I set myself a goal to properly learn Technical Analysis in 30 days instead of only watching Youtube TA videos for entertainment. As a way to improve my own learning process, I will be making a series of posts on everything that I learned in bite-sized pieces.
As mentioned in my 1st post (Link), Technical Analysis is a process all about asking questions in order to understand the psychology of the market allowing you to make better decisions based on probabilities.
The first question you want to ask is "What's the general trend ?"
There are 3 Basic trends:
3 Sideways Trend
The trend is basically a series of price points over time that indicate a certain trend. The time frame needs to be taken into context as there can be a trend within a trend depending if you look at it on the weekly or 4-hour chart. You first want to detect the general trend over a longer timeframe before zooming in.
Support & Resistance
Markets are a place with supply and demand. Buyers are willing to buy at a certain price and Sellers want to sell at a certain price. This mechanic creates support and resistance zones because when the price gets too low at a certain point, buyers are going to step in which creates support. On the other hand, when prices get too high, sellers going to come in creating resistance.
The moment there are no more sellers, buyers will need to up their price if they want to buy causing a breakout, the moment there are no more buyers, sellers need to lower their price creating a breakdown. The more a certain Support/Resistance point managed to hold, the more likely it won't break below/above that.
The further back support & resistance go, the less weight it has because most buyers and sellers from that previous point will have moved on and no longer be in the market at that point. The only real exception to make is all-time highs or all-time lows and strong long term trend lines.
This is an uptrend pattern from the BTC/USD chart where the uptrend line had 6 touches on the top and only a couple on the bottom making it less likely to break to the upside. The moment it reached the strong longer-term resistance line ever since the end of the previous bull cycle, it broke down.
This is a recent downtrend pattern on the EOS/BTC 4-hour chart. There were 7 touches on the resistance line and 5 on the support line making it less likely for the price to break to the upside. When the market ran out of buyers, the resistance was broken forcing sellers to lower their prices resulting in a -10% move the days after.
3 Sideways Trend
This is a sideways trend pattern from the ETH/BTC 4-hour chart where there were 5 touches on the resistance line and 3 on the support line finally causing the price to break to the downside. Notice that the previous top became the support price which is often the case. Horizontal trendlines tend to be the most reliable when forming trend lines.
Support & Resistance prices on trends are never to the exact $ but have to be seen as approximations around the zone.
Previous Technical Analysis Lessons
Technical Analysis #1 | Basics
Free Software I use for Charts