Part 9 Technical Analysis – Price formations

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Technical Analysis


1. Background

Introduction to the concept of technical analysis and how it differs from Fundamental analysis. We also discuss the kind of return expectation one needs to set while trading based on Technical Analysi ..

2. Introducing Technical Analysis

This chapter explores the many characteristics of Technical Analysis including its adaptability to different asset classes, time frames etc. We also understand the need to summarize the Open, high, lo ..

3. The Chart Types

We explore the different chart types used in technical analysis along with its merits and de merits. Specifically we discuss the candlestick chart and why traders prefer candlesticks over bar charts. ..

4. Getting Started with Candlesticks

Basic concepts on various candlestick patterns used by traders to make decisions on the market. We also discuss the basic classification of candlestick patterns ..

5. Single Candlestick patterns (Part 1)

Detailed description on the Bullish and Bearish Marubozu with real examples from Indian markets. The chapter discusses how to identify and set up a trade based on Marubozu. ..

6. Single Candlestick patterns (Part 2)

The Doji and Spinning top candlestick patterns explained in detail and how these patterns play a key role in developing a view on markets. ..

7. Single Candlestick patterns (Part 3)

This chapter explores how to identify hammer and hanging man. We understand the thought process behind these patterns and how to setup trades based on these patterns. ..

8. Multiple candlestick patterns (Part 1)

In this chapter we understand how two or more candlesticks can be combined to identify trading opportunities. To begin with we understand the bullish and bearish engulfing pattern with real examples f ..

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9. Multiple Candlestick Patterns (Part 2)

Continuing from the previous chapter, we discuss the bullish harami and the bearish harami patterns with real examples taken from the Indian markets. ..

10. Multiple Candlestick Patterns (Part 3)

In this chapter we discuss about the price Gaps, which is a common occurrence in the markets. We then explore the morning star and the evening star candlestick formation. ..

11. The Support and Resistance

A detailed insight into Support and Resistance price levels, its relevance in technical analysis, its construction, drawbacks, and insights into setting price targets. ..

12. Volumes

This chapter outlines the importance of volume in technical analysis. Learn how to associate the volume and the price information to analyze the markets ..

13. Moving Averages

Moving average is a simple technical analysis indicator used to detect the price trend. Learn about the moving average and a how to set up a simple moving average trading system. ..

14. Indicators (Part 1)

Learn about the Relative strength indicator (RSI) and how it can be used to predict the short term movement in the market. Learn about the merits and drawbacks of RSI indicators. ..

15. Indicators (Part 2)

An extensive explanation on the Moving average convergence and divergence (MACD) and Bollinger Bands. ..

16. The Fibonacci Retracements

Starting with the basics of the construction of the Fibonacci sequence, we also learn about the derivation of the Golden Ratio. The Fibonacci retracement provides excellent opportunity for the traders ..

17. The Dow Theory (Part 1)

A brief on the history of the Dow theory, its principles and the types of trends in Dow theory – Primary, Secondary and Minor and the inference of each trend type in relation to the markets. ..

18. The Dow Theory (Part 2)

In this chapter we look into the methods to identify trading ranges and flag formation. We also learn how to interpret the risk to reward ratio to make market entry and exit decisions. ..

19. The Finale – Helping you get started

This chapter helps you get started on the things that you need to do on a daily basis to identify trading opportunities employing “Technical Analysis” methodologies. ..

20. Supplementary Notes 1

Average Directional Index (ADX) About: The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) represent a group of directional movement indicators ..

21. Interesting features on TradingView

If you don’t know already, then TradingView is now available on Kite. Here is the TradingQ&A post announcing the beta launch. Given this, I thought I could share a few of my favourite ..

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Using Price Action As Your First Indicator in Technical Analysis

What is Price Action?

Price action is the study or analysis of price movement in the market. Traders use price action to form opinions and base decisions on trends , key price levels and suitable risk management . Trend identification is frequently utilized as the initial step in price action trading. All other facets to price action indicators require a trend basis to begin price action analysis.

Characteristic price action chart:

Price Action as Your First Indicator

Technical analysis setups generally begin with price action as the initial form of evaluation. The first thing to remember when using an indicator is that it is a function of price action. The indicator itself is not the ultimate tool when it comes to trading, but rather comes in behind price action. Price action governs the information that the indicator will ultimately provide on the chart. As such, a trader must determine what price action is doing (i.e. the trend ) before consulting the indicator for an entry signal. Once the trend is determined, the trader can then consult the indicator for an entry signal in the direction of the trend.Traders trade on the price movement of an instrument therefore, the focus is on the change in price as opposed to the change in indicator value. Some traders base trading decisions and analysis purely on price action whilst other prefer a combination of price action and technical indicators which serve as a support system.

Technical indicators are derivatives of price action – price action governs the information that indicators provide on the chart. These indicators are calculated using varying periodic price data which provide substantiation for entry , exit , and stop distance criteria. Trend identification is also important in market analysis to ascertain how the market is functioning on a holistic scale (time frame dependent).

USD/ZAR price action example:

The USD/ZAR chart above exhibits the symbiotic relationship between price action and technical indicators in an archetypal trade setup. The chart arrangement begins with price action by identifying the upward trend (blue line) which also serves as a support level in this instance. The addition of the moving average (MA) further confirms the short-term trend direction with the forex price being above the 20, 50 and 200 moving average lines.

Using the stochastic oscillator suggests the market is nearly in oversold territory which points towards further bullish/upward movement. Timing the entry would require keeping an eye on the stochastic as well as the price movement as it approaches the support (blue line). Once price reaches this level, traders would look to enter into a long position with appropriate risk management.

Price Action and Technical Indicators: A Summary

Price action is a broad technical analysis technique that incorporates various trading strategies which traders apply to analyze the markets. Technical indicators work well in conjunction with price action to allow traders to formulate more accurate trade decisions.

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