How do you enter a trade safely? Every new trader knows the situation. He sees a green candle, goes long and price retraces. The new trader exits the trade but then price continues higher.
Price seems to interact with certain levels. It touches a level several times before and after passing it. Obviously this would be a good spot to enter a trade. What are these levels?
Support and Resistance
If a level stands out, like a swing high or a swing low, when price returns there, it usually reacts with that level. A level like that is called support (if price approaches from the top) or resistance (if price approaches from down below). If a level is touched more than once it becomes more and more obvious. Orders start piling up around that level and price will react more heavily if it returns. If a level is touched from one side multiple times these orders get eaten up every time price comes there and eventually all orders are gone and price will break through that support- or resistance-level.
In trading technical analysis tries to predict future price devlopment by analyzing data of the past. Usually this data consists of price and volume. There are quite a few technical indicators, that help the technical analyst in his predicitons. They are derived of mostly but not limited to price and volume. Tradingview is one website that offers a lot of those indicators. In the following Tradingview and some charting basics will be introduced.
Tradingview is an instrument for technical analysis. It offers a variety of tools for that purpose. Let’s talk about the chart and the representation of the price. Tradingview offers different ways to look at the price. The most well known is a line representing the price going up or down over time from left to right. But usually technical analysts use some form of candle chart, because they offer additional information. The candle stick way of charting price action was invented at the imperial rice exchange in ancient japan. It is called candle chart, because the instrument somehow resembles a candle – with the cande body and the smaller “wicks” at the top and bottom. In a candle chart each candle represents a certain time frame, for example five minutes, one hour, a day or a week. But while a line only shows a certain point in this timeframe, the candle shows the development: the opening price at the beginning of the interval, the closing price at the end. The smaller wicks on top and the bottom of the candle represent the highest and the lowest price traded within that interval.
There are quite a few other ways of representing the price action like Heiken Ashi, Renko and others, but for the beginner candle charts is a good way to start.
Introduction to Trading Patterns
Sometimes during price action patterns emerge. These patterns led to certain outcomes in the past. One example of such a pattern is a triangle. Price becomes less volatile and starts compactification – until it breaks out, either up or down. The shape of the triangle can give a trader hints, too. For example ascending triangles tend to break out to the upside more often than descending ones.
There are all kinds of patterns: different kind of triangles, patterns that resemble a “head-and-shoulders” or a “cup-and-handle” or more exotic patterns like harmonic patterns. Looking at past data these patterns have certain probabilities on their outcome and thus let the technical analyst make some predictions for the future. This is no hard science nor is it clearvoyance. In most cases it is a game of probability and self fullfilling prophecy. A lot of traders are looking at the same pattern, expecting a similar outcome, making the same trade and making this pattern self fulfilling.
And so some traders use these kind of patterns to decide which side of a trade to take: buy or sell.