How I Started To Learn About Technical Analysis
About The Author
Unlike other market analysts and trading educators who make fleeting appearances and think they’ve hit the jackpot because they’ve appeared on a TV station, James Trescothick is down to earth. Not only does James, our awesome Chief Market Analyst and Trading Educator, have firsthand experience on some of the biggest and most active trading floors in the world, like the Philippines Stock Exchange, he’s also a prominent and star speaker with over 20 years experience in the financial service industry, both online and offline. His works and opinions have been printed in a number of leading industry publications, such as The Financial Times Adviser, Market Watch, The Street and several newspapers, including City A.M. and FX Trader Magazine. You’re in for a productive and fun treat as he’s fun, informative, knows the markets inside out, and most importantly, approachable!
Having said that, fasten your seatbelts ladies and gents as we’re about to jump straight into the subject of Technical Analysis.
For those of you who are somewhat familiar with trading, we have prepared an agenda below, feel free to skip the introductory part and navigate towards the actual examples.
Psst… We’ve also included James’ webinar recording at the end of this article. Go ahead and watch it. We promise, we won’t tell anyone you skipped the whole thing.
AGENDA
- What is Technical Analysis
- Technical Analysis vs Fundamental Analysis
- The theory behind using Technical Analysis in your trading
- Introduction to Moving Averages and Bollinger Bands
- Using the Relative Strength Index (RSI) to see if the market is potentially overbought or oversold
What is Technical Analysis?
Technical Analysis is a method of trying to establish potential future direction of an asset by studying past price data and volume.
What is Fundamental Analysis?
Fundamental Analysis is a method of analysis to try and identify the intrinsic value of an asset.
Technical Analysis vs Fundamental Analysis
Fundamental Analysis studies the overall picture by taking into account economic, industrial and financial conditions.
Technical Analysis assumes that the fundamentals are already factored into the value of an asset, so it ignores the intrinsic value. Instead, Technical Analysis attempts to recognize patterns and trends to predict future movements.
The Theory Behind Technical Analysis
The theory is that previous trading activity can give a better indication of what direction an asset may go.
The basic concept was developed from the Dow theory from writings by Charles Dow.
The Dow theory believes that price movement is not random, but follows patterns and repeating trends.
So far so good? Let’s dive further in!
What are Technical Indicators?
Technical Indicators are calculations that take into account price, volume and demand over a period of time.
Examples of Technical Indicator include:
•Relative Strength Index
•Stochastics
•MACD
•Bollinger Bands
•Trend Lines
•Simple Moving Averages
•Commodity Channel Index
Simple Moving Average (SMA)
Simple Moving Average (SMA) is often used to identify a trend and used to spot potential support and resistance levels.
SMA is calculated by adding up the recent closing price and then dividing it by a certain time period.
According to the theory, if an asset is trading below the Simple Moving Average, it’s on a downtrend. And vice versa, if an asset is trading above the SMA then it’s on an uptrend. At the same time, in accordance with this theory, if an asset is below the Moving Average, that SMA will now act as a potential resistance, and if an asset is above the SMA, that will act as a support.
Moving Average Crossover
Here’s another theory, according to which we will be looking at not just one SMA, but two SMAs.
Moving Average Crossover can be used to identify if a trend is about to change which can enable a trader to be prepared and get a better entry level.
Moving Average Crossover happens when a smaller SMA crosses over a larger SMA.
By saying smaller SMA we mean a SMA with a smaller time period (10) and we then out in an SMA over a larger time period (20).
Have we already mentioned that this is just a theory? Like any theory, it doesn’t work every time and the reality dictates its rules.
Another thing about the Moving Average is that it’s a lagging indicator, which means that any breaking economic news, headlines, etc. will not be taken into account. So, keep an eye on what’s going on in the market and don’t just rely on indicators.
Bollinger Bands
Developed by John Bollinger in the 1980’s, traders try to use Bollinger bands to measure market volatility.
Bollinger Bands is another indicator, based on a theory that when the bands are wide apart, there is a lot of volatility in the market and when they are closer together the market is quieter.
Bollinger Bands consist of a Moving Average and traders also use Bollinger Bands to try to identify potential support and resistance levels.
We have ONE LAST indicator, just hang in there.
Relative Strength Index (RSI)
Relative Strength Index is a momentum indicator, which can be used to measure if an asset is overbought or over sold.
The RSI has a value range between 0 to 100
The theory is that if the value of an asset is above 70, the asset is potentially overbought and that could cause a sell off. If the value drops below 30, the asset is potentially oversold which could encourage the market to start to buy in again.
We wish we could always rely on indicators — we would use them on autopilot while we’d be busy sharing a cup of tea with friends, playing golf or watching good videos.
Speaking of videos, do you remember the webinar recording we promised at the beginning of this article? Well, here it is! You’ve deserved it and thank you for making it this far!
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