Day 15 Trading Bootcamp: Introduction to Technical Analysis

Technical analysis is a method used by traders to evaluate securities and make trading decisions by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysis, which attempts to evaluate a security’s intrinsic value, technical analysis focuses on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security’s strength or weakness.

What is Technical Analysis?

Technical analysis is based on three primary assumptions:

1. The Market Discounts Everything: This assumption means that all relevant information, including fundamental factors, is already reflected in the price of the asset.
2. Price Moves in Trends: According to technical analysis, prices move in trends. This means that once a trend is established, it is likely to continue until a reversal occurs.
3. History Tends to Repeat Itself: The repetitive nature of price movements is attributed to market psychology. Market participants tend to react in a similar way to similar market stimuli over time.

The Basics of Technical Analysis

1. Charts and Chart Types

   • Line Charts: A simple line chart connects the closing prices of a security over a given time period.
   • Bar Charts: Bar charts provide more information than line charts, showing the open, high, low, and close prices for each period.
   • Candlestick Charts: Candlestick charts also show the open, high, low, and close prices but with more visual appeal, making it easier to read market sentiment.

2. Support and Resistance Levels

   • Support: This is the price level at which demand is thought to be strong enough to prevent the price from declining further.
   • Resistance: This is the price level at which selling pressure is thought to be strong enough to prevent the price from rising further.

3. Trendlines

   • Uptrend Line: Drawn by connecting the lows of the price movements, indicating that the price is moving higher.
   • Downtrend Line: Drawn by connecting the highs of the price movements, indicating that the price is moving lower.

4. Volume

   • Volume is an important indicator in technical analysis as it provides insights into the strength of a given price movement. Higher volume during a price movement indicates stronger conviction.

Key Indicators and Oscillators

1. Moving Averages

   • Simple Moving Average (SMA): Calculated by averaging a set number of past prices. For example, a 50-day SMA.
   • Exponential Moving Average (EMA): Gives more weight to the most recent prices to reduce the lag.

2. Relative Strength Index (RSI)

   • Measures the speed and change of price movements. RSI values range from 0 to 100, with levels above 70 considered overbought and levels below 30 considered oversold.

3. Moving Average Convergence Divergence (MACD)

   • A trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.

4. Bollinger Bands

   • Consist of a middle band being an N-period moving average (typically a 20-day SMA), and an upper and lower band at K times an N-period standard deviation away from the middle band (usually 2).

20 Examples of Technical Analysis

1. Price rising above a 50-day SMA: Indicates a potential buy signal.
2. RSI crossing above 70: Suggests an overbought condition, a potential sell signal.
3. MACD line crossing above the signal line: Bullish signal.
4. Price touching the lower Bollinger Band: May indicate the price is oversold.
5. Volume spike accompanying a price breakout: Confirms the breakout.
6. Head and Shoulders Pattern: Indicates a potential reversal.
7. Double Top Pattern: Indicates a bearish reversal.
8. Double Bottom Pattern: Indicates a bullish reversal.
9. Ascending Triangle Pattern: Indicates a potential breakout to the upside.
10. Descending Triangle Pattern: Indicates a potential breakdown to the downside.
11. Symmetrical Triangle Pattern: Indicates a breakout in the direction of the prior trend.
12. Cup and Handle Pattern: Bullish continuation pattern.
13. Price crossing below a 200-day SMA: Indicates a potential sell signal.
14. MACD Histogram moving from negative to positive: Bullish signal.
15. Price closing above resistance level: Bullish signal.
16. RSI moving from below 30 to above 30: Bullish signal.
17. Volume declining while price increases: Indicates a potential reversal.
18. Bearish Engulfing Pattern: Indicates a bearish reversal.
19. Bullish Engulfing Pattern: Indicates a bullish reversal.
20. Price creating a new high on increased volume: Confirms the strength of the trend.

10 Real World Scenarios

1. Apple (AAPL) stock breaks above its 50-day SMA with increased volume: Indicates strong buying interest, suggesting a potential buy opportunity.
2. Bitcoin (BTC) RSI crosses above 70: Indicates that Bitcoin is overbought, signaling a potential sell-off.
3. Ethereum (ETH) price touches the lower Bollinger Band: May indicate an oversold condition and a potential buying opportunity.
4. Tesla (TSLA) forms a head and shoulders pattern: Suggests a potential reversal to the downside.
5. S&P 500 forms a double bottom pattern: Indicates a potential bullish reversal, suggesting a buy opportunity.
6. NASDAQ breaks below a 200-day SMA: Signals a potential bearish trend.
7. Gold (XAU) forms an ascending triangle pattern: Suggests a potential breakout to the upside.
8. Amazon (AMZN) MACD line crosses above the signal line: Bullish signal, suggesting a buy opportunity.
9. Litecoin (LTC) price crosses above a key resistance level on Binance: Indicates strong bullish momentum.
10. Microsoft (MSFT) volume spikes during a price breakout: Confirms the breakout strength, suggesting a buy.

Practical Examples

1. Identifying an Uptrend: Using Trading 212, observe a stock’s price consistently making higher highs and higher lows, confirming an uptrend.
2. Spotting Overbought Conditions: On eToro, monitor an asset’s RSI. If it crosses above 70, it might be time to consider taking profits.
3. Utilizing Bollinger Bands: When trading cryptocurrencies on Binance, observe how the price interacts with Bollinger Bands to identify overbought or oversold conditions.
4. Analyzing Volume Trends: High volume accompanying a breakout on Trading 212 indicates strong buying interest.
5. Reading Candlestick Patterns: On eToro, identify bullish or bearish engulfing patterns to predict potential price reversals.
6. Using Moving Averages: On Binance, apply the 50-day and 200-day SMA to identify buy and sell signals.
7. Identifying Support Levels: On Trading 212, use historical price data to identify strong support levels where the price tends to rebound.
8. Recognizing Chart Patterns: On eToro, identify patterns like head and shoulders to predict potential reversals.
9. Tracking MACD: Use MACD on Binance to identify bullish or bearish trends.
10. Analyzing RSI: On Trading 212, monitor the RSI to detect overbought or oversold conditions and adjust your trading strategy accordingly.