Welcome to our Advanced Course.This course is designed especially for those who would like to start making money in the markets. In this course we will start educating you about the common patterns shown on the financial charts, and dive deeper into the two most important pillars of an analyst; the Fundamental analysis and Technical analysis.
The idea is to give you possession over that valuable knowledge while you practice each section in order to perfect it.
We make sure you are familiar with the basics of the market as we will use and enhance the ideas shown on the Beginner Course (BEGINNER COURSE INCLUDED).
What does it mean to be an analyst?
Fundamental analysis involves analyzing a company’s financial statements to determine the fair value of the business, while technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.
Technical analysis may appear complicated on the surface, but it boils down to an analysis of supply and demand in the market to determine where the price trend is headed. In other words, technical analysis attempts to understand the market sentiment behind price trends rather than analyzing a security’s fundamental attributes. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor over the long-term.
In this tutorial, you will be introduced to technical analysis and develop the foundation needed to understand more advanced concepts down the road.
Introduction to Charting The trend and the correction Fractals Development of the Trend Different chart types.
What is ‘Technical Analysis’
Technical analysis is a trading tool employed to evaluate securities and identify trading opportunities by analyzing statistics gathered from trading activity, such as price movement and volume. Unlike fundamental analysts who attempt to evaluate a security’s intrinsic value, technical analysts focus on charts of price movement and various analytical tools to evaluate a security’s strength or weakness.
BREAKING DOWN ‘Technical Analysis’
Technical analysts believe past trading activity and price changes of a security are better indicators of the security’s likely future price movements than the intrinsic value of the security. Technical analysis was formed out of basic concepts gleaned from Dow Theory, a theory about trading market movements that came from the early writings of Charles Dow. Two basic assumptions of Dow Theory that underlie all of technical analysis are 1) market price discounts every factor that may influence a security’s price and 2) market price movements are not purely random but move in identifiable patterns and trends that repeat over time.
The Underlying Assumptions of Technical Analysis
The assumption that price discounts everything essentially means the market price of a security at any given point in time accurately reflects all available information, and therefore represents the true fair value of the security. This assumption is based on the idea the market price always reflects the sum total knowledge of all market participants.
The second basic assumption underlying technical analysis, the notion that price changes are not random, leads to the belief of technical analysts that market trends, both short term and long term, can be identified, enabling market traders to profit from investing according to the existing trend.
How Technical Analysis Is Used
Technical analysis is used to attempt to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs. In fact, technical analysis can be viewed as simply the study of supply and demand forces as reflected in the market price movements of a security. It is most commonly applied to price changes, but some analysts may additionally track numbers other than just price, such as trading volume or open interest figures.
Over the years, numerous technical indicators have been developed by analysts in attempts to accurately forecast future price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. Commonly used technical indicators include trendlines, moving averages and momentum indicators such as the moving average convergence divergence (MACD) indicator.
Technical analysts apply technical indicators to charts of various timeframes. Short-term traders may use charts ranging from one-minute timeframes to hourly or four-hour timeframes, while traders analyzing longer-term price movement scrutinize daily, weekly or monthly charts.
Intro. to Charting
Charts Most Important Starting Point.
Technical traders use the price history of any asset, and the price patterns that form, as a basis for making trading decision and analysis. This is called technical analysis, a technique that uses the price chart of an asset as a key determinant in forecasting where the price will go next.
Price charts are highly visual, showing where a stock price has been in the past, the price’s current trajectory, how volatile the price movements are, and whether the stock has a lot or little interest in it.
What Can You Learn from Charts?
Chart patterns are a field of study within the larger field technical analysis. Chart patterns are geometric shapes created by the price movements of an asset, such as a stock, currency, or commodity. These geometric shapes provide a context for how the asset is moving right now, and the direction and magnitude of the price moves that may be forthcoming.
Chart patterns are a key tool in the technical trader’s arsenal. This tutorial covers the main types of charts patterns, including how to trade them and what insights they provide into current and future price movements.
Background & Rules
The Dow theory is a theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average.
Trend levels & transition stages
A sideways trend is a series of horizontal peaks and troughs, with prices moving within a range, failing to make new highs at the top of the price range and failing to make new lows at the bottom of the price range.
Trend duration is also made up of three time periods; major, intermediate and minor.
Trend volume & trend ending patterns
Chart patterns are a valuable part of technical analysis – even if they are more art than science.
Many traders use them to identify potential trades that they can confirm using other forms of technical analysis to maximize their odds of success.
You should now be able to recognize some of these chart patterns as we move on to other forms of technical analysis.
Introduction to technical tools
There are loads of technical indicators that forex traders can add to their charts.
There are commonly used indicators, such as the MACD, RSI, and moving averages, and then there are less commonly used tools such as the zigzag, envelopes and TTM Trend.
Support and Resistance
The concepts of support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis.
Part of analyzing chart patterns, these terms are used by traders to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction.
At first, the explanation and idea behind identifying these levels seems easy, but as you’ll find out, support and resistance can come in various forms, and the concept is more difficult to master than it first appears.
The Round Number
Have you ever wondered why prices tend to stall at certain levels in the forex market? Is this just a coincidence or is there a valid reason behind this happening? Well, this phenomenon may actually be explained based on the psychology of forex traders.
As humans, we tend to think in terms of whole, round numbers rather than in terms of uneven random numbers. This happens very regularly in everyday life where numbers tend to be rounded up or down in order to simplify things.
Forex Psychological and Round Levels.
For example, if someone asked you the time and you looked at your watch and it was 12:29pm, what time would you give the person? Based on the psychology of rounding, many persons are likely to just say 12:30pm rather than 12:29pm since 12:30pm is a rounded number and 12:29 is not.
Or what if you wanted to know the price of a meal and saw that it was advertised for $9.99? In your mind, you would probably round it up to $10 instead of $9.99. A similar thing happens in trading when traders conduct technical analysis by examining the price charts.
Trend Lines 1
An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Note that at least three points must be connected before the line is considered to be a valid trendline.
Uptrend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of the buyers. As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.
A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Note that at least three points must be connected before the line is considered to be a valid trendline.
Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.
For a detailed explanation of trend changes, which are different than just trend line breaks, please see our article on the Dow Theory.
High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a large change in price. Most charting programs allow users to set the scale as arithmetic or semi-log. An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they move up the y-axis. A $10 movement in price will look the same from $10 to $20 or from $100 to $110. A semi-log scale displays incremental values in percentage terms as they move up the y-axis. A move from $10 to $20 is a 100% gain, and would appear to be much larger than a move from $100 to $110, which is only a 10% gain.
It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. It can sometimes be difficult to find more than 2 points from which to construct a trend line. Even though trend lines are an important aspect of technical analysis, it is not always possible to draw trend lines on every price chart. Sometimes the lows or highs just don’t match up, and it is best not to force the issue. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.
Trend Lines 2
Spacing of Points
The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together. The most suitable distance apart will depend on the timeframe, the degree of price movement, and personal preferences. If the lows (highs) are too close together, the validity of the reaction low (high) may be in question. If the lows are too far apart, the relationship between the two points could be suspect. An ideal trend line is made up of relatively evenly spaced lows (or highs). The trend line in the above MSFT example represents well-spaced low points.
As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance (or decline) over a brief period of time. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level. Even if the trend line is formed with three seemingly valid points, attempting to play a trend line break or to use the support and resistance level established it will often prove difficult.
Internal Trend Lines
Sometimes there appears to be the possibility of drawing a trend line, but the exact points do not match up cleanly. The highs or lows might be out of whack, the angle might be too steep or the points might be too close together. If one or two points could be ignored, then a fitted trend line could be formed. With the volatility present in the market, prices can over-react, and produce spikes that distort the highs and lows. One method for dealing with over-reactions is to draw internal trend lines. Even though an internal trend line ignores price spikes, the ignoring should be within reason.
Trend lines can offer great insight, but if used improperly, they can also produce false signals. Other items – such as horizontal support and resistance levels or peak-and-trough analysis – should be employed to validate trend line breaks. While trend lines have become a very popular aspect of technical analysis, they are merely one tool for establishing, analyzing, and confirming a trend. Trend lines should not be the final arbiter, but should serve merely as a warning that a change in trend may be imminent. By using trend line breaks for warnings, investors and traders can pay closer attention to other confirming signals for a potential change in trend.
What is a ‘Trading Channel’ A trading channel is a channel drawn on a security price series chart by graphing two trendlines drawn at resistance and support levels. Trading channels can be drawn using a variety of methodologies.
Generally traders believe that security prices will remain within a trading channel.
BREAKING DOWN ‘Trading Channel’
Trading channels are a key methodology used by technical analysts to create buy and sell signals from technical charts. Technical analysts may follow a variety of patterns that occur within a channel to discern short term directional changes in market prices. Trading channels however provide one of the most important overlays that a technical analyst will use for long term analysis and trading decisions.
There are generally two broad types of trading channels that technical analysts will use: trend channels and envelope channels.
Trend channels are drawn with defined slope trendlines at the resistance and support levels of a security’s price series. These channels are not used for long-term price analysis since they lack the ability to flow through reversals. Trend channel trading relies heavily on a security’s trend cycle which spans through breakout gaps, runaway gaps and exhaustion gaps. Generally trend channels will be either flat, ascending or descending.
Flat: Flat channels occur when trendlines have a zero slope. These trend channels show sideways movement in the market with no upward or downward trend.
Ascending channel: An ascending channel is drawn from two positive sloping lines at the resistance and support levels of a price series chart. This channel shows a bullish trend.
Descending channel: Descending channels are the opposite of ascending channels. These channels are formed from two negative sloping trendlines at the resistance and support levels. A descending channel will show a bearish trend.
To take into account longer term price movements, traders can also use envelope channels. Envelope channels have trendlines that are drawn based on statistical levels. Two of the most common envelope channels include Bollinger Bands and Donchian Channels.
Bollinger Bands: Bollinger Bands are one of the most popular trading channels incorporating moving average trendlines. In a Bollinger Band trading channel, trendlines at the resistance and support levels are based on movement of the moving average. The resistance trendline is two standard deviations above the moving average. The support trendline is two standard deviations below the moving average.
Donchian Channel: Donchian Channels are a type of envelope trading channel based on high and low prices. The resistance trendline in a Donchian Channel is drawn based on the security’s high over a specified period (n). Adversely the support line is drawn based on the security’s low over a specified period. Traders can use various periods to create Donchian Channels. Typically resistance and support trendlines will be defaulted to a 20 day period.
Introduction to The Fibonacci Scale
The Fibonacci sequence
[ 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, …]
is one of the most famous number sequences of them all. We’ve given you the first few numbers here, but what’s the next one in line? It turns out that the answer is simple. Every number in the Fibonacci sequence (starting from $2$) is the sum of the two numbers preceding it:
and so on. So it’s pretty easy to figure out that the next number in the sequence above is $55+89 = 144,$ and (in theory at least) to work out all numbers that follow from here to infinity.
Where does it come from?
The Fibonacci is named after the mathematician Leonardo Fibonacci who stumbled across it in the 12th century while contemplating a curious problem. Fibonacci started with a pair of fictional and slightly unbelievable baby rabbits, a baby boy rabbit and a baby girl rabbit.
What is a ‘Correction’
A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either. A correction is very different from a crash since it measures the the percentage decline from the most recent high. A crash is generally considered to be a 10% or more decline, irrespective of the most recent high.
BREAKING DOWN ‘Correction’
One way analysts attempt to predict whether a market is headed for a correction is to compare one market index to a similar index. For example, if the U.K.’s FTSE 100 has recently underperformed, the Standard & Poor’s (S&P) 500 in the United States might follow suit. When the market is showing a trend of closing lower, a correction may be at hand. However, a correction in the market or index as a whole does not necessarily tell how any one stock is performing. A stock within an index may remain strong despite a correction. A stock could also perform about the same as the overall market during a correction, or it could plummet even further than the overall market. A correction can be an opportunity for value investors to pick up good companies at bargain prices.
Frequency of Market Corrections
Market corrections in the stock market are fairly frequent events. On February 8, 2018, the DJIA and the S&P 500 both fell into a correction falling more than 10% from their highs on January 26, 2018. Prior to this most recent correction, we have experienced 36 corrections in U.S. markets since 1980, and the S&P 500 fell by an average of 15.6% from peak to trough during those periods. One year after that, on average, the S&P 500 returned 16% from the low. Two years after that, on average, the S&P 500 returned 28% from the low, according to LPL Financial. Only 10 of the 15 correction in the S&P 500 turned into Bear markets. Prior to the correction during the second half of 2015, the stock market had gone nearly three years without a correction. Corrections also tend to be relatively short-term phenomena. On average, a market correction lasts about three to four months. During the recent stock market dips in September 2015 and again in January 2016, in each case, the S&P 500 was able to retrace most of its gains within roughly two months of entering correction territory.
Corrections are Healthy for the Markets
Despite the inherently uncomfortable nature of watching an account balance drop by 10% or more, market corrections can be healthy for both the market and for investors.
The stock market is fairly volatile on a short-term basis but has a strong track record of success over the long-term. Many view corrections as an opportunity for the stock market and traders to digest recent gains and avoid a sense of irrational exuberance in the short-term. For investors, corrections provide a chance to see how truly comfortable they are with market risk, and to make changes to their portfolio if warranted. They also provide investors with an opportunity to potentially add companies at discounted prices, or to dollar cost average down on existing positions.