Technical Analysis: a look into charts
To begin the series, we’re going to make a brief introduction about the information that technical analysis (TA) can give.
Before we talk about the main topic of this article, we must know that there are two major analyses that investors always choose to follow before they step in in a stock or crypto project: Fundamental and Technical Analysis.
The present is always tending toward the future and there are always in existing conditions signals of danger or encouragement for those who read with care.
Charles Dow
Fundamental vs Technical Analysis
Using Fundamental Analysis (FA), investors make their decisions to buy or sell through many inputs, such as the company’s evaluation and financial reports.
With this, we can say that indirectly, many investors can analyze the market in the same way and it's clear that exists a collective motivation and valorization of the market, particularly on the price (the thing that we all try to predict).
While FA investors try to buy what is supposed to be cheap, waiting for the market to recognize it, Technical Analysis is relatively agnostic about exact price, but more about its movement, is it going up or down?
Technical Analysis is studied through price charts and volumes, amongst other indicators, built from one, or both, of the mentioned values.
Historically, TA didn’t have the best adhesion in the stock market, however, it gained more and more investors' interest, and the crypto market, as well as the progression of technology and wide access to the internet, allowed TA to be used for millions of traders.
This article is going to approach the basics of TA and show many indicators that can help us choose the best trade.
Transaction volumes
After the price, volume is the next most important information about a stock or crypto. Volume can be explained as the quantity of realized trades or transacted monetary values. The link between price and volume mirrors supply and demand.
Observing the chart above of Bitcoin (BTC) we can see the relation between price and volume, if the volume of supply or demand increases, it can indicate that a movement in price is going to happen. We can see the bottom bars of the chart representing the volume, and in this case, the selling volume increased getting the price to drop.
Homework: See if you can spot the volume when the prince increases.
Volume is a great indicator of price movement but let us not forget to relativize it! You should always check which stock or crypto you are analyzing and see its market cap. 1 Million USD of volume in one coin or stock can be nothing on another.
Moving Averages
These types of indicators are mobile (in the moving sense) because every day we take the first price of the series and add the most recent one. The mean of the numeric series continues with the same amount of numbers, but the first and the last change, so the mean oscillates.
Through moving averages, with different time intervals, it creates a transaction system, such as Stop Loss, which we’ll discuss in a future article.
When these moving average lines intersect with one another, it displays visual feedback to the investor and a change of the price tendency.
Moving Averages are the main structure of many indicators such as Bollinger Band and MACD.
Trending Lines
All of the markets have standard cycles to follow and we can see it through the chart. Even in a small set of time, we can see trending patterns that can give us visual feedback regarding the price movement.
Every line we draw to validate a trend is subjective, however, we can practice until it makes sense for us.
Drawing a line that connects at least 2 or 3 higher/lower values we can validate in what type of trend we are on, ascending trend, downtrend, or lateral trend.
We will see several strategies in an article related to trending lines, but for now, we can validate that we must follow the trend lines and check when the price breaks out the trend.
For example, if we are on an uptrend and the price breaks the lower trend line, it is a warning for the investor to sell because the trend was broken.
When a lateral trend happens, we are in a consolidation phase, where we draw two lines that can represent a support line and a resistance line. If the price goes down to the support line, investors feel that is a good buy opportunity.
Support and Resistance Lines
This is really an important topic and it should not be avoided at any cost when you are trading.
Support in technical analysis represents an actual or potential buy movement with enough volume to sustain a price decrease.
On the opposite side, Resistance represents an actual or potential sell movement with enough volume to sustain a price increase.
If these movements keep repeating themselves at a certain price range, then zones of Support and Resistance are created.
To detect these kinds of movements we must verify not only the quote repetition but also the level of relative volume on which can represent the existence of investors that have enough weight to sustain de movement (high or low).
Another thing we should know is that the Support/Resistance price is more visible and prominent as the temporal proximity of repetitions.
In short, repetition, volume, time, and distance are the elements to consider so we can determine the level of Support or Resistance.
Ascending and Descending Triangles
When we join a trend line and a support or resistance line, we have a Triangle.
These triangles allow us to determine if a break on the support (breakdown) or resistance(breakout) was made.
The example above represents a bullish pattern called ascending triangle, where a line is crossed along with the higher lows, and the triangle breaks at the resistance line, which takes to price discovery.
This next one represents a more bearish pattern, where the price breaks the support line and the price will meet new lows.
So as you can see this is only the beginning of a journey, there’s a lot to process and a lot to learn. I am still learning and improving my trading skills and hopefully, these articles can help you become more interested in Technical Analysis.
Note: I am not a writer and I am still developing my writing skills, if you have any comments to give regarding my articles or writing, please comment below and share your thoughts!
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