough is denied. It takes a breath but gets that resistant level denial again. The result is the formation of a pattern resembling the letter M.
- Head & Shoulders: This name is given because the resulting pattern resembles a head with shoulders shrugged at the sides. When this pattern is seen, there’s the likelihood of a downtrend. The vice versa is also true.
These are sought after by technical analysts to help identify the exit and entry points when trading securities. The most popular chart indicators used include:
- MACD (Moving Average Convergence-Divergence).
- RSI (Relative Strength Index).
- Bollinger Band.
When considering trading securities, technical analysis is most commonly used. While it is a broad topic, you must find time to understand every aspect of it to find the most suitable method for you.