The technical vs. the fundamental
Traders utilise both technical and fundamental analysis to help them decide on a trading strategy. Traders can use both fundamental and technical research to forecast future trends and pricing.
Technical Analysis; “The process of analysing a financial instrument’s historical prices and other statistics generated by market activity, in an effort to determine probable future prices”
Fundamental Analysis; Fundamental Analysis is defined as “‘the assessment of pricing based on future earnings — it primarily considers elements such as the overall status of the economy, interest rates, production, earnings, and management.
Here it is put simply;
Fundamental analysis thinks that market movement is controlled by macro and microeconomic events such as interest rates, war, political unrest, recession, global economic depression, and so on, whereas technical analysis looks at previous prices of an asset to anticipate future values.
Fundamentalists are interested in the reason of market movement, whereas technicians are more interested in the outcome.
There are probably a million questions running through your mind;
- “Which one is better?”
- “What’s the difference between the two?”
- “Can I use them both?”
- “How do I analyze?”
- “What do I analyze?”
So, let’s start from the very beginning…
the basics of the fundamentals
Fundamental analysis is a method of evaluating an asset; it attempts to measure its intrinsic value by examining the underlying forces that could affect the asset.
Fundamental Analysis includes;
- Geo Political factors – such as interest rates and other government policies
- Macroeconomic factors – such as the level of unemployment
- Company or industry specific factors – such as mergers or acquisitions
Why is it useful?
- So, what makes Fundamental Analysis so popular, and how can it help us achieve and understand our objectives?
- We may utilize fundamental analysis to assess an economy’s overall health and predict market direction over the medium to long term. Fundamental analysis aids in assessing an item’s intrinsic value. Fundamental analysis assumes that each asset has a “correct” price, allowing us to determine whether the current market price is overvalued or undervalued. Knowing if an asset is undervalued or overvalued might help us decide whether to buy or sell it, bearing in mind that the price will always revert to “right.”
Major Industrialized Nations Central Banks
Below is a list of a few major industrialized nations, their central banks and the chairman or governor:
- USA – The Federal Reserve [FOMC – Federal Open market Committee] – Chairman: Janet Yellen
- Europe – European Central Bank [ECB] – Chairman: Mario Draghi
- UK – Bank of England [BoE (MPC – Monetary Policy Committee)] – Governor: Mark Carney
- Japan – Bank of Japan [BoJ] – Governor: Haruhiko Kuroda
Central banks make decisions that influence the economy, and decisions that affect the economy will affect your trade, so if you ever see one of these men on TV, pay attention to what they’re saying because it’s likely to be something significant.
interest rates
Every time Janet Yellen, the head of the Federal Open Market Committee, gives a speech, everyone is anticipating what will happen with interest rates.
The cost of borrowing money represented as a percentage of the loan value is known as the interest rate.
Because central banks manipulate interest rates to control the money supply and battle inflation, understanding interest rates is critical when discussing aspects such as the money supply and inflation.
If you’re wondering why these matters to you, consider this: interest rate changes affect the economy, and the economy affects your trading.
Example: Increasing the interest rates
This effectively makes borrowing money more difficult, and as a result, individuals spend less. As a result of the fall in spending, the demand for numerous things decreases, and as a result, the price of those goods decreases as well.
When the central bank fears that the economy is “inflamed,” it will often raise interest rates, making borrowing more difficult in order to reduce spending and cool the economy and avoid inflation.
Example: Decreasing the interest rates
As a result, we are able to borrow money more easily, and as a result, people’s spending increases. Higher spending equals increased demand for various items, and as demand for these goods rises, so will their costs.
When the central bank believes the economy is on the verge of a recession, interest rates will be decreased to encourage spending and foster economic growth.
money supply
The main role of any central bank is to control a country’s money supply.
By decreasing borrowing costs, central banks are effectively increasing the money supply.
The money supply is a measure of the entire amount of bills, notes, coins, loans, credit and other liquid instruments in circulation within a country’s economy.
Money supply is measured by M0, M1, M2 and M3, with M0 being the narrowest measure of money (cash and liquid assets), and M3 being the broadest.
The money supply is an important factor to keep an eye on, especially if you want to trade FX.
Increased money supply demonstrates early signs of inflation – if the supply of money exceeds the supply of goods prices are likely to rise – hello inflation.
The government used to set targets for the money supply’s growth rate and would frequently modify interest rates to force the supply to fall into their specified bands. Indeed, many argue that the over-manipulation of interest rates in the 1980s [a period when the US government feared the money supply was increasing proportionately out of control] was to blame for the subsequent economic downturn.
They appear to have learned their lesson; governments no longer push monetary growth to fall inside their goal ranges. Governments nowadays “play it by ear,” waiting for the right moment to act in order to maintain stability, control inflation, and promote long-term economic growth.
inflation
What is inflation?
We’ve spoken about inflation a lot in this module, and in case you haven’t got it yet; put simply inflation is ‘Rising prices’.
It can also be described as the sustained increase in the prices of goods and services.
What does inflation do?
Inflation causes what we call an erosion of the purchasing power of your money.
I.e. your money is worth less, you can buy less with your buck [or pound or euro] and its all because of inflation.
What causes inflation?
There are two main cause of Inflation:
Demand-Pull Inflation; this form of inflation occurs when aggregate demand outweighs aggregate supply. When there is more demand than there is supply, prices increase = inflation.
Cost-Push Inflation; this form of inflation occurs as a result of an increase in say the prices of wages and or of raw materials. These increased costs cause supply to decrease and consequently the amount of demand will outweigh supply. Again, where there is more demand than there is supply, prices increase = inflation.
What are the different types of inflation?
- Hyper-Inflation – Extremely rapid or out of control rising inflation
- Deflation – Falling prices – The opposite of Inflation
- Stagflation – Sluggish economic growth accompanied with rising inflation
- Disinflation – Slowing of Inflation rate
economic release
Every country in the globe will experience an economic release at some point in the future. A data release is the periodic dissemination of qualitative and quantitative economic data and/or news.
These data or press releases help to provide a picture of a company’s or country’s overall economic health. A higher business stock price or stronger native currency should imply a better economic outlook for a company or country.
This data/news can affect prices in both the short and long term, and traders will try to profit from any price movement caused by these economic data releases. As a result, investors will make investment decisions based on their perception of the recently revealed economic statistics.
Key Points of Economic Data
- The key to trading data is to look at the outcome of the data/news release in relation to the expected forecast.
- The larger the difference between the actual figure and the forecast figure, the greater the likely hood of a larger change in prices.
- The strength of importance of the data will also be a factor in determining strength of price moves.
An example of an economic data release is as follows;
U.S. Non-Farm Payrolls – [Released monthly] Measures the number of jobs created or lost each month excluding the agricultural sector.
| For the month of July we can see that… | – | – |
| The forecasted figure is | = | -65k |
| The prior figure is | = | -125k |
| The actual figure is | = | -131k |
| And finally, the revised figure is | = | –221k |
We can see here that the actual figure is more than two times the forecasted figure – and as we mentioned before the bigger the difference the more likely the fluctuation.
In this case, higher than expected unemployment rates is bad news, so there was an initial sell off on the Dollar.
what is technical analysis?
Now that we’ve spoken about fundamental analysis, what it means and what it consists of, let’s take a closer look at technical analysis.
What is technical analysis?
Technical analysis, as opposed to fundamental analysis, which is concerned with an asset’s intrinsic value and what its price should be, is primarily focused with pattern recognition.
Technical analysis is a subjective art that involves predicting future events based on historical price movements. Simply said, it assists investors in predicting what will happen in the future by examining at what has already occurred.
Why is technical analysis useful?
It’s a popular assumption that technical analysis is just a bunch of charts. Technical analysis requires a variety of abilities that, when used correctly, can boost the likelihood of a profitable transaction by predicting price action.
- Support & Resistance Levels + Pivot Points
- Trend Lines & Channels + Breakout Points
- Chart Patterns
- Trade Entry & Exit points
- Strategic Stop Loss points
Technical analysis can be looked at as another way of reducing your risk.
support and resistance
Support and resistance is a concept used within technical analysis that suggests that the market price of an asset will tend to fall and rise at certain predetermined levels.
Support
The support level is where the price tends to find support as it falls; it is more likely to “bounce” off this point than to break through it. If a price does break through its support, it will almost always continue to decrease until a new support level is found.
Resistance
Resistance is the polar opposite of support; it is the level at which the price tends to encounter resistance as it rises, and it is more likely that the price will “bounce” off this level rather than break through it.
When a price breaks past a resistance level, it usually continues to rise until it encounters another resistance level.
The diagram above gives an example of support and resistance levels.
The “zigzag” pattern that we see here has an upwards trend and shows us how new levels of support and resistance are determined as the market moves.
When the market moves up and then pulls back again the highest point before the fall was be identified as the price resistance level.
Similarly, as the market then moves up again, the lowest point reached before the increase began is the support level.
The reverse of this is true for a downward trend
How do I find support and resistance?
Now that you have a general idea of what support and resistance levels are it’s time to learn how to identify them.
Support and resistance levels aren’t exact numbers that can be calculated using a formula or rule, therefore it’s not as simple as A, B, C. A support or resistance level may appear to have broken, but we soon discover that the market was simply testing it, and the support and resistance levels are still in place.
Because support and resistance levels are frequently depicted as lines, even though they are not exact figures, it’s sometimes easier to think of support and resistance as zones rather than definitive levels.
The two types of support and resistance
There are essentially two types of support and resistance – major and minor.
A price can advance up, for example, breaking the minor resistance to test the major resistance, and as seen below, a price move against the trend is frequently halted by the minor resistance or support and reversed.
The more often a price tests the levels of support and resistance without actually breaking through them, the stronger the support and resistance zones are seen to be
trendlines and channels
Trendlines
“The trend is your friend” is a quote used often by traders and the theory behind it is simple; it’s perceived as easy to make money trading in the same direction as the trend.
- An uptrend line (successive higher highs and higher lows) is depicted as a line drawn along the bottom of easily identifiable support areas.
- In a downtrend (successive lower highs and lower lows), the trend line is drawn along the top of easily identifiable resistance areas.
Channels
Channels can be seen as adding a dimension to the trend line theory we referred to earlier
A channel is created simply by drawing a parallel line at the same angle of the uptrend or downtrend to create a channel.
- To make an uptrend channel, draw a parallel line at the same angle as the uptrend line and move it to where it touches the most recent high.
- Draw a parallel line at the same angle as the downtrend line, then move it to a place where it touches the most recent low to establish a downtrend channel.
[This should be done at the same time you created the trend line]
When prices hit the bottom trend line this may be used as a buying area
When prices hit the upper trend line this may be used as a selling area
indicators
There are essentially two groups into which technical indicators fall – leading and lagging indicators.
- Leading indicators fluctuate ahead of projected economic trends; they’re frequently used to forecast future movements, but they’re not always accurate.
- Lagging indicators are used to describe past movements rather than forecast future trends; they alter after the economy has already started to follow a certain pattern or trend.
lagging indicators
Moving Averages
A moving average is a sort of technical indicator used by traders to determine the average price of a securities over a period of time.
Simple moving averages [SMA] and exponential moving averages [EMA] are the two types of moving averages.
Simple Moving Averages (SMAs)
A simple moving average is calculated by adding up the last “X” period’s closing prices and then dividing that number by X.
If you plotted a 10-period simple moving average on a 1-hour chart, you would add up the closing prices for the last 10 hours, and then divide that number by 10. There you have a simple moving average.
A simple moving average reflects the market’s general mood at a given point in time. It can be used to detect support and resistance as well as provide buy/sell signals, and it helps to illustrate market direction by smoothing out market noise (price variations) over time.
We can see that the longer the SMA period is, the further it lags behind the current price; in other words, the bigger the number of periods you employ, the slower it is to react to current price movement.
One issue that traders frequently encounter with SMAs is that they are extremely vulnerable to price spikes.
Exponential Moving Averages (EMAs)
EMAs, as opposed to SMAs, give more weight to recent periods and react faster to recent prices. The current price will have more weight in the MA curve if the EMA period is shorter — the opposite is also true.
SMAs or EMAs
Now that you understand the differences between simple and exponential moving averages, you’re probably wondering when you’d utilise each and, more importantly, which is better.
The answer is either; it may sound cliche, but it actually relies on your trading style, as with most types of analysis.
Let’s look at the advantages and disadvantages of both SMAs and EMAs to see which one best fit your trading approach.
Simple moving averages do not respond as quickly to price changes as EMAs do, and they do not help you catch current trends as quickly or correctly as EMAs do.
BUT
Because EMAs react so quickly to price changes, a price surge can be mistaken as the start of a trend.
When looking at the market’s long-term and overall movement, SMAs are preferable. It works well for longer-term trends and prevents the price spikes that can occur when utilizing EMAs.
BUT
Although useful when looking at the long run, the slow reaction time of SMAs generates a price lag, making short-term changes more difficult to profit from.
After we’ve compared the two, it’s up to you to choose which one you want to utilise. Consider whether you’re seeking to spot a long-term trend or profit from a short-term change.
If you’re ever unsure, use both; the EMA to gain a basic picture of the overall trend, and the SMA to profit from short-term swings.
How to use moving averages
Moving averages are used to facilitate lots of trading strategies such as;
- Identifying trends and reversals
- Measuring the strength of market’s momentum
- Recognizing support and resistance levels
- Spotting potential entry and exit points
Identifying trends
As mentioned before, moving averages are lagging indicators; they do not predict new trends, but confirm trends once they have started.
Moving averages are often used to identify trends as displayed in the graph above. When the price of the product is higher than that of the moving average then the price can be said to be in an uptrend. For example many traders will only consider going long when the price is trading above a moving average.
The opposite is also true; in instances where there is a downward slope with the graph displaying prices lower than the moving average traders will use this to confirm a downtrend.
Identifying momentum with Moving Averages
The strength and direction of a market’s momentum can also be assessed by the use of moving averages.
On the graph below three moving averages have been applied;
Blue – EMA50 [short term]
Pink – EMA100 [medium term]
Orange – EMA200 [long term]
The three moving averages used here have varying time frames in an attempt to represent short-term, medium-term and long-term price movements.
In this graph an upward momentum can be seen in instances where the shorter-term averages are located above longer-term averages.
When the shorter-term averages are located below the longer-term averages, the momentum is in the downward direction.
Finding Support and Resistance with Moving Averages
At the same level as a significant average, a market’s falling price can come to a halt and reverse course. As a result, moving averages are frequently employed to determine levels of support and resistance on a chart.
The graph below shows an example of the 200-day moving average acting as a support level.
Shorter time frames will give you a weaker and less trustworthy perspective of a support level than moving averages based on longer time periods.
When the price goes below a significant moving average, it acts as a resistance level, which traders frequently use as a signal to take profits or close out any open long bets.
Because the price frequently bounces off the resistance and continues its downward trend, traders utilize these averages as entry points to go short.
Finding crossovers with Moving Averages
By determining when an uptrend or downtrend is beginning, moving averages can be utilised to produce buy and sell signals.
Moving averages can be used to determine up and downtrends, as we previously explained. As a result, moving averages can be utilized as a buy or sell indication.
A cross above a moving average can indicate whether it’s time to go long or close a short position.
A cross below a moving average might be seen as a signal to sell or close a long position.
The most common sort of crossover occurs when price goes from one side of a moving average to the other, as shown in the graph below.
Blue – EMA20 [short term]
Pink – EMA100 [long term]
When a short-term average cross through a long-term average it can mean momentum is shifting in one direction and that a strong move is approaching.
A buy signal is when the short-term average crosses above the long-term average.
A sell signal is when a short-term average cross below a long-term average.
leading indicators
As previously stated, leading indicators fluctuate ahead of projected economic trends; they are frequently used to forecast future movements but are not always accurate.
Let’s move on to the Relative Strength Index, which is a form of leading indicator, now that we’ve covered moving averages, which are an example of a lagging indicator.
Relative Strength Index (RSI)
The Relative Strength Index [RSI] measures the purchasing or selling momentum of a product by determining the pace and change of price movements. The RSI fluctuates between 0 and 100, and once it reaches 70, a market is considered overbought. This is a strong indication that the asset is becoming overvalued and is due for a correction.
When the RSI reaches 30, on the other hand, it indicates that the market is oversold and that the asset is likely to become discounted.
What does Overbought mean?
Overbought is a term used in technical analysis to describe a situation in which a market’s price has increased to such a degree – usually on strong volume – that an oscillator, such as the RSI, has hit its upper bound.
Simply put, it occurs when the demand for a product causes a market’s price to rise to unjustified levels.
When a product is overbought, it usually means the market has become overvalued and is about to face a pullback.
What does Oversold mean?
Oversold is simply the opposite to overbought.
Oversold is a condition in which a market’s price has fallen too much and too quickly in comparison to underlying fundamental considerations. This is typically caused by market overreaction or panic selling.
Overselling is usually seen as an indication that the asset’s price is becoming cheap, and it could be a good time for investors to buy.
Hopefully, you now have a better understanding of what it means to state an asset is overbought or oversold, but keep in mind that evaluating the degree to which an asset is overbought or oversold is subjective and varies amongst traders.
Stochastic Oscillator
Another example of a leading indicator is the Stochastic Oscillator, which is a momentum indicator that monitors the rate of change of price or the price impulse. It achieves so by comparing an asset’s closing price to its price range over a predetermined period of time.
Stochastic Oscillators, like RSI, have values that signal prospective trends or entry or exit points.
When the Stochastic Oscillator line rises over 80m, traders generally attempt to sell, believing that it will ultimately fall back below. Traders will also attempt to buy if the level goes below 20, assuming that it will rise above it.
Another way of utilizing stochastic oscillators is to watch timing trades. The graph below gives an example of this;
%K = Black
%D = Red
%K = (Current Close – Lowest Low)/ (Highest High – Lowest Low) * 100
%D = 3-day SMA of %K
The %K is called the faster moving of the two lines and compares the latest closing price to the recent trading range. %D is a signal line calculated by smoothing out %K; It is a 3-day simple moving average of %K which is plotted alongside %K to act as a signal or trigger line.
Traders will look to sell when the %K (Fast) line shifts below the %D (Slow) line and will look to buy when the %K line shifts over the %D line.
The concept behind this indicator is that prices tend to close near their highs in an upward-trending market and near their lows in a downward-trending market. When the %K crosses through the ” %D,” a three-period moving average, trade alerts appear.
The sensitivity of the oscillator can be adjusted by changing the time period for the %D or %K lines.
bollinger bands
Bollinger bands is an analytical tool used by traders to identify a market’s volatility and looks at the levels of current prices relative to previous trades.We can see from the above graph that in an instance where there is little volatility the bands contract and as the market becomes increasingly volatile the bands expand.
It may be simpler to look at Bollinger bands as a form of support and resistance.
Often what is seen with Bollinger bands is that as the price deviates within the band it often tends to return back to a middle ground; this is what is known as the Bollinger Bounce.
Often the bands can be seen to “squeeze” together such as in the graph below:
Many traders interpret a band squeeze as a sign that the market is about to break out. If the graph appears to be moving towards the upper band, an upward trend is likely. When the candlestick appears to be reaching the lower bound, the reverse is true.
An example of a “breakout can be seen below”:
A Bollinger squeeze is not common; on a 15-minute candlestick chart, it occurs just a few of times per week.
fibonacci sequence
The Fibonacci sequence is widely utilized in many different businesses around the world, which is why, of all the technical analysis methods we’ve examined thus far, it may sound the most familiar to you.
Leonard Fibonacci was an Italian mathematician who found a simple sequence of integers (Fibonacci numbers) that are now utilized in the popular technical analysis tool known as Fibonacci retracement.
Fibonacci Numbers are as follows; 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on.
The mathematical relationship between the numbers is more essential than the series itself. What matters to us is the quotient of any two adjacent numbers in the sequence; each term in this sequence is the sum of the two terms before it.
The Fibonacci retracement method involves selecting two extreme points on a chart and dividing the vertical distance between them by Fibonacci ratios. The quotients of adjacent numbers in the sequence are 23.6 %, 38.2 %, 50 percent, 61.8 %, and 80 per cent. Once these computations have been completed and the point determined, horizontal lines are used to mark them on the graph. Many traders interpret these lines as levels of support and resistance, and they can also be used to help identify critical locations for transactions and target prices or stop losses.
chart patterns
Technical analysis, like we said before, is not just about charts. It does, however, rely heavily on them and often uses chart patterns to assist in making trading decisions.
The underlying theory is that traders often expect chart patterns to repeat, and this prediction is what presents them with various trading opportunities.
The most common chart patterns are:
- Symmetrical Triangles
- Ascending Triangles
- Descending Triangles
- Double Top
- Double Bottom
- Head and Shoulders
- Reverse Head and Shoulders
Chart patterns – Triangles
Triangles represent continuation patterns and there are three main types;
Symmetrical Triangles – Neutral pattern signaling breakout to either side, though usually a continuation pattern
So how do you spot a systematic triangle pattern?
Symmetrical triangles have distinct pattern signs and these can be seen in the image below
- Upper trend line downwards sloping
- Lower trend line upward sloping
- Both trend lines converging together
- Breakout to upside or downside being confirmation of trend in that direction
The slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle.
In the below example of a systematic triangle the market is making lower highs and higher lows. This type of price activity is called consolidation.
Traders who utilize symmetrical triangles are frequently on the lookout for a breakout, or a point where the price swings decisively in one way or the other. A breakout generally occurs after a consolidation, as illustrated below; traders wait for the price to rise above or below the top or bottom trend lines, as explained in the Bollinger “squeeze.”
Ascending Triangles – Bullish continuation pattern
Ascending triangles also have pattern traits with which you can identify it.
- Upper trend line horizontal / flat
- Lower trend line upward sloping
- Both trend lines converging together
- Breakout to the upside through upper resistance
Ascending triangles are experienced in instances where there is a resistance level coupled with a slope of higher lows as seen below;
Again, traders will often wait to see if the price finally breaks the resistance level, at which point the price could breakout decisively to the upside as seen below
The alternative occurs when the resistance level proves too strong for an upward break through and the price move reverses downwards.
Descending Triangles – Bearish continuation pattern
Finally, there are descending triangles; Descending triangles are essentially the opposite of ascending triangles.
- Upper trend line downwards sloping
- Lower trend line horizontal / flat
- Both trend lines converging together
- Breakout to the downside through lower support
Above we can see a descending series of highs, which forms the upper line. The lower line is a support level in which the price cannot seem to move below.
Unlike with ascending triangles where traders are waiting for an uptrend breakthrough trader witnessing a descending triangle are expecting a bearish market and are waiting to see if the price eventually makes a breakout to the downside through the support level.
The alternative scenario will occur when the support level proves too strong for a downward break; the price will then be seen to “bounce” off of the support level and generally begin in an upward movement.
Double Tops – Reversal Pattern
A double top is a bearish reversal pattern that is formed after there is an extended move up.
The “tops”, as seen above, are peaks which are formed when the price hits a resistance level that appears it is unable to break.
The price bounces off the support level somewhat, as shown in the graphic above, before returning to re-test the support. A DOUBLE top chart pattern is generated when the price is unable to break through the support level for a second time and bounces off of it again.
Returning to the diagram above, we can see that the second “top” was unable to surpass the first’s peak. This trend shows that the purchasing pressure is reducing, which traders frequently perceive as a strong sign of a reversal.
Traders that use double tops as a method of analysis will frequently try to go short below the level known as the “neck line.” Traders will expect an upward trend to reverse if the price level goes below the neckline.
Double Bottom – Reversal Pattern
A double bottom is the opposite of a double top. It is a bullish trend reversal formation, meaning that unlike with double tops traders are now looking for the price to reverse upwards after it has been coming down.
Head and Shoulders
Head and shoulders is another form of a reversal pattern which has two main types;
- Head and shoulders – Pattern formation that indicates a reversal in an uptrend [bearish]
- Inverse Head and Shoulders – Pattern formation signalling a reverse in a downtrend [bullish]
Head and Shoulders
The “Head and Shoulders” is produced by a taller peak, the “head,” which is subsequently followed by another peak, the “shoulder.” Following this high peak [head], another shoulder indicating a lower peak can be seen.
Finally, we can observe that a neckline has been drawn by connecting the two dips’ lowest points. Although the neckline in this case is a straight line, it might slant upwards or downwards.
Traders utilizing head and shoulders will attempt to sell after the price falls just below the neckline, since this is regarded to indicate an imminent downward trend, similar to double
bottom and top formations.
Reverse Head and Shoulders
A reverse head and shoulders are pretty self-explanatory; it’s a head and shoulders formation, in reverse.
An inverse head and shoulders formation are a bullish reversal pattern and so traders will look to buy when the price increases above the neck line as they will be expecting an upward trend break through.
Japanese Candlestick Formations
Basic candlestick patterns – Spinning Tops
One of the most common candlestick patterns is the spinning top. This pattern is frequently seen as neutral, indicating uncertainty among buyers and sellers about an asset’s future moves.
Despite the fact that there may be a lot of price volatility over the day, the body of the spinning top is little, as we can see above. It’s also either green or red in color, indicating whether you’re feeling upbeat or downbeat.
Traders utilise the presence of a spinning top to determine whether an up or down trend is about to begin. For example, if a spinning top form after a long uptrend, it usually implies that purchasers have begun to lose interest and that a decline is on the way. The opposite is also true.
Basic candlestick patterns – Marubozu
At first glance, the Marubozu pattern appears to be very similar to the spinning top candlestick formation described earlier.
The Marubozu are larger than spinning tops and do not have shadows, which is one of the key contrasts between the two. Green and red, once again, represent whether the market is bullish or bearish.
In a bullish market, the open price equals the low price, and the high price equals the close price. Many traders may purchase into a market where they see a bullish Marubozu pattern since it is frequently considered as the initial element of a bullish continuation or a bullish reversal pattern.
The bearish Marubozu, which is shown in red, is the polar opposite. In this situation, the low price equals the close price, whereas the open price equals the high price. Many traders interpret the red Marubozu as an indication to sell into the market since it indicates an impending bearish reversal or continuation.
Basic candlestick patterns – Doji
Doji candlesticks are referred to as “neutral” since they do not reflect a clear upward or downward trend, implying that traders are undecided.
Doji candlesticks are similar to spinning top candlesticks in that they have small bodies; however, the body of a Doji candlestick is only a bar, as shown below. Doji candlestick patterns, like spinning tops, can be seen to cast extended shadows.
There are four main types of Doji candlesticks;
Let’s start with the long-legged Doji, where we can observe that the starting and closing prices were nearly identical. This long-legged Doji indicates that supply and demand are nearly balanced, and that a price turning point is nearing.
Then there’s the dragonfly Doji, which, like the long-legged Doji, appears when an asset’s opening and closing prices are equal. The extended bottom shadow, on the other hand, indicates that this equilibrium occurred during the day’s peak. The lengthier lower shadow indicates the possibility of a bearish trend reversal, signaling that the trend direction is reaching a major breakthrough.
Finally, a fourprice Doji is a candlestick formation in which the price of the day’s high, low, open, and close are all the same. This is the most neutral of all Doji candlestick forms, and it doesn’t happen very often. It occurs most frequently during periods of low trading volume, such as after hours, and is frequently dismissed by traders as the product of faulty data.
Although Doji Candlesticks are important, traders are mainly interested in their conjunction with previous patterns. A Doji candlestick, for example, emerges after a sequence of candlesticks with extended green bodies, indicating that purchasing pressure is weakening.
Basic candlestick patterns – Hammer and Hanging man
The hammer and hanging man look very similar with short bodies and long lower tails, but they have very different indications.
A bullish reversal pattern that emerges during a downtrend is the hammer, which can be seen above on the left in green. When prices are falling, hammers indicate that the support level has been reached, and prices are likely to start rising again. Traders frequently interpret a hammer man as a sign of coming price rises, but it is always better to wait and confirm a positive trend before buying.
The hanging guy, depicted in red above, is the polar opposite of the hammer man. It’s a bearish reversal pattern that frequently occurs to indicate a top or heavy resistance. When price rises, traders typically interpret the creation of a hanging man as a sign that downward selling pressure is greater than upward buying pressure.
Basic Candlestick Patterns: Inverted Hammer & Shooting Star
The inverted hammer occurs when a falling price indicates the possibility of a reversal. Its long upper shadow as seen below showing us that buyers are attempting to counter the downwards pressure and were able to close the session near its open as opposed allowing the price to be pushed down further.
The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when prices have been rising.
Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom. Conversely to the inverted hammer the shooting star shows us that sellers countered the upward pressure of buyers and were able to keep the day’s close almost equal to its open and avoid any further upward pressure.
conclusion
We’ve completed our study, and now that you’ve learned the fundamentals of both technical and fundamental analysis, it’s up to you to put what you’ve learned to good use. It depends on your trading style, goals, time frame, and a variety of other things. Don’t place yourself in a box and cling to a single style; variety is valuable. Each of these strategies compliments the others, so you can utilize any or all of them. Many investors utilize technical analysis and graphing to determine strategic exit and entrance opportunities, but fundamental analysis is used to determine which asset to trade. There are endless possibilities and opportunities – best of luck with your trading!
