What is technical analysis?
Technical analysis is how investors rely on past and current market price fluctuations to predict future market price trends.
Technical analysis is mainly based on charts and support tools to be able to determine the highest price, the lowest price, since it is known that the trend has increased or decreased in a certain period of time since then. Can make the right investment decision and correct
Technical analysis (TA), also known as chart research, is a type of analysis to predict future market behavior based on price movements and previous trading volume. The TA method is widely applied to stocks and other assets in traditional financial markets, but it is also an indispensable component in cryptocurrency trading in the cryptocurrency market.
While the fundamental analysis (FA), taking into account many factors surrounding the price of an asset, TA focuses solely on historical price movements. As a result, it is used as a tool to test price movements and trading volumes, and many traders use this analysis to identify favorable trading trends and opportunities.
Although the first forms of technical analysis appeared in Amsterdam in the 17th century and in Japan in the 18th century, modern technical analysis is often considered to originate from the work of Charles Dow. As a financial journalist and founder of The Wall Street Journal, Dow was one of the first to find that individual assets and markets often fluctuate according to trends. Can be segmented and tested. His work later gave birth to Dow Theory, which encouraged later developments of technical analysis.
In the early stages, the rudimentary approach of technical analysis was based on self-made spreadsheets and manual calculations, but with the advancement of modern computing and technology, TA became universal. and today it is an important tool for many investors and traders.
Why must technical analysis?
Catching market trends captures the psychology of investors in the market. Sharks also analyze techniques to decide whether to bring good or bad news to the market. Technical analysis helps us make buying decisions when we are at a good price, and identify you when the market is on a downtrend, or going up and helping you become a successful trader in trading. .
What is the price?
Price is the main concern that investors pay attention to first. Just like every category shows the price through which investors can capture the market.
The price of one coin at a time, when buyers and sellers form a transaction at a price they desire. The buyer thinks that it will be increased, they buy and sell at a higher price. The seller will think that the price will fall, so he will take profits and will buy at a lower price.
Opening price: The first trading price of the evaluation period (5p, 30p, 1h, 1d ....)
Highest price: is the highest price in the evaluation period.
Lowest price: how 11 in the evaluation period.
Closing price: is the last transaction level of the review period. This is the most important price level that investors need to pay attention to.
How does technical analysis work?
As mentioned, TA is basically a study of current and previous prices of an asset. The main underlying assumption of technical analysis is that the price movement of an asset is not random, and these fluctuations often develop into trends that can be identified over time.
In essence, TA is the analysis of market forces of supply and demand, which is a representation of the overall psychology of the market. In other words, the price of an asset is a reflection of the opposite buying and selling forces, and these forces are closely related to the emotions of traders and investors (mostly scare and greed).
Notably, TA is considered to be more reliable and efficient in markets operating under normal conditions, with large trading volumes and high liquidity. High volume markets are less affected by price manipulation; and abnormal external influences can produce false signals and render TA useless.
To check prices and to find favorable opportunities, traders use a variety of chart research tools, called indices. Technical analysis indicators can help traders identify existing trends and at the same time provide insight into future trends. Because TA indicators are prone to error, some traders use a combination of multiple indicators as a way to reduce risk.
The usual TA index
Normally, traders who use TA often use a variety of indicators and metrics to try and identify market trends, based on historical charts and price movements. Among the technical indicators, the simple moving average (SMA) is one of the most commonly used and known. As can be seen from its name, SMA is calculated based on the closing price of an asset for a set period of time. The exponential moving average (EMA) is a revised version from the SMA, which values the recent close above the old price.
Another commonly used indicator is the relative strength index (RSI), which belongs to a group of indicators called oscillators. Unlike simple moving averages that are only able to track price changes over time, oscillators apply mathematical formulas to valuation data, thereby producing results that fall within the predefined range. In the case of RSI, this range is between 0 and 100.
The Bollinger Bands (BB) indicator is another oscillator that is quite popular among traders. The BB indicator consists of two bands located on either side of the moving average. It is used to detect potential overbought and oversold conditions, as well as to measure market volatility.
In addition to the more basic and simpler TA tools, there are some indicators that rely on other indicators to create data. For example, Stochastic RSI is calculated by applying a mathematical formula to a regular RSI number. Another common example is the moving average convergence divergence indicator (MACD). The MACD is created by taking the signals of the two EMAs to create the main line (MACD line). The first line is then used to create another EMA, creating the second line (called the signal line). In addition, there is also a MACD chart, calculated based on the difference between these two lines.
Trading signals
While indicators are useful for identifying general trends, they can also be used to provide insight into potential entry and exit points (buy or sell signals). These signals can be generated when specific events occur in the indicator chart. For example, when the RSI has a result of 70 or above, it indicates that the market is operating under overbought conditions. Similarly, when the RSI drops to 30 or lower, it is often considered a signal that the market is in an oversold condition.
As discussed above, the trading signals provided by technical analysis are not always accurate and the TA generates a significant amount of noise (false signals). This is especially true for the cryptocurrency market, which is always smaller than traditional markets so they are more volatile.
Common types of charts
There are 3 popular graphs: line chart, Bar chart, and candle stick chart.
Each chart type has its own advantages and disadvantages, but candle charts are widely used both in stocks, forex, and crypto. To be a good investor, reading candlestick charts is a must.
What is a candlestick chart?
In the 1600s, the Japanese developed a method of technical analysis to analyze rice prices. This technique is called a "candlestick chart". Steven Nison is credited with popularizing this analytical method. At the same time, it is one of the leading experts on candlestick charting.
To use the Japanese candle model you need to know some of the following concepts:
Opening price: The transaction price at the start of the fair, or the price of the first person to make a trade. For example, if you go to the market to buy Chicken for 30k / kg and you are the first to buy chicken, 30k is the opening price.
Closing price: The price of the last trade in that session, it is also the closing price for the session. For example, if you go to the market to buy Chicken for 25k / kg and you are the last one to buy on that day, 25k is the closing price. This is the most significant and important price for technical analysis.
Lowest price: The lowest price in all transactions of that session. For example, if 100 people buy chicken and you are the one who forces the cheapest price to buy 10k / kg, the price of 10k is the lowest price in the market.
Highest price: The highest price in all transactions of that session. For example, if 100 people buy chicken and you are a buyer with a high price of 50k / kg, the price of 50k is the highest price in the market.
Each candle will contain 4 above information as shown below:
Japanese candle pattern
If the closing price is lower than the opening price, then we have a red candle, while the closing price is higher than the opening price, we have a green candle. the upper and lower lines of the opening and closing prices show the price movement of the day (candle shadow).
The longer the body of the candle, the stronger it shows that the buying / selling power is stronger and vice versa. Green candles indicate buying power. In a down market, if a long green candle is encountered, it means that the buyers are establishing and controlling the market. Signaling a market is about to turn. The opposite direction when a market goes up to see a long red candle shows that the sellers are dominant. The strong selling force signals a downtrend in the future.
Candlestick charts show a battle for position between the buyer (who expects the price to go up) and the seller (who expects the price to go down) for a specified period of time. In a session if:
The long green candle proved that the whole buyer session dominated
Long candles show that sellers dominated the majority of the time
The body of the candle is short and does not have a shadow (or short shadow), showing that neither side has the upper hand and the price has hardly changed compared to the beginning.
The candlestick with a long lower shadow shows that the selling side dominated in the first time of trading but was regained control at the end of the session.
A candle with a long upper shadow is the opposite of the idea above.
The candlestick has a long upper and lower shadow and a small real body, showing that both the buying and selling sides have a dominant phase in the session, but at the end of the session, neither side can overwhelm the other.
Using
Many investors prefer to use candlestick charts because of its magic. Besides, there are also people who turn away from this technique because they think it is just a normal graph. No matter how we feel, we should explore the use of this analytical technique. How to use candlestick charts is based mainly on patterns. The following are common patterns.
The pattern of candlestick chart
The pattern of 3 candles decreases
After a long red body, there are 3 small real bodies, usually blue. This is followed by another long red real body. 3 green real bodies fit within the previous red real body. This pattern shows the continuation of a downtrend. Price is falling sharply (long red candle body). After that, there were 3 weak recovery attempts (3 small green candles) and continued to decline.
The pattern of 3 candles decreases
The pattern of 3 candles increases
After a long green body, there are 3 small real bodies (usually red). Next is another long green candle. The three red real bodies fit within the range of the previous white real body. This pattern shows the continuation of an uptrend. The price is increasing sharply, after that, it has been adjusted 3 times and continued to rise again.
The pattern of 3 candles increases
Doji candle pattern
Doji / Doji
In a Doji, the opening and closing prices are equal and form a cross. It means that the body of the candle is neither red nor green. Doji candles show indecision because the stock opened and closed at the same price. Doji candles appear in many important candlestick patterns.
Doji candle pattern
double Doji / 2 Doji candles
This pattern shows that after breaking out of the current indecision period, there will be a strong volatility period.
Dragonfly Doji / Dragonfly Doji
This candle also signals a reversal. Dragonfly doji also appears when the closing price and the opening price are equal (One Doji) and the lowest price is much lower than the opening price, the highest price, and the closing price.
Gravestone Doji / Doji tombstone
In this candle, the opening and closing prices are the lowest level of the trading period. This candle shows a reversal signal at the top of the market. The longer the upper shadow is, the more reliable the reversal signal.
Long-legged Doji / Long-legged Doji
This is a Doji candle with a long upper shadow and lower shadow. This candle usually signals a reversal.
Engulfing Lines / Engulfing pattern
Brearish Engulfing Lines / Engulfing Lines decrease.
The Engulfing Lines pattern decreases as a long red candle appears covering the entire small green candle before. This pattern signals a high probability of a decrease if it occurs after a strong uptrend.
Bullish Engulfing Lines / Engulfing Lines increase
The Engulfing Lines pattern formed when a long green candle appeared and covered the entire small red candle ahead. This pattern signals a strong increase if it appears after a strong downtrend.
Hammers / Hammer shaped candles
Hammer / Hammer
The hammer candle consists of a small real body (the gap between the opening and closing price is small). And a long lower shadow (ie, the lowest price is much lower than the opening price, the highest price and the closing price). The body of the candle may be red or green. This is a bullish signal candle if appearing after a strong downtrend.
Inverted red Hammer / Red inverted hammer
This is a reversed form of a hammer with a black trunk. This pattern signals a reversal at the bottom and is confirmed based on the next candle.
Harami’s / Harami model
The Harami pattern signals a decline in the intensity of price fluctuations. This pattern appears when a small candle fits within the body of a larger body than before.
Bearish Harami / Harami fall: A small red real body fits within a long blue real body. This pattern shows the decreasing of intensity of price fluctuation when appearing in an uptrend.
Bullish Harami / Harami rise: A small green real body is within the long real body of a long red body. This pattern shows the weakening of price fluctuation intensity when it appears in a downtrend.
Harami cross / Harami cross: This pattern is formed when the second candle in the Harami pattern is a Doji candle. As with other Harami patterns, the cross shows a decrease in the intensity of price fluctuations. However the Doji candle shows hesitation.
Bullish Harami Cross / Harami cross rising: This pattern is similar to the above Harami Cross pattern except that the Doji candle fits within a large black body. This is a bottom reversal signal.
Long shadows / Long shadow candles
Long lower shadow / Long lower shadow candle
This is a red or green candle with the lower shadow equal to or more than 2/3 of the total length of the candle. This candle shows bullish signals, especially when appearing around the support levels.
Long upper shadow / Long upper shadow candle
This is a red or green candle, with the upper shadow equal to or more than 2/3 of the total length of the candle. This candle shows bearish signals, especially when appearing around resistance levels.
Sheparating lines / The pattern of 2 separate black and white candles
In an uptrend. After a red candle is a green candle with the same opening price. This pattern shows bullish signal as it signals a strong uptrend after a temporary decline.
In a downtrend. After a green candle is a red candle with the same opening price. This pattern shows bearish signal because it signals a strong downtrend after a temporary recovery.
Star / Star pattern
Star pattern for reversal signals. A star candle is a small body candle that appears after a much larger body. This small real body is not within the scope of the previous large real body, but the shadows can be within each other's range.
Doji star / Sao Doji
The star candle shows a reversal signal and the Doji shows hesitation. Therefore, this pattern often signals a reversal after a period of indecision. Before trading in the Doji star pattern, we should wait until there is a confirmation signal (for example, the appearance of a star star pattern). The first candle may be red or green.
Evening star / Star day
After a long green candle is a small green / red candle (this is a star candle). and create a gap above the previous green candle. The third day body has a red body and the close is deep within the range of the first green body. This pattern signals the possibility of peaks and declines. The star candle shows the possibility of a reversal and the bearish candle (red body) confirms this signal. Star candles can be green or red.
Evening Doji star / Star from Doji
After a long green candle is a Doji candle and creates a gap above the previous white candle. The third day body has a red body and the close is deep within the range of the first green body. This pattern signals a greater chance of peaks and declines than the regular star pattern due to the addition of a Doji.
Morning star / Tomorrow
After a long red candle is a small green / black candle (this is a star candle) and creates a gap below the previous red candle. The third day has a green body and the closing price is deep within the range of the first red body. This pattern signals the possibility of bottoming and increasing prices. The star candle shows the possibility of a reversal and the third up candle confirmed this signal. Star candles can be green or red.
Morning Doji star / Morning star Doji
After a long red candle is a Doji candle and creates a gap below the previous red candle. The third day has a green body with a close close within the first black body. This pattern signals the possibility of a bottom and an increase in price greater than the regular star pattern due to the addition of a Doji.
Shooting star / Shooting star
This candle (red or green) has a small body, the upper shadow is long and the lower shadow is short or absent. This pattern shows a slight reversal, if present after a rally. The meteor candle has a long upper shadow and the real body must be near the lowest price.
Threesomes / 3 candles pattern
Three black cover / 3 black crows
The three long black candles closed down continuously to or near the lowest prices. This pattern shows bearish signals. When appearing in an uptrend, this pattern shows a reversal signal. When appearing in a downtrend, this pattern signals that the downtrend will resume.
Three white Soldier / 3 white soldiers
The three white candlesticks with the closing price increased continuously close to or equal to the highest price. This pattern shows bullish signal. When appearing in a downtrend, this pattern shows a reversal signal. When appearing in an uptrend, this pattern signals that the uptrend will continue.
Windows / Window pattern
Folling Windows / Windows reduction
The window, that is, the gap between the bottom of the first day's candle and the top of the second day's candle And in the process of rising above the window will meet resistance.
Rising Window / Rising window
The bullish window is the gap between the bottom of the first day and the top of the second day. When this pattern appears, it is more likely that a fall will occur to close the window. In the process of falling below the stock price, you will see support.
Critical comments
Although widely used in all types of markets, many experts consider TA to be a controversial and unreliable method, and is often called a "self-fulfilling prophecy". This term is used to describe events that occur only because a large number of people think they will occur.
Critics argue that, in the context of financial markets, if a large number of traders and investors rely on the same types of indices, such as support or resistance, This index will be more likely to become more realistic.
On the other hand, many TA advocates argue that each charter has his or her own chart analysis and they use some of the available indicators, which means that a large number of traders use Using the same specific strategy is impossible.
Basic analysis and technical analysis
A central premise of technical analysis is that market prices reflect all the basic elements associated with a particular asset. But in contrast to the TA approach, which mainly focuses on price and volume fluctuations (market graphs), fundamental analysis (FA) adopts a broader and more focused analysis strategy. more on qualitative factors.
Fundamental analysis suggests that the future performance of an asset depends on more than historical data. Basically, FA is a method used to estimate the intrinsic value of a company, business or asset based on a variety of micro and macroeconomic conditions, such as management and reputation. The company's competitiveness, market competitiveness, growth and health of the industry.
Therefore, we may consider that unlike TA, which is primarily used as a predictor for price movements and market behavior, FA is a method for determining whether an asset is Overvalued, according to its context and potential. While technical analysis is primarily used by short-term traders, fund managers and long-term investors tend to prefer basic analysis.
A notable advantage of technical analysis is that it relies on quantitative data. As such, it provides a framework for objective study of price history, eliminating the element of guesswork that is often associated with a more qualitative approach of fundamental analysis.
However, despite the processing of empirical data, TA is still affected by personal bias and subjectivity. For example, a trader who is inclined to make a certain conclusion about an asset will be able to manipulate his TA tools to support his bias and reflect pre-defined concepts. their. And in many cases, this happens without them even realizing it. Moreover, technical analysis can also fail in periods where the market does not exhibit a clear pattern or trend.
In general, reading candlestick charts is very important in technical analysis, so you need to practice a lot. You can practice directly on the tradingview website.
This is a technical analysis site that every trader needs to know. You access the site: tradingview.com
Conclude
In addition to critics and a long-standing debate about which method is better, many people think using a combination of both TA and FA methods is a more reasonable option. While FAs often involve long-term investment strategies, TA can provide insightful information regarding short-term market conditions, which can be useful for both traders and traders. from (for example, when trying to identify favorable entry and exit points).
Source: dautucp.com
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