In today’s more complex article, I would like to take a look at the technical analysis and some of its aspects.
Technical analysis is nothing more than the analysis of the current market price, and we use it to predict future price directions.
So, the technical analysis basically a work with the charts.
Although technical analysis is a broader concept that includes a lot of subcategories, we can divide it for our better understanding to:
1 # Technical Indicators
2 # Price action
Technical indicators and price action can be either combined or used separately. I will show this at the end of the article.
1 # Technical Indicators
The technical analysis contains indicators that can help you to analyze market, monitor if the market is either overbought or oversold, track other market players, follow decreasing momentum, determine short- or long-term trends, find divergences, and more.
The more indicators, the bigger the edge, they said.
Traders are trying to combine different indicators mainly to have more information to analyze the market and its direction. There is nothing easier than trying to open a long or short position and try to confirm your decision with as many indicators as possible.
Tip: Beware of confirmation bias, or have you ever entered the market just because you saw a clear short while ignoring other information?
There are many available indicators, standard ones and most commonly used can be found in Metatrader4. A practical information for setting up the trading platform can be found here. You will find there trend indicators, oscillators, momentums, volatility, and volume indicators.
In addition, you can browse directly the Metatrader official forum– where you can find countless custom or customized indicators directly from its users. If you know how to program, you can program your own as well.
You can trade manually or trade through automated trading systems.
Tip: Zdeněk wrote a very important series on how to start with ATS (automated trading systems) even if you are not a programmer.
Also, it is good to know that the indicators in your chart are based on past, not current prices, so you have to take it into the account when trading and making your analysis. An indicator can even show the price with smaller delay and therefore you enter the market with a small delay and for a worse price. It also depends on the timeframe and the traded instrument how this will affect you.
“I use price action,” it is the most common trader’s answer. This short answer paradoxically hides a complex trading system that includes many market approaches and trading styles.
The basis is a clear candle chart without indicators.
Traders usually trade with trend lines, support and resistance, Fibonacci retracements, pivots, and mainly through candle formations.
Candle formations are traded best on the candle chart, where the formations and candles are clearly visible. See picture below.
However, it is not possible to think that every spotted candle formation will make us money. It depends where the candle formation is located, whether it is close to the strong S / R levels, how strong the trend is, momentum, whether the formation is in the trend or against the trend direction, and so on.
As well as with the indicators, you can trade price action both in the trend and against the trend direction. Formations and indicators confirming the continuing trend may be a good tool for analyzing how to stay in position, but the trend can change, although information based on indicators and price action had confirmed its continuing tendency.
If the important news is published, it may happen that even a strong uptrend suddenly turns into a downtrend. Therefore, it is recommended to not trade when the main news is published, the news report can be found for example at forexfactory.com. The most important news is marked in red.
Combination of technical indicators and price action
Below is the figure of price action and RSI indicator:
If you don´t know the indicator RSI yet, see the picture bellow and check the blue vertical dashed lines, which identify the “overbought” area, and when the RSI line moves in this area, it signals a turn in the trend – to a downtrend. In all cases that had happened, the market went down.
On the contrary, with red lines, I highlighted places on the indicator when the level of the indicator went into the “oversold” area, where no trader wanted to sell anymore and everyone started to buy. The market then started to grow.
Technical analysis is a really complex topic, so we cannot write here about individual indicators, price action patterns or candle formations. But we will deal with it in the next parts.
For explanation and description of each indicator’s settings, please see this section: trading indicators, where the most important indicators will be presented together with their use in the market. The biggest problem of indicators is in their diversity. They offer so much information that they need to be filtered.
- Technical analysis based on price action requires a certain sense for the market and the significant knowledge of the charts.
- When using indicators during our technical analysis, be careful not to have too many indicators in the chart so that you do not even see the monitor. Following too many indicators will make you feel confused.
- Even the best and most accurate technical analysis based on price action, indicators, or both together will be useless if our psyche prevents us from entering the trade in the right moment- fear of losing.
- Read Zdenka’s article on confirmation bias, you’ll surely find it useful. The market will offer a perfect situation, all indicators indicating a clear and strong decline in the market. After “infiltration” of this information, you unknowingly sabotage any other market information, and you are blind to the information indicating continuing growth. It’s clear short!