Technical Analysis

Tradevesting Methodology — VI

Analyzing stock price movements is essential for making better trading decisions. This guide will introduce you to the fundamentals of technical analysis, focusing on candlestick patterns, indicators, and different types of charts. Additionally, we will cover key chart patterns such as the cup with handle, reverse head and shoulders, triangles, and range patterns. By learning to identify these patterns and effectively use indicators, you can enhance your ability to predict future price movements with greater accuracy.

1. Candles (Candlestick Patterns)

Candlesticks are used in technical analysis to show the price movements of a stock within a specific period. Each candlestick represents the open, high, low, and close prices.

Components of a Candlestick:

• Body: The difference between the opening and closing prices.
• Bullish Candle: Close price is higher than the open price (often green or white).
• Bearish Candle: Close price is lower than the open price (often red or black).
• Wicks (Shadows): Lines showing the high and low prices of the period.
• Upper Wick: Highest price reached.
• Lower Wick: Lowest price reached.

2. Indicators

Indicators are mathematical calculations based on stock price and volume. They help traders make predictions about future price movements.

Types of Indicators:

• Trend Indicators: Show the direction of the market.
• Moving Averages: Simple Moving Average (SMA), Exponential Moving Average (EMA).
• Momentum Indicators: Measure the speed of price movements.
• Relative Strength Index (RSI)
• MACD (Moving Average Convergence Divergence)
• Volatility Indicators: Measure how much the price is changing.
• Bollinger Bands
• Volume Indicators: Measure the amount of trading activity.
• On-Balance Volume (OBV)

3. Charts

Charts are visual representations of stock prices over time. Different types of charts help traders analyze market trends and make decisions.

Types of Charts:

• Line Chart: Plots closing prices over a period.
• Bar Chart: Shows open, high, low, and close prices for each period.
• Candlestick Chart: Similar to bar charts but more visually detailed.

Common Chart Patterns

1. Support and Resistance

Support is a price level where a stock tends to find buying interest as it falls, preventing the price from dropping further. This level acts as a “floor” for the stock price.

Characteristics:

• Bouncing Prices: When the stock price approaches this level, it often bounces back up.
• Multiple Touches: Support levels are validated when the price touches and rebounds from this level multiple times.
• Volume Increase: Higher trading volume at the support level can indicate strong buying interest.

Resistance

Resistance is a price level where a stock faces selling pressure as it rises, preventing the price from climbing further. This level acts as a “ceiling” for the stock price.

Characteristics:

• Price Rejection: When the stock price approaches this level, it often gets rejected and moves down.
• Multiple Touches: Resistance levels are confirmed when the price touches and falls back from this level multiple times.
• Volume Increase: Higher trading volume at the resistance level can indicate strong selling interest.

2. Cup with Handle

A bullish pattern that indicates a continuation of an uptrend. It looks like a tea cup with a handle.

Characteristics:

• Cup: A rounded bottom.
• Handle: A slight downward drift following the cup.
• Breakout: Occurs when the price breaks above the resistance level formed by the top of the cup and handle.

3. Reverse Head and Shoulders

A bullish reversal pattern that signals a potential change from a downtrend to an uptrend.

Characteristics:

• Left Shoulder: A price drop followed by a rise.
• Head: A lower price drop followed by a rise.
• Right Shoulder: A higher price drop similar to the left shoulder, followed by a rise.
• Neckline: A resistance level that, when broken, confirms the pattern.

4. Range Pattern

Occurs when the price moves within a specific horizontal range, indicating indecision in the market.

Characteristics:

• Support Level: The lower boundary of the range.
• Resistance Level: The upper boundary of the range.
• Breakout: Occurs when the price moves outside the range (either above resistance or below support).

Practical Application

To use these patterns effectively, traders typically:

1. Confirm with Volume: Look for increased volume during breakouts.
2. Consider Pattern Duration: Longer patterns often lead to stronger price movements.
3. Identify Support and Resistance: Use these levels for setting entry and exit points.

Example: Cup with Handle

1. Identify the Cup: Look for a rounded bottom.
2. Identify the Handle: Look for a short-term downward trend.
3. Breakout Confirmation: Enter a trade when the price breaks above the handle’s resistance with high volume.

By learning to read candlesticks, apply indicators, and identify chart patterns, you can better anticipate stock price movements and make more informed trading decisions. Technical analysis is a valuable tool for any trader, helping you to understand market trends and potential price changes. Practice using these techniques on charts and keep refining your skills to become a more confident and successful trader.

If you loved this story, please feel free to check my other articles on this topic here: https://ankit-rathi.github.io/tradevesting/

Ankit Rathi is a data techie and weekend tradevestor. His interest lies primarily in building end-to-end data applications/products and making money in stock market using Tradevesting methodology.