In this blog we will share with the viewers the basic principles that you must master before risking into trading. In this article we are going to explain basic concepts to be able to read a chart properly, starting with candlesticks, forms of support and resistance, and the different methods to identify the general trend of the market. We will continue posting in this blog other articles as a continuation.
Candlesticks are the representation of the market on a specific timeframe, used in technical analysis, displays the high, low, open and closing prices. The first image represents the general meaning of a candlestick. You can observe that the green color represents bullish candle, the red represents a bearish candle. The opening price of the green candle is found in the bottom, while in the bearish candle it is found on the top.
Certain patterns of the candles on the chart indicates the next move of the market, in the next images we are going to show the main bullish and bearish patterns that can be found on the chart. Starting with the bullish reversal patterns, the most common patterns that can be observed on a chart are the Inverted Hammer, The Bullish Engulfing Pattern, The Hammer. These are the most common bullish patterns that can be seen on a chart. On the other side, the most common bearish reversal patterns are the Bearish Engulfing, The Falling Star, The Bull Fortress and the Star Turn. Meanwhile the patterns of continuation are found in the clear trend of the market as fluctuation of price before resuming moving depending on the trend.
Support And Resistance
Support and Resistance are very useful terms used in technical analysis, used to identify breakouts, possible targets and entry prices. A resistance line can become a support line if successfully passed, the same in the case of support line. There is several methods to identify Support and Resistance lines. It is not necessary to be a horizontal line, diagonal lines are also important to identify. In the first image you can observe clear Support & Resistance based on price movement.
In this second image, the support and resistance term is used whenever the price can hold a certain level, or can't pass through and close a candle above.
In the next image you can observe a support line found on clear trends, generally the support line is tested on several occasions during the continuation of a trend. Breaking below this support line and closing a candle below it means that there might be a reversal of the trend.
Other methods to identify Support and Resistance levels are by using the EMAs, mainly the 200, 50 and 20 EMA. Support and Resistance levels must be identified on larger timeframe starting from 1 hour to 1 day candles. The larger the timeframe is, you will be able to identify previous support and resistance lines that might have been tested months or weeks ago.
Identifying a Trend
In the last chapter of our article, we are going to explain the methods to identify the trend of the market. The main method is using the 200 EMA on the daily timeframe. If the price is above the 200 EMA, this indicates that we are in an uptrend, and this indicates that the most secure trades are going long. While if the price is trading below the 200 EMA this means that we are in a downtrend and indicates that short trades should be taken. This method is mainly used on 1D candlestick.
The other method, much easier, is by using the Heiken Ashi candlesticks. This type of candlesticks can be an easy way to identify the trend just by looking on the form of the candles and the color. In the next image we will show an example of Heiken Ashi candlesticks. The disadvantage of using Heiken Ashi candlesticks is that this type give late signals for entry and the reversal of the trend. The advantage of using it is that this type of candles can be used on a smaller timeframe to identify the trend and take entries, mainly on 1 hour to 4 hours timeframe.
This was a brief introduction to the markets. In the next article we are going to explain how to take good entries, setting a proper stoploss and identifying possible targets. Also we are going to discuss the main indicators used.
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