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Technical Analysis & Price Action
Basic price action and technical analysis should be paired with Lambda's tools for stronger trade ideas.
Technical analysis is a way for traders to predict how the market will move by looking at patterns in charts. They use past data about price and volume to find common patterns, which can help them identify opportunities for trading.
Charts are crucial for technical analysis as they show the price action, which is the main indicator of a market's performance. They provide a clear picture of what the price is doing, making them the starting point for analyzing potential trades.
Technical analysts use various time frames for chart analysis, ranging from one-minute to yearly. Popular time frames include 5-minute, 15-minute, hourly, 4-hour, and daily charts. Traders choose a time frame based on their trading style, with intra-day traders preferring shorter time frames and long-term traders opting for hourly, 4-hour, daily, or weekly charts. Price movements that are important to intra-day traders may not be significant for long-term traders when viewed on longer time frame charts.
Technical analysis ignores external financial data, but some traders view this as beneficial because they believe all fundamental news is reflected in the price. However, it can be confusing and requires a solid understanding of signals before trading.
"The trend is your friend" is a popular phrase in trading that emphasizes the importance of following the current trend of a particular asset or market. The idea behind this saying is that the direction of a trend can provide valuable information about the future direction of prices.
Before further analysing the market, a trader should establish the environment first.
When a trend is established, it tends to continue until there is a significant change in market conditions or other external factors that influence the asset's price. Traders who follow the trend can use this information to make informed trading decisions, such as entering or exiting a position based on the direction of the trend.
To determine whether the market is ranging or trending, you can look at the price chart and analyze the price action. Here are some ways to do this:
- 1.Look for horizontal price levels: In a ranging market, the price tends to move within a range or channel, bouncing between support and resistance levels. Look for horizontal price levels that have acted as support or resistance in the past. If the price is moving back and forth within a relatively tight range, the market may be ranging.
- 2.Identify trend lines: In a trending market, the price tends to move in a directional trend. Look for trend lines that connect the highs or lows of the price. If the trend lines slope up or down, the market may be in an uptrend or downtrend, respectively.
- 3.Check moving averages: Moving averages can help to smooth out the price action and identify trends. If the price is consistently above or below a moving average, this may indicate a trend. If the price is crossing back and forth over a moving average, the market may be ranging.
- 4.Use technical indicators: Technical indicators such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) can help to confirm a trend or range. For example, if the RSI is above 50 and rising, this may indicate an uptrend. If the RSI is below 50 and falling, this may indicate a downtrend. If the RSI is oscillating between 30 and 70, this may indicate a ranging market.
By looking at these factors and analyzing the price action, you can get a better sense of whether the market is ranging or trending. It's important to note that market conditions can change quickly, so it's important to stay vigilant and adapt your trading strategy accordingly.
If the market is ranging, winning traders will sell resistance and buy support, while those traders who try to trade breakouts of the range, will likely lose money.
Characteristics of a Ranging Market include:
- Price chopping above/below the moving averages
- Support and Resistance levels respected in a tight range
- Moving averages + RSI mostly flat
A ranging market is often 'boring' but can be profitable
A market may be said to be ranging on any given timeframe, if the market is ranging on the 15 minute timeframe, that does not necessarily mean that it is also ranging on other timeframes.
If the market is trending, winning traders will follow the trend, whether that be an 'uptrend' or a 'downtrend' while those traders who try to trade as if the market is ranging, will likely lose money.
Characteristics of a Trending Market include:
- Price remains above (uptrend) or below (downtrend) the moving averages
- Moving averages have a directional gradient (positive or negative sloping)
- Uptrend: market makes higher highs and lower lows
- Downtrend: market makes lower lows and lower highs
Downward trending market
Upward trending market
Support and resistance are important concepts in technical analysis of trading. They refer to levels at which a stock or other financial instrument has historically found buying or selling pressure, respectively, creating a floor or ceiling on the price.
These levels can provide traders with potential entry and exit points for their trades, as well as indications of potential trends or reversals in the market. It's important to note that support and resistance levels are not set in stone and can shift over time as market conditions change.
Using Horizontal Levels as Support and Resistance
Support levels are the levels at which buying pressure has been strong enough to prevent the price from falling further. Traders may see these levels as an opportunity to buy a security at a lower price, anticipating that the price will bounce back up.
Resistance levels, on the other hand, are levels at which selling pressure has been strong enough to prevent the price from rising further. Traders may see these levels as an opportunity to sell a security at a higher price, anticipating that the price will fall back down.
Drawing support and resistance lines on price charts is a common technique used by traders and analysts to help identify potential price levels where buying or selling activity may occur. Here's a simple explanation of how to do it:
Start by looking at the price chart of the asset you're interested in. You can use any charting software or platform that you're comfortable with.
Identify the major swing highs and swing lows on the chart. These are the points where the price moved up or down sharply before reversing its direction.
Draw a horizontal line across each swing high and swing low. These lines represent the levels of resistance and support, respectively.
If the price moves up to the resistance level and fails to break through it, the resistance line is considered to be holding and the price may move down again.
Conversely, if the price moves down to the support level and fails to break through it, the support line is considered to be holding and the price may move up again.
You can also draw trendlines to connect multiple swing highs or swing lows. These trendlines can help identify the overall trend of the asset and provide additional levels of support and resistance.
It's important to note that support and resistance levels are not exact prices, but rather zones where buying and selling pressure may be present. It's also important to use other indicators and analysis techniques to confirm potential trades, as support and resistance levels are not always reliable predictors of future price movements.
Using Technical Indicators as Support and Resistance (200 EMA)
While there are many technical indicators that traders use to help identify potential support and resistance levels, here are a few of the most commonly used ones:
- 1.Moving Averages: A moving average is a line that shows the average price of an asset over a specific time period. Traders often use moving averages to help identify potential support and resistance levels. For example, if the price of an asset is consistently bouncing off a particular moving average, that moving average may be acting as a level of support or resistance.
- 2.Pivot Points: Pivot points are a set of horizontal lines that are calculated based on the previous day's price action. These lines can act as levels of support and resistance. Traders can use pivot points to help identify potential price zones where buying or selling pressure may occur.
- 3.Fibonacci Retracement: Fibonacci retracement is a tool that uses horizontal lines to indicate areas of support or resistance at the key Fibonacci levels before the price continues in its original direction. These levels are calculated using a series of ratios based on the Fibonacci sequence.
- 4.Bollinger Bands: Bollinger Bands are a type of technical analysis tool that consist of two standard deviation bands and a moving average line. Traders use Bollinger Bands to help identify potential support and resistance levels. For example, if the price of an asset is bouncing off the lower Bollinger Band, that band may be acting as a level of support.
Pivot Points Acting as Resistance
Fibonacci Retracement Acting as Support
Keep in mind that these are just a few of the many technical indicators that traders use to identify support and resistance levels. It's important to use a combination of different indicators and analysis techniques to confirm potential trades and minimize risk.
Multiple Indicators as Support