Technical Analysis

Technical Analysis:

Why?
In the absence of news, technical analysis comes into play. Technicals are important it allow you to estimate the limits of the price action. For example, you are expecting the market to move up, the next question is when to enter and when to exit. If you are wrong, when to exit. The answer will lies in technicals.

CandleSticks
I use candle stick because it gives me the visual, whether it is up or down. It also gives me past information of how the performance has been. CandleStick offers what is the opening price, high price, low price and closing price for the last time frame. A combination of candlestick also allow me to predict and expect whether the trend will continue or a reversal will take place.

By pure candlestick analysis there is limitation in analysis. But let us look at candlestick purely and see what can we get out of it.

Support and Resistance
Support and resistance are fundmentals of technicals analysis. Traders will also try to estimate where is the region the price action will hit and where is the region where the price will fall back to.

Take a look at the Figure 18.1 which is purely candlestick on a day chart.

Figure 18.1 - CandleStick on a daily chart

At a look it does not appear any useful.

Figure 18.2 - Trends

But if I start to draw lines, suddenly, it appears useful. It looks as if there is a certain retrace, but overall the trend is going up.

Figure 18.3 - Support and Resistance line


Figure 18.3 showed two horizontal lines. The Upper line indicates the resistance level, while the lower line indicated the support level.

Support and resistance lines are physiological region. Rebound and retracement may not exactly happened at the line, but around the region. To draw such line, we need to look at the highs and the lows of the candle stick and observed how the price action behaves.

Sometime support and resistance line may not be drawn horizontally.

Figure 18.4 – Slanted support and resistance lines

When the support and resistance line are not horizontal, they are termed as channels.

The use of support and resistance line is to identify the price and when the break out will come. Usually, when the price hit outside the support or the resistance line, a breakout will occur. A strong breakout will be one that transforms the support to resistance line and resistance to support line.

Figure 18.5 Sqeezing

When triangles can be identified, a squeeze can be found. Often breakout will occur near the tapering end, as in this case as seen in figure 18.5

Lastly, physiological numbers like a whole number 2.0000 happened to be a strong resistance line. In the above case, the 1.700 provides a natural resistance line. Traders will be cautious when approach such value.

For all support and resistance line, attempt will try to break it. It may take 2-3 attempts before the breakout occurs. Sometimes it does not. In this case a rebound will occur. At support or resistance line, 2 things can happen, break out or rebound.

Usually, if I were to trade breakout, I will leave a gap below the support line or a gap above the resistance for the price to go into before I really consider a breakout.

Once breakout, you must quickly identify the next support and resistance so as to take profit.