Technical analysis studies past price and transaction volume data, and then predicts future price trends. This type of analysis focuses on the composition of charts and formulas to capture major and minor trends, and to identify buying/selling opportunities by estimating the length of the market cycle. Depending on the time span you choose, you can use intraday (every 5 minutes, every 15 minutes, hourly) technical analysis, weekly or monthly technical analysis.
PART 1: Basic theory of technical analysis
Dow Jones Theory
The oldest theory in this technical analysis believes that prices can fully reflect all existing information, and the knowledge available to participants (dealers, analysts, portfolio managers, market strategists, and investors) is already in the pricing behavior Be converted. Currency fluctuations caused by unpredictable events, such as the will of God, will be included in the overall trend. Technical analysis aims to study price behavior and make conclusions about the future direction.
The Dow Jones theory, which mainly developed around the average line of the stock market, believes that prices can be interpreted as including three types of volatility-dominant, auxiliary and secondary. The relevant time period varies from less than 3 weeks to more than 1 year. This theory can also explain the flyback mode. Flyback mode is the normal phase of the trend slowing down the speed of movement. Such flyback mode levels are 33%, 50%, and 66%.
Fibonacci flyback phenomenon
This is a widely used group of flyback phenomena based on the ratio of numbers produced by natural and man-made phenomena. This phenomenon is used to determine the magnitude of the rebound or retracement between the price and its underlying trend. The most important flyback phenomenon levels are 38.2%, 50% and 61.8%.
Elliot scholars classified price trends in a fixed wave pattern. These patterns can represent future indicators and reversals. Waves that move in the same direction as the trend are called impulse waves, and waves that move in the opposite direction of the trend are called correction waves. Elliott’s wave theory divides the push wave and the correction wave into 5 and 3 main directions respectively. These 8 directions form a complete wave cycle. The time span can range from 15 minutes to decades.
The challenging part of Elliott's wave theory is that one wave cycle can be composed of 8 wavelet cycles, and these waves can be further divided into push and correction waves. Therefore, the key to Elliott's wave is to be able to identify the environment in which a particular wave is located. The Elliot also used the Fibonacci flyback phenomenon to predict the peaks and troughs of future wave cycles.
PART 2: The content of technical analysis
Spot the trend
Regarding technical analysis, the first thing you may hear is the following motto: "The trend is your friend." Finding the dominant trend will help you view the overall market orientation and give you more keen insight-especially when shorter-term market fluctuations disrupt the overall market. Weekly and monthly chart analysis is best used to identify longer-term trends. Once you find the overall trend, you can choose the trend in the time span you want to trade. In this way, you can buy or sell during the uptrend and sell during the downtrend.
Support and resistance
Support and resistance levels are the points on the chart that experience continuous upward or downward pressure. The support level is usually the lowest point in all chart modes (hourly, weekly or yearly), and the resistance level is the highest point (peak point) in the chart. When these points show a recurring trend, they are identified as support and resistance. The best time to buy/sell is near the support/resistance level that is not easily broken.
Once these levels are broken, they will tend to become reverse obstacles. Therefore, in an uptrend market, the broken resistance level may become a support for an upward trend; however, in a downtrend market, once the support level is broken, it will turn into resistance.
Lines and channels
Trend lines are simple and practical tools in identifying the direction of market trends. The upward straight line is formed by connecting at least two consecutive low points. Naturally, the second point must be higher than the first point. The extension of the straight line helps to determine the path the market will follow. Uptrend is a specific method used to identify support lines/levels. Conversely, the downward line is drawn by connecting two or more points. The variability of transaction lines is to some extent related to the number of connection points. However, it is worth mentioning that the points do not have to be too close.
A channel is defined as an upward trend line parallel to the corresponding downward trend line. Two lines can represent a corridor where prices are up, down, or horizontal. The common attribute of a channel that supports trend line connection points should be located between the two connection points of its reverse line.
If you believe in the credo of "the trend is your friend" in technical analysis, then the moving average will benefit you a lot. The moving average shows the average price at a specific time in a specific period. They are called "movements" because they are measured at the same time and reflect the latest average.
One of the disadvantages of moving averages is that they lag behind the market, so they are not necessarily a sign of trend change. To solve this problem, the use of a short-period moving average of 5 or 10 days will reflect recent price movements better than a 40 or 200-day moving average.
Alternatively, a moving average can also be used by combining two averages with different time spans. Regardless of whether the 5- and 20-day moving averages or the 40- and 200-day moving averages are used, a buy signal is usually detected when the shorter-term average crosses the longer-term average upward. In contrast, a sell signal will be prompted when the shorter-term average crosses the longer-period average downward.
There are three mathematically different moving averages: simple arithmetic moving average; linear weighted moving average; and square factor weighted average. Among them, the last one is the preferred method because it gives more weight to the most recent data and considers the data throughout the cycle of financial instruments.