Technical Analysis

3/24/2021 Technical Analysis
Technical Analysis
Site: Stock Market College Printed by: Letladi Paul Lamola

Course: Financial Markets Education Date: Wednesday, 24 March 2021, 8:41 AM
Book: Technical Analysis
https://learn.stockmarketcollege.com/mod/book/tool/print/index.php?id=217 1/123
Table of contents
Important note
What is Technical Analysis
Why Use Technical Indicators
What is a chart?
Line chart
Bar chart
Candle Stick
Japanese Candlesticks
Reading a candlestick
The Doji Signal
Gravestone Doji
Dragon y Doji
Long-Legged Doji
The Four Price Doji
Bullish Engul ng
Bearish Engul ng
Hammers
Inverted Hammers
Dark Cloud
Piercing Pattern
Bullish Harami
Bearish Harami
Morning Star
Evening Star
Kicker Signals
Shooting Star
Hanging-Man
Marubozu Candlestick
The Spinning Top Candlestick
Support and Resistance
Overbought and Oversold
Trend Lines
Identifying an Upward Trend
Identifying a Downward Trend
Identifying a Sideways Trend
Trend Line Breakouts
Trend Line Bounces
Patterns/Formations
Continuation Pattern: Symmetrical Triangle
Continuation Pattern: Ascending Triangles
Continuation Pattern: Descending Triangles
Continuation Pattern: Ascending Flags
Continuation Pattern: Descending Flags
Reversal Pattern: The Double Top Formation
Reversal Pattern: The Double Bottom Formation
Reversal Pattern: The Head and Shoulders Formation
Reversal Pattern:The Inverted Head and Shoulders Formation
Elliott Wave
Correction Pattern: ABC Wave Pattern
Correction Pattern: ZIG-ZAG'S
Zig-Zag: Flats
Zig-Zag: Triangles
Zig-Zag Combinations
Retracements and Reversals

Fibonacci Retracements
Market Shapes of Recession

Possible causes of Recession
L shape recovery
U Shape Recovery
V Shape recovery
W-Shape Recovery
Technical Indicators
Leading and Lagging Indicators
Moving Averages (Lagging)
Simple Moving Average (SMA)
Exponential Moving Average (EMA)
Linear Moving Average (LWMA)
Smooth Moving Average (SMMA)
Adaptive Moving Average (KAMA)
Double Exponential Moving Average (DEMA) (Lagging)
Triple Exponential Moving Average (TEMA) (Lagging)
Relative Strength Index (RSI) (Leading)
Bollinger Bands (Lagging)
Stochastic (Leading)
MACD (Lagging)
Williams % R (Leading)
Envelopes (Lagging)
Parabolic Stop and Reverse (SAR) (Lagging)
Standard Deviation (Lagging)
Important note
What is Technical Analysis
While Fundamental Analysis looks at the impact of various economies, company pro ts and losses, the news in general, Technical Analysis is a trading
tool that assists with deciding what shares to buy, when to buy and when to sell, volume, liquidity, trends etc.
What is Technical Analysis?
Technical analysis is used to assist with the analysis of market conditions, guiding a trader to analyse and predict market movement by way of price. and
volume. In order to do so Technical Indicators are used.
A. technical indicator is a mathematical calculation. using price and volume that aims to forecast market direction.
Technical indicators, collectively called 'technicals', are distinguished by the fact that they do not analyse any part of the fundamental business, like
earnings, revenue and pro t margins. Active traders in the market use technical indicators most extensively, as they are designed primarily for analysing
short-term price movements. The Long-term investors use di erent indicators to the active trader. The most e ective uses of technicals for a long-term
investor are to help identify good entry and exit points for the stock by analysing the long-term trend.
Why Use Technical Indicators
Indicators serve three broad functions: to alert, to verify and to predict.
An indicator alerts one to price action/movement. If momentum is decreasing, it may be a sign to watch for a break of support. Or, if there is a large,
positive increase, it may serve as an alert to watch for a resistance breakout.
More than one indicator can be used to con rm an action or prediction of the market. For example: If there is a breakout on the price chart, a
corresponding moving average, together with the use of the On-Balance Volume (OBV) indicator, could serve to con rm this breakout. The key to
successfully investing in stocks is to nd the indicator or combination of indicators that are the easiest for you to work with.
The chapters on Technical Analysis are designed to introduce the concept of technical indicators and explain how to use them in your analysis. We will
cover leading and lagging indicators and oscillators.
When choosing an indicator, choose carefully. It is recommended to use 3 to 4 indicators. Know the outcome of each indicator before applying to a chart.
Using more, may result in confusion and a lack of decision-making. Try to choose indicators that complement each other eg RSI and MACD, instead of
those that move in unison and generate the same signals (RSI and Stochastics). For example, it would be redundant to use two indicators that are good for
showing overbought and oversold levels, such as Stochastics and RSI, as both of these indicators measure momentum and both have
overbought/oversold levels. They operate in unison.
What is a chart?
A chart is made up of a large amount of data, and represented by certain symbols so as to promote understanding. A chart has an X- and Y-Axis
representing Time and Price.
3 commonly used charts are the line, bar and candlestick. It is important to know that certain types of charts are used to perform certain analyses.
These will be covered in detail.
Line chart
A line chart is the most basic type of chart and commonly used by new traders. A simple line chart connects one closing price to the next closing price
price by use of a line. When displayed on a chart connected together by a line, we can view the general price movement of currency pair over a period of
time. These high and low points eventually create trends. On a line chart the trend and momentum of the price movement is simple and quick to interpret.
Bar chart
A bar chart is a very popular charting method. In order to plot a bar chart, a price open, high, low and close is needed for a particular time period eg on a
day chart, a single bar represents one vertical bar. The high and low is represented by the very top and very bottom of the vertical bar. The close is the
short, horizontal line that crosses the vertical bar. The bar chart is also the foundation of the Candlestick chart.
The bar chart shows the 4 elements displayed on a typical price bar:
Opening price
Highest price
Lowest price
Closing price
On the above OHLC bars, they are coloured red and green:
If today’s close is higher than today's open – the bar colours green.
If today’s close is lower than today's open – the bar colours red.
If today’s close is equal to today's open – the colour of the bar is black..
Bar charts are used to identify trends. We will look at how they do so when we discuss Trends.
Candle Stick
Originating in Japan over 300 years ago, candlestick charts have become a commonly used indicator. As mentioned, Candlesticks originate from bar
charts. It is therefore very important that you clearly understand your bar charts.
For a candlestick chart, like the bar chart, an open, high, low and close is necessary.
The below image shows the Bar chart vs the Candlestick chart
Below is an example of a candlestick graph
Japanese Candlesticks
There are many signals with candlesticks that will either indicate an upward, downward or sideways trend indicating a break out or break down of the
currency pair.
The importance of Time Frames when trading Candlesticks
Setting your time frame on your trading platform is very important as each candle represents that particular time frame. Time frames include: 1 min, 5
min, 15 min, 30 min, 1 Hr, 4 Hrs, 1 daily, 1 weekly, 1 yearly.
A 30 minute delayed candlestick is based on the Open price, the 30 min delayed High and Low and the Close. A daily candlestick is based on the open
price, the daily high and low, and the close. A weekly candlestick is based on Monday’s open and Friday’s close. You would view a weekly range from
Monday (current) to Monday (week past), Tuesday to Tuesday etc.
The following signals indicate di erent directions in the market that may promote a buy or a sell: Doji, Gravestone, Long-legged, Bullish, Bearish,
Hammers and Inverted hammers, Piercing Pattern, Dark Cloud, Bullish Harami, Bearish Harami, Morning Star, Evening Star, Kicker Signals, Shooting Star,
Hanging-Man Doji. These will be covered in detail.
Reading a candlestick
To understand the Japanese candlestick patterns you need to understand what a candlestick shows you.
Candlesticks have 3 basic features:

The body: which shows the open to close range of the price movement for the selected period.
The wick, or shadow, which indicates the price high or low of the period.
The colour, which indicates the directions of price movement.Â Green/White is bullish (increased price movement) and Red/Black is bearish (decreased
price movement)
CANDLESTICK BODY: indicating open to close range.
If price movement was bullish (upward), the candle colour is either green or white and the lowest point of the BODY is the open price and the highest point
of the BODY is the close price as price opened low and closed high.
If price movement was bearish (downward), the candle colour is either red or black and the highest point of the BODY is the open price and the lowest
point of the BODY is the close price as price opened high and closed low.
The length of the body indicates the range of the price movement. The longer the body the greater the change in the price. Indicating the strength of the
market sentiment . No body, indicated by a line is indication of the price opening and closing at the same level. This shows indecisive trading, with no
movement of price.
CANDLESTICK WICK/SHADOW: indicating price high and price low.
The length of the wick indicates the range the price moved HOWEVER as it is not the body (which indicates open and close price) the wick/shadow shows
the price moved and returned before close to a previous price. In other words the price movement was met with resistance causing the price movement
to reverse. The longer the wick/shadow the greater the movement in the price before meeting resistance.
CANDLESTICK COLOUR: indicating price direction.
The colour of the candlestick indicates the direction of price movement for the time period selected.
GREEN / WHITE candles mean the price direction was upward with the price closing higher than it opened.
RED / BLACK candles mean the price direction was downward with the price closing lower than it opened.
The Doji Signal
With the Doji, the Bulls and the Bears are at loggerheads. This is an alert to warn traders of a possible trend reversal – up or down.
The Doji signal reveals a state of uncertainty due to a struggle between buyers and sellers awaiting news that could in uence the direction of the
market. This uncertainty can result in a sideways movement of the market.
When the Doji appears at the end of a trend, it implies that the trend may be ending and thereby creates a pro table trading opportunity as
market conditions might change.
Find the Doji signal by clicking on the correct candlestick pattern.
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Gravestone Doji
The Gravestone Doji forms when the open, low and close are equal. The high creates a long upper shadow, with an appearance similar to an upside
down “T.” This shows that the buying pressure pushed the market higher, only to have it brought back down to the open by the bears (sellers). The
Gravestone Doji is an indication of a possible turning point.
It is found in both bullish and bearish trending markets, however when found in an upward trending market the Gravestone Doji is a strong
indicator of trend reversal as it usually means price has hit and bounce o a resistance level, unable to break through.
Therefore in a bull market, it is a possible SELL (Short) signal.
Find the 1 Gravestone Doji signal by clicking on the correct candlestick pattern.
Dragonfly Doji
The Dragon y Doji is a bullish candlestick and signi es price reversal. This Doji
is opposite to the Gravestone Doji and appears as a red "T" candlestick on a chart.
How Does a Dragon y Doji Work? Prices open at a high, where there has been a sell o and returns to the opening price. A dragon y forms when
there is early pressure forcing the security down, then nds support, and buying pressure pushes the security back up resulting in a green
candlestick after the red "T". Even though a signi cant indicator of price reversal, always wait for break out con rmation from the next candlestick.
It is found in both bullish and bearish trending markets. However, when found in a downward trending market, the Dragon y Doji is a strong indicator of
trend reversal as it usually is found when price hits a support level and bounces back to return to the open price.
Therefore if found in a bearish market it is a possible BUY (Long) signal.
Long-Legged Doji
Recognized by a long upper AND lower wick/shadow with an extremely short or non existent body resembling a cross. The upper and lower
wick/shadow have to be of equal length.
It indicates equilibrium in supply and demand (buyers and sellers) and therefore could be a trend reversal signal.
It is therefore found in both bullish and bearish trending markets (upward or downward trend) where there is uncertainty.
Find 1 Long-legged Doji signals by clicking on the correct candlestick pattern.
The Four Price Doji
4 Price Doji
The 4 Price Doji is simply a horizontal line with no vertical line above or below the horizontal. This Doji pattern signi es the ultimate in indecision
since the high, low, open and close by the candle are the same. The 4 Price Doji is a unique pattern signifying once again indecision, an extremely
quiet market or trading volume is too thin.
When a four price Doji forms, it shows us that the market hasn’t moved anywhere. If there were any trades, these were all executed at the same price, with
no price uctuations whatsoever. Traders should avoid trading securities that often perform four price Dojis, since the trading volume is too thin and is
exposed to slippage.
Slippage refers to the di erence between a trade’s expected price and the actual price at which the trade is executed.
Bullish Engulfing
On a day chart, the body of the second day completely engulfs the body of the rst day. (Colour green). This signal suggest the
buyers (bulls) are very active and suggests a change in the direction to an upward trend.
The Bullish Engul ng signal suggests a very high probability of a trend reversal as buying pressure increases. This Bullish (positive
trend) Engul ng Pattern is formed after a downward trend after opening lower than the previous day’s close and closing higher
than the previous day’s open. It is a possible BUY (Long) signal. In this two-stick candle pattern, the third candle immediately
following the pattern must be observed with a close that is higher than the previous candle's close, to ensure the change in
direction. It indicates a long (BUY) trade opportunity.
Find the Bullish Engul ng Doji signal by clicking on the correct candlestick pattern.
Bearish Engulfing
This pattern is the opposite to the Bullish Engul ng candle. Here, the body of the second day (green/red) fully engulfs the body
of the previous day (green/red). This shows the Bears are in control, suggesting prices will decrease, resulting in a downward trend
reversal. It is important to wait for con rmation of trend before acting. The third candle after the two-stick pattern will con rm the
trend.
This Bearish (downward trend) Engul ng Pattern is formed after an upward trend and opens higher than the previous day's close
and closes lower than the previous day's open. This signal indicates a negative or downward trend and is a possible opportunity for
you to go SELL (Short),
Find the 2 Bearish Engul ng Doji signals by clicking on the correct candlestick pattern.
Hammers
The hammer is recognized by its appearance as resembling a hammer and was named such as it is a signal indicating the market is hammering
out the bottom. It looks identical to the Hanging man but the di erence is that the hammer is found in a downward trending market, and the
hanging man is found in an upward trending market.
The Hammer Doji appears at the bottom of a downward trend. The lower shadow should be at least two times the length of the body. The colour
of the body is green/white signalling Bullish indications. This shows that the bulls are taking charge. The candle immediately following after the
hammer needs to be a green/white candle, twice the size of the hammer in order to con rm a positive trend. On con rmation, this will be a BUY
(Long) trade opportunity.
The hammer has a lower wick/shadow that is about two or three times the length of the candle body and has little or no upper wick/shadow. The body of
the candle is always at the top of the candle (price range). It is found only in a downward trending market. In a downward trending market, the hammer
signals the near end of the trend and the possible reversal of direction. It is a bullish reversal signal. The candle immediately following the hammer should
be bullish indicating the trend reversal and should be at least twice the size of the hammer’s body.
Find 1 Hammer signal by clicking on the correct candlestick pattern.
Inverted Hammers
The Inverted Hammer Doji appears at the bottom of a downward trend. The upper shadow should be at least two times the length of the body.
The colour of the body is green/white signalling Bullish indications. This shows that the bulls are taking charge. The candle immediately
following after the hammer needs to be a green/white candle twice the size of the hammer in order to con rm a positive trend. On con rmation,
this will be a BUY (Long) trade opportunity.
Find 1 Inverted Hammer signal by clicking on the correct candlestick pattern.
Dark Cloud
The Dark Cloud signal is a two candle pattern found in an upward trend that is recognized by a gap between the close of the rst candle
(bullish) and the open of the second candle (bearish) which is also a long candle indicating a strong con rmation of reversal.
It is a two candle pattern with a third candle con rming the trend reversal. The body of the rst candle is green/white and the body of the
second candle is red/black. The second candle (black/red) opens higher, above the trading range of the rst candle (green/white). If the price
of the third candle (red/black) opens 50% or lower than the closing price of the second candle, a downward trend reversal is con rmed.
After a strong uptrend, the market conditions are Bullish but before the end of the second candle (red/black), the Bears step in and cause a sell-o forcing
the price downward.
The rst candle is always bullish (green/white) and the second candle is always bearish (red/black). The second candle (bearish) must close at least half
way down the rst (bullish) candle. Remember if the second candle (bearish) closes below the open of the bullish candle it would turn these candles into a
Bearish Engul ng pattern.
It is found in an upward trending market and signals a possible trend reversal. It is a possible SELL (Short) signal. The candles immediately following the
pattern must be observed to ensure the change in direction.
Find the Dark Cloud signal by clicking on the correct candlestick pattern.
Piercing Pattern
The Piercing Pattern is a two candle pattern with a third candle con rming the trend reversal. The body of the rst candle is red/black and the
body of the second candle is green/white. It signals a two candle pattern found in a downward trend that it is recognised by a gap between
the close of the rst candle (bearish) and the open of the second candle (bullish) which is also a long candle indicating a strong con rmation
of reversal. After a strong down trend (bearish) (red/black), but before the end of the second candle (green/white), the Bulls step in and price
closes near the high of the previous candle. One needs to wait for the third candle to form a gap higher than the close of the second candle
to con rm the trend reversal.
The Piercing Pattern is the opposite of the Dark Cloud pattern, appearing in a downward trend as opposed to the Dark Cloud which is only found in an
upward trend. It is found in a downward trending market and signals a possible trend reversal. It is a possible BUY (Long) signal. The candles immediately
following the pattern must be observed to ensure the change in direction.
The longer the black/red candle and the green/white candle, the greater the reversal of the trend.
The greater the gap down from the previous candle close, the more pronounced the reversal.
The higher the white/green candle closes into the black/red candle, the stronger the reversal.
Large volume during these two candles is a signi cant con rmation of a possible positive trend.
Find the Piercing Pattern signal by clicking on the correct candlestick pattern.
Bullish Harami
A two candle pattern forming in a downward trend. The body of the rst candle is the same colour as the current trend and should be a long
black/red candle. The body of the second candle is white/green and opens and closes within the body of previous day’s candle.
This signi es after a strong downward trend the Bulls step in and open the price higher than the previous candle's close. This is a worry for
the bears and traders who have gone short who then begin closing their positions. A strong candle after that would convince everybody that
the trend may be in a reversal.
The size of the second candle will in uence the size of the reversal. It is a possible BUY (Long) signal. The candles immediately following the
pattern must be observed to ensure the change in direction.
Find the 2 Bullish Harami signals by clicking on the correct candlestick pattern.
Bearish Harami
The Bearish Harami is a two candle pattern forming in an upward trend. The body of the rst candle is the same colour as the current upward
trend which should be a long white/green candle. The body of the second candle is black/red that opens and closes inside the body of the
previous candle.
After a strong upward trend the Bears step in and open the price lower than the previous candle's close. The price nishes lower for the
candle and due to the decrease in the price the bulls start to close out their trades to take pro ts fearing further decrease in price.
The Bearish Harami is the exact opposite of the Bullish Harami. Its presence indicates that the positive trend is over. It is a possible SELL
(Short) signal. The candles immediately following the pattern must be observed to ensure the change in direction.
Find the Bearish Harami signal by clicking on the correct candlestick pattern.
Morning Star
This three candle pattern is found at the bottom of a downward trend. The body of the rst candle is black/red and con rms the current
downtrend. The second candle is an indecisive candle signaling indecision by traders. The third candle is white/green and should close at
least 50% up the rst black/red candle.
After a downward trend the Morning Start signal shows the Bulls taking control as the price opens higher than the previous candle's close.
The price continues to increase and closes higher that open which causes the Bears to be concerned and begin covering their short
positions.
It is found in a downward trending market and signals a possible trend reversal as buyers increases. It is a possible BUY (Long) signal. The candles
immediately following the pattern must be observed to ensure the change in direction.
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Find the Morning Star signal by clicking on the correct candlestick pattern.
Evening Star
This three candle pattern is found at the top of an upward trend. The body of the rst candle is white/green, as it is part of the upward trend.
The second candle is an indecisive candle that signi es indecision by traders. The third candle is black/red and should close at least halfway
down the white/green candle.
This pattern shows the bears taking control and lowing the price after a upward trend. The bulls react to the bears by closing their positions
and taking pro ts before the price declines further.
This pattern is a top reversal signal. It is exactly the opposite of the Morning Star signal being formed after an obvious upward trend. The Evening Star
signal would have a gap before and after the star candle (second candle)
It is found in an upward trending market and signals a possible trend reversal as sellers increases. It is a possible SELL (Short) signal. The candles
immediately following the pattern must be observed to ensure the change in direction.
Find the Evening Star signal by clicking on the correct candlestick pattern.
Kicker Signals
The Kicker signal works equally well in both an upward (Bullish) and a downward (Bearish) trend. It is especially important when it occurs
in overbought or oversold market conditions.
It is formed by two candles. The rst candle opens and moves in the direction of the current trend. The second candle opens at the
same open of the previous candle, a gap opens and heads in the opposite direction of the previous candle. The bodies of the candles are
opposite colours. This pattern suggests a signi cant reversal in trend. The candles immediately following the pattern must be observed to ensure the
change in direction.
Find the Kicker signal by clicking on the correct candlesticks
Shooting Star
The shooting star looks identical to the inverted hammer but the di erence is that they are each found in opposite trending markets. The
inverted hammer is found in a downward trending market, and the shooting star is found in an upward trending market.
The shooting star has an upper wick/shadow that is about two or three times the length of the candle body and has little or no lower
wick/shadow. The body of the candle is always at the bottom of the candle (price range). It is found only in an upward trending market.
In an upward trending market, the shooting star signals the near end of the trend and the possible reversal of direction and also can mark a
resistance level. It is a bearish reversal signal. The candle immediately following the shooting star should be bearish indicating the trend reversal and
should be at least twice the size of the shooting star’s body.
Find the Shooting Star signal by clicking on the correct candlestick pattern.
Hanging-Man
The hanging man looks identical to the Hammer but the di erence is that the hammer is found in a downward trending market, and the
hanging man is found in an upward trending market.
The hanging man has a lower wick/shadow that is about two or three times the length of the candle body and has little or no upper
wick/shadow. The body of the candle is always at the top of the candle (price range). It is found only in a upward trending market.
In a upward trending market, the hanging man signals the near end of the trend and the possible reversal of direction and also can mark a
resistance level. It is a bearish reversal signal. The candle immediately following the hanging man should be bearish indicating the trend
reversal and should be at least twice the size of the hanging man body.
Click on the below image to nd the Hanging-Man Doji signal.
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Marubozu Candlestick
The Marubozu candlestick pattern is an easy to spot candle signal. It comes in both a bearish (red or black) and a bullish (green or white) candle
formations.
A Bullish marubozu has a long White/Green real body. The bulls were in full control that day. The stock closed higher than it opened. It didn't have
a higher or lower price that formed.
The Bearish marubozu candle has a long Black/Red real body. The bears had control and drove price down. It closed lower than it opened. No high or lows.
These signals are at times referred to as a White Marubozu and Black Marubozu.
Depending on where a Marubozu is located and what colour it is, one can predict market direction.
If a Green/White Marubozu occurs at the end of an uptrend, a continuation is likely.
If a Green/Wite Marubozu occurs at the end of a downtrend, a reversal is likely.
If a Red/Black Marubozu occurs at the end of a downtrend, a continuation is likely.
If a Red/Black Marubozu occurs at the end of an uptrend, a reversal is likely.
It is always important to con rm the candles that appear after the Marubozu. If the next few candles con rm your forecast.
The Spinning Top Candlestick
The Spinning Top identi es key points of support or resistance. When a Spinning Top is formed after a bullish move, it can signal a bearish trend.
The Spinning Top signi es weakness in the trend but not necessarily a trend reversal and indicates uncertainty in the market. Paying attention to the
candles following the Spinning Top is important to con rm if there is a possible trend reversal. However, if found on a support or resistance level, the
Spinning Top is a strong indication of a trend reversal. A Spinning Top pattern with its single candle indicates uncertainty in the market. The candlestick
itself is de ned by a short body surrounded by long wicks on either side.
The Spinning Top can be either bullish or bearish at the close of the candle. This candlestick pattern is often located within an uptrend or downtrend
signifying possible reversals.
Trading with the Spinning Top candle involves understanding how it is formed and where it sits in relation to the overall market trend. The example below
goes through identi cation, con rmation and execution of using the Spinning Top.
Support and Resistance
What Does Support Mean? Support is a price level on a stock chart where historically the stock has had di culty falling below. The price level acts as a
oor and prevents the price of the stock from falling any further. There are two ways the stock will test this level of support:
. Either the stock will fall to this level and then “bounce” o of it and begin to rise again or…
. The stock will fall to this level, break through it, and continue dropping until it nds another level of support, a resting spot so to speak.
The more times a stock falls to the level of support and bounces o it, the more signi cant (stronger) the price level becomes.
What Does Resistance Mean?
Support and resistance levels are horizontal price levels that typically connect price bar highs to other price bar highs or lows to lows, forming horizontal
levels on a price chart. Resistance in a sense is the opposite of support. Resistance is a price level on a chart where historically the stock has had
di culty rising above. This price level acts as a ceiling and prevents the stock from rising any further.
The stock price will test the resistance area in the same two ways as it does an area of support. Either it will bump up against it and reverse in the down
direction, or it will break through it and continue rising.
What Causes Support and Resistance?
When you rst learn about support and resistance it seems almost mystical that an imaginary spot on the chart can hold prices back. Let’s take a look at
how they are created. A support level is created at a point where “buying pressure” exceeds selling pressure and the decline in price is halted. The
sellers drove the price of the stock down and then the bargain hunter buyers step in and start buying the stock, which in turn causes it to reverse and
start to rise again. Those that missed out on buying the stock at a discount the rst time wait for another buying opportunity. The next time the stock
falls to that price level (support) they jump in and buy it to take advantage of the low price. This buying pressure causes the stock price to rise again. If
the stock falls to the support area and the sellers win out over the buyers (more selling pressure), the stock tumbles and nally breaks through the
support line. Majority rules!
A resistance level is created at a point where “selling pressure” exceeds buying pressure and the rally in stock price is halted. The stock will rise to a
certain point. People who believe the stock has peaked will begin to sell, which in turn causes the stock to reverse and fall in price. Those that decided to
hold onto their stock see this kind of price action and when the stock rises to that point again they decided to sell and lock in their gains. And once again
this selling pressure causes the stock to reverse and fall again. The moment the buyers win out over the sellers (more buying pressure), the stock breaks
through the resistance barrier and continues to rise higher.
Support and resistance levels reverse roles once they are broken. A previous support level will become a resistance level once broken through and a
previous resistance level will become a support level once broken through.
Support and Resistance always run horizontally, not at an angle. It’s a common practice of traders to draw horizontal lines (trend lines) on the stock
chart to identify where there is support and resistance.
Drag the applicable objects to a Support and a Resistance level on the chart
 Check
Overbought and Oversold
Shares/currencies move into overbought and oversold conditions, where entering trades in these conditions is risky as a reversal in trend is expected.
Overbought: A technical condition that occurs when there has been a lot of buying and the price of the stock is considered too high and susceptible to a
decline.
Oversold: A technical condition that occurs when there has been a lot of selling and the price of the stock is considered too low and a rally in prices is
anticipated.
The indicators used to identify overbought or oversold conditions are the Stochastic and Relative Strength indicators. We will discuss Overbought and
Oversold when looking at the Stochastic, RSI and MACD oscillator indicators.
Trend Lines
Trendlines are straight lines that are drawn on a stock chart along at least two price highs or price lows, with a third point to
confirm the validity of the line. Trend lines are very basic, yet powerful tools used in technical analysis. They are used to highlight the
general direction of a stock’s price movement. Trend lines are based on the idea that a stock, or the market, moves in trends
(upwards, downwards, and sideways). It can be assumed that prices will continue in the direction of the trend until the trend is broken.
There are three types of trends:
. Downward Trend (Bearish)

. Upward Trend (Bullish)
. Sideways (Range)
Trends can be narrowed down into three time frames:
Short-term
Medium-term
Long-term
There is no set time frame (days, weeks, months, etc.) that can define each of these terms. It depends on the instrument you are trading eg if you are
trading a derivative, as an intra-day trader, you are looking at trends where time frames are intra day eg 15 min, 1 hr, 4 h, 1 Day labelled a short-term
trend. .
In order to see the borders of a possible trend line we need to draw another line parallel to the trend line, which is called a channel line. The channel
line is built using one or two maximum points (Highs) in an uptrend or using minimum points (Lows) in a downtrend. This is the way a trend channel is
formed. The trend line becomes more significant (stronger) as more prices touch the line.
The main rule of trading in the trend channel is to buy in an uptrend and sell in the downtrend. Thus, we can see that the trend channel is essential to
trade within the bounds of the existing tendency, which is limited by it.
There are also strength levels besides trend lines. A strength level is a price level in which a price movement stops or changes its direction. There two
types of strength levels:
1. Resistance trend line – is a price level, which is prevented from increasing by the market participants. Simply put, if this level is reached, than
everybody starts selling.
2. Support trend line – is the price level, which is prevented from decreasing by the market participants. Similarly, if this level is reached, than
everybody starts buying.
As long as the price action runs within the channel, the upward or downward direction continues. Should the pricing break out of the channel a
change in direction occurs.
Trend lines are primarily used to gauge and manage direction and possible breakouts.
The following levels can also be used as strength levels:
Trend and channel lines;

Historical price level – maximum or minimum price values reached throughout the history of trading. Traders will use these levels
(historical chart) to help identifying the momentum of the chart.
Psychological level – this level results from round price values, eg16 000 or 16 500. As a rule this phenomena is caused by human
psychology, as it is always easier to operate with round price values.
All those levels can represent resistance or support depending on whether the price is higher or lower than this level at the current
moment.
Price movement always has its direction. The duration of this movement can vary from several minutes to several months. Let us look at
the 3 types of trends in more detail in the next chapter.
Identifying an Upward Trend
An upward trend line is used when prices have been rising. To draw an upward trendline - draw a straight line from left to right, across the price lows in an
upward direction. Make sure to get as many price lows (at least 2 to 3) to touch or very close to the line. As long as prices stay above the trend line the
uptrend is considered in tact.
How to identify an upward trend?
Upward momentum: Where price gradually builds to create higher highs and higher lows.
An upward trend, see example below - shows a high (H), moving to a higher high (HH) which is higher than the previous high. It drops to a higher low
(HL) which is higher than the previous higher low (HL). The overall price movement is upward in direction.
For this trend to change direction con rming that the buyers' momentum has stopped, it must cross down the most recent higher low (HL) support
level. Always use more than one indicator to con rm this change.
This image demonstrates an upward trend line.
01:02
Drag and Drop the objects to show upward trends
 Check
Identifying a Downward Trend
When prices begin to fall in a general downward direction, a downward trend line is used to assist with con rming direction. To draw a downward trend line
- draw a straight line in a downward direction along at least two price lows (Support Level). Con rm this direction by drawing another line along the price
highs (Resistance) - Forming the downward channel. All price action is below the trend line. Make sure to get as many price highs (2 to 3 minimum) to
either touch or be very close to the line. As long as prices stay below the trend line, the downward trend is considered in tact. Bearish trading strategies
and downward trend lines are a great compliment to each other.
How to identify a downward trend?
A downward trend, see example below, is started with a low (L) moving to a lower high (LH), it drops to a lower low (LL), which is lower than the previous
low (L). The overall price movement is downward in direction, where price gradually builds to create Lower highs and Lower lows. For a change in direction
or breakout, the price needs to break the lower high (LH).
See example below of a downward trend.
01:11
Drag and Drop the objects to show downward trends
 Check
Identifying a Sideways Trend
A side-to-side trend is often called a channel. It’s when stock prices have been moving up and down between two parallel price barriers.
To construct the trend lines for a channel you draw a horizontal line across price highs AND across price lows where at least 2 or 3 points touch or come
close to the line. A sideways channel will form.
The upper line is commonly referred to as the resistance level and the lower line is referred to as the support level.
Many traders make the mistake of assuming that a trend is changing just because the stock price closes outside of the trend line. While this may be the
case, there are generally three situations that can occur if the stock closes outside of the trend line.
. Prices will stay outside of the trend line for a day or two, and then drift back into their previous direction - this happens when news comes out that is
driven by expectation and market sentiment appears to drive the price out of the channel, but if the news is not what is expected, the prices moves
back into the channel. This is a false breakout.
. Prices will break the trend line and drift in a horizontal channel for a period of time. This break is also driven by market and investor sentiment - the
time period is not pre-determined. This is a false breakout.
. Prices will break the trend line and create a new trend in the opposite direction. This could be for a period of 4 or 5 days or longer and result in a
positive breakout.
Trend lines are used in many ways, one is to con rm the entry or exit of a trade thereby maximizing and/or minimising pro ts.
01:12
Drag and Drop the objects to show sideway trends
 Check
Trend Line Breakouts
A breakout, either bullish or bearish, occurs when the price trades beyond the support or resistance levels of an existing trend. This happens when
volatility and momentum increases. Price usually trend in the breakout's direction resulting in trend reversal trades, When a breakout occurs it is generally
the start a new trend.
A conservative trader would wait for a 3 candle body close to con rm the trend reversal, whereas an aggressive trader would possibly only look at a single
candle close. See below.
How do we interpret a breakout?
Bullish breakout: To trade this breakout (upward trend) you would buy when prices break outside of the Resistance level.
Bearish breakout: To trade this breakout (downward trend), you would buy when prices break outside of the Support level.
If the price closes outside of a trend line, always assess the volume and how it broke out of the trend. In the case below, there is a large gap in price action
and higher volume. Because of the gap in prices and the higher volume (aggressive movement), this would be considered an upside breakout. The high
volume and gap in prices strengthens the possibility that this is a valid trend change.
Example of a Bullish Breakout
Example of a Bearish Breakout
Drag and Drop the objects to show trend breakouts
 Check
Trend Line Bounces
A trend line bounce occurs when the price action is in uenced by market sentiment, ie by the volume of traders supporting the price direction, either an
increase in sellers or buyers. If the bulls and bears exert the same in uence in their volumes, the price trends sideways until market sentiment changes
enough to in uence the price movement.
Trend line bounces are trend continuation trades. You would participate in this type of trade if you expect prices to continue in the direction of the trend.
A trend line bounce occurs when prices move - (dip) toward the line, touch it, then bounce o and reverse back into their original direction.
Drag and Drop the objects to show trend line bounces
 Check
Patterns/Formations
Trend lines are used in the formation of CHARTING PATTERNS which help identify points in the chart where the price is potenially expected to move. A
pattern is found within a chart when prices are plotted and is repeated over a period of time.
In technical analysis, transitions between rising and falling trends are often signaled by price patterns. By de nition, a price pattern is a recognizable
con guration of price movement that is identi ed using a series of trendlines and/or curves. When a price pattern signals a change in trend direction, it
is known as a reversal pattern; a continuation pattern occurs when the trend continues in its existing direction following a brief pause. Technical
analysts have long used price patterns to examine current movements and forecast future market movements.
There are three kinds of patterns/formations:
1. Continuation patterns: A continuation pattern is a pattern formation which shows a tendency for the trend to continue in the same direction it was
before whether up or down. We will cover the following continuation patterns:
symmetrical triangles
ascending triangles
descending triangles
ascending ags
descending ags
2. Reversal patterns: A reversal pattern is any pattern on a chart that indicates a previous trend is changing to a new trend. You usually nd these
patterns at a major resistance and support levels. We will cover the following reversal patterns:
double top formation

double bottom formation
head and shoulders
inverted head and shoulders
3. Correction Patterns/Waves: In this pattern, the market or share attempts to move against the trend very slightly, struggling against the overall trend,
wanting to break out. The share struggles to keep the momentum, correcting itself and continues moving in the general direction of the overall trend. It is
a bullish attempt in a bearish trend or a bearish attempt at a breakout in a bullish trend. We will cover the following correction patterns:
Elliott Wave
ABC wave pattern
zig-zag's ( ats, triangles and combinations)
Continuation Pattern: Symmetrical Triangle
With the Symmetrical triangle the trading range does not ascend or descend but rather the highs and the lows form trend lines that move toward each
other forming a triangle. There is a breakthrough at the point where the highs and the lows meet. This formation usually results in the price moving in
the same direction as the current trend.
For example, in the image below, the current trend is bearish before the formation of the symmetrical triangle and continues moving in a downward trend
after the formation of the pattern.
In the below example, the prevailing trend is bullish at the formation of the symmetrical triangle pattern and continues to move in an upward trend after
the pattern has formed.
Drag and drop the object to show the symmetrical triangle pattern on the below chart
 Check
Continuation Pattern: Ascending Triangles
The Ascending Triangle pattern is identi ed by the formation of a horizontal line at the top of the triangle. The price highs form a at line being a
resistance level while the price lows tend to move higher until the point where the upward trend line on the price lows meets the resistance level at the
price highs. The upward trend in the price lows indicates an increase in the demand for the pair (buyers increase) and should the buyers maintain their
pressure the price is likely to breakthrough the resistance line of the triangle and continue in the direction of the prevailing trend. Ascending Triangle
patterns are found in an upward trend where the trend is bullish.
Drag and drop the object to show the ascending triangle pattern on the below chart
 Check
Continuation Pattern: Descending Triangles
The Descending Triangle pattern is identi ed by the formation of a horizontal line at the bottom of the triangle. It is the opposite of the Ascending
Triangle. The price lows form a horizontal line being a support level while the price highs tend to move lower until the point where the downward trend line
on the price highs meets the support level at the price lows. The downward trend in the price highs indicates a decrease in the demand for the currency
pair (sellers increase) and should the sellers maintain their pressure the price is likely to breakthrough the support line of the triangle and continue in the
direction of the prevailing trend (downward). Descending Triangle patterns are found in a downward trend where the trend is bearish.
Drag and drop the object to show the descending triangle pattern on the below chart
 Check
Continuation Pattern: Ascending Flags
The Ascending Flag formation is formed by a sharp increase in price in an upward trend which represents the ag pole. After the sharp increase in price
the price attempts to move lower as the bears try to take control and for a duration of time the price oscillates (moves up and down between) in a
slightly downward channel (forming the ag). However, after a period of the the bears and bulls con icting the bulls overcome the bears and the
prevailing upward trend continues.
Drag and drop the object to show the ascending ag formation on the chart.
 Check
Continuation Pattern: Descending Flags
The Descending Flag formation is form by a sharp drop in price in a downward trend which represents the ag pole. After the sharp drop in price the
price attempts to move higher as the bulls try to take control and for a duration of time the price oscillates (moves up and down between) in a slightly
upward channel (forming the ag). However, after a period of the bears and bulls con icting, the bears overcome the bulls and the prevailing downward
trend continues
Drag and drop the object to show the descending ag formation on the chart
 Check
Reversal Pattern: The Double Top Formation
A Double Top Formation is formed in an upward trend by the price testing a resistance level with two consecutive bounces at the same resistance levels
with a moderate decline between them. After hitting the resistance twice without being able to breakthrough due to the lack of demand, the bulls pull
out of their trades giving control to sellers who cause the price to decrease and a reversal in trend occurs. This reversal is accompanied by an increase
in the volume of sellers.
TREASURE!!! Nice nd!! [stashdrop secret="Eznk4G" text="Pick up!" image]
The Double Tops Formation is therefore a strong sell signal. Multiple tops are regarded as much stronger signals than the double tops.
00:48
Drag and drop the objects above each of the two tops of the Double Tops Formation on the chart
 Check
Reversal Pattern: The Double Bottom Formation
A Double Bottom Formation is formed in a downward trend by the price testing the same support price level with two consecutive bounces at the same
support levels with a moderate decline between them. After hitting the support twice without being able to breakthrough due to the lack of supply, the
bears pull out of their trades giving control to buyers who cause the price to increase and a reversal in trend occurs. This reversal is accompanied by an
increase in buyers volume.
The Double Bottom Formation is therefore a strong buy signal. Multiple bottoms are regarded as much stronger signals than the double bottoms.
00:59
Drag and drop an arrow below each bottom of the Double Bottom Formation
 Check
Reversal Pattern: The Head and Shoulders Formation
Head and shoulders is a pattern that signals possible trend reversal. It is found in a bullish market, an upward trending market and is recognised by its
three peaks. The two outside peaks representing the shoulders are of similar levels and the middle peak representing the head is the highest price level.
This reversal signal occurs after an upward trend when the bears step in to take control over the bulls and after a small dip in the price followed by an
increase in price, the bears force the reversal in trend and a decrease in price (downward trend) follows.
What the candles are telling you is that the price reached a resistance level and bounced o , the bulls then increased their volume trying to cause price
to breakout past the resistance level and although they appear to they are met with resistance bringing the price back beneath the resistance level.
Once again the bulls attempt to break through resistance but they do not succeed and price bounces o again.
This shows the bulls were in charge, when meeting resistance they made an attempt to break through but resistance won reversing their breakout, which
depleted the bulls aggression in moving the price and the bullish market sentiment drops which is shown by the second bounce o the resistance level,
the second shoulder, having broken through temporarily, been forced back beneath resistance, their interest in price pushing through wans and they give
up their attempt, and price reverses moving in the opposite direction, ie lower in a downward bearish trend.
01:16
Drag and drop the labels on the chart showing the Head and Shoulder Formation
 Check
Reversal Pattern:The Inverted Head and Shoulders Formation
This formation is formed before the end of a bearish (downward) trend and is made up of three well-de ned peaks (lows). The middle peak is lower than
the two outside peaks and represents the head of the formation, while the two outside peaks represent the shoulders. This reversal signal occurs after
n downward trend when the bulls step in to take control over the bears and after a small increase in the price, followed by a decrease, the bulls force the
reversal in trend and an increase in price (upward trend) follows.
01:20
Drag and drop the labels on the chart showing the Inverted Head and Shoulder Formation
 Check
Elliott Wave
The Elliott wave indicator is a tool used in technical analysis that allows traders to predict the trend of the market. How was it named?
The Elliot wave was named after Ralph Nelson Elliott who discovered in the 1930's that the stock market price movements can be predicted as all prices no
matter what time frame used, move in a predictable wave pattern. He found that if he applied three rules to this pattern he could predict price movement.
He noticed that this pattern repeated continuously and he attributed it to the psychology of the masses. In other words, based on the psychology of
traders in general, (psychology referring to emotions that in uence traders and motivates a trader in his trading direction, entry and exit levels) that there
is a commonality in all our thinking, in how traders will react to markets and therefore how the price is in uenced.
So what is the Elliot Wave theory?
Elliot says that price movement occurs in a repetitive sequence of 8 waves, of which the rst ve waves which move in the direction of the current trend
are impulse waves and are followed by 3 corrective waves which move price in the opposite direction. Elliot says that the ve impulse waves are made of 3
motive waves and 2 correctional waves.
There are 5 main (impulsive) wave forms, followed by 3 corrective waves (ABC pattern) of the trend. These waves are created based on buying and selling
pressure.
Reading Elliott Waves
This indicator pattern must ful l the following:
Wave 1 must be greater than Wave 2

Wave 2 must be smaller than Wave 3
Wave 3 must be greater than Wave 4
Wave 4 must be smaller than Wave 5
Followed by the corrective ABC where:
Wave A is greater than Wave B

Wave B is greater that Wave C
There are other patterns within Elliott waves (zigzags, triangles, etc) but the impulse and the corrective components are the most used ones when it
comes to technical analysis of trends.
There are three rules in Elliott Wave Theory waves:
. Wave 3 can NEVER be the shortest impulse wave

. Wave 2 can NEVER go beyond the start of Wave 1
. Wave 4 can NEVER cross in the same price area as Wave 1
Correction Pattern: ABC Wave Pattern
The ABC Pattern is a 3-wave counter (con icting) movement in trend.
This means there will be a move against the current direction of the market (wave A) followed by a move in the opposite direction (wave B) then a third
wave (wave C) will occur which reverts the market move to the same direction as wave A, (reversal of the original market move.)
In order for the 3 wave movement to be a valid ABC pattern:
there is a three way movement against the original direction of trend

wave A and C are generally the same length
the end of wave B should fall on the 61.8% of the Fibonacci levels (Fibonacci as a indicator will be discussed in the Section, Retracements)
Below you can see the ABC corrective pattern where wave B ends on the Fibonacci 61.8% level.
Drag and drop the objects to show the start and end point of each wave in the ABC wave
 Check
Correction Pattern: ZIG-ZAG'S
A Zig-Zag pattern appears as points on a chart whenever prices reverse, alternating directions, often a series of short sharp angles or turns resulting in a
zig-zag pattern.
The Zig-Zag pattern can be simple or more complex referred to as a double zig-zag. Let's have a look remembering that the zig-zag is the basis of the
Elliott Wave with the ABC pattern.
Simple Zig-Zag: A single zigzag is a simple three-wave ABC correction pattern. It sub-divides into a 5-3-5 internal wave pattern. Waves A and C tend to be
the same length. This is the simplest Elliott wave correction pattern. You are able to predict a possible end point to wave C using the length of wave A as a
guide.
A trader can place an order at the end of wave B, and when the price reverts back to the previous trend, the trader can resume the trend.
Double Zig-Zag: As mentioned, this is a more complex zig-zag corrective pattern. To take advantage of this pattern a trader will use the same approach as
the simple zig-zag, by placing an order at the end of wave X, when the price resumes the former direction.
Drag and drop the objects to show the buy and sell signals of the Double Zig-zag correction pattern on the chart
 Check
Zig-Zag: Flats
Of the zig-zag corrective pattern, there are 3 further patterns we will look at: at, triangle and combination. The Flat is made up of a Simple and Expanded
Flat.
A Simple Flat correction di ers from a simple zig-zag in that the wave form is an internal 3-3-5 wave form. The waves are considered at as the market is
moving in a side-to-side channel and therefore the waves are of the same or similar length. A trade can be entered at the start of wave B and again catch
the reversal at the end of wave B.
An Expanded Flat correction is where the price breaks out above/below the last wave. Therefore the length of the last wave will be greater than the rst.
Drag and drop the objects to show the buy and sell signal on the correction Flats pattern
 Check
Zig-Zag: Triangles
The zig-zag triangle patterns occur in a sideways trend due to decreasing volatility and volume and subdivide into 3-3-3-3-3 before breaking out in the
same direction as the original trend, ie continuing the trend. We will look at contracting, descending and ascending triangles to determine trend reversals
and break outs.
Contracting Triangle: The contracting triangle, traces out ve internal moves, the distance travelled by each subsequent wave reduces in length, this has
the e ect of contracting the range of the wave, hence the name!
A trade can be placed at the end of wave E with the idea of catching the market as it turns back into the trend.
Descending Triangle: A descending triangle usually appears in a downtrend. The lower bound of the triangle pattern holds in a at line while the top
trend line drops as usual, and the overall range of prices contracts. A trade can be placed at the end of wave E with the idea of catching the market as it
turns back into the trend.
Ascending Triangle: The ascending triangle usually appears in an uptrend. The upper bounding trend line of the triangle pattern holds in a at line and
the lower trend line rises, and the overall range of prices contracts into wave E.
A trade can be placed at the end of wave E with the idea of catching the market as it turns back into the trend.
Expanding Triangle: A expanding triangle appears in both downtrends and uptrends. The top trend line rises and the bottom trend line falls, and the
overall range of prices expands into wave E.
This time the end of wave B of the triangle is used to place a trend trade.
Zig-Zag Combinations
The Zig-Zag combination is made up of exactly that - a combination of zig-zag formations. The combinations may be any 3 eg a simple zig-zag, a at or a
combination of these. See below image.
Retracements and Reversals
RETRACEMENTS
A retracement is a temporary change in direction over a short period of time, of a stock's price that goes against the prevailing trend. For
example, a retracement in an upward or downward trend, may have short selling/buying periods during the uptrend, also known as dips,
o ering buying or selling opportunities. Retracements happen in the prevailing trend.
REVERSALS
A reversal is when the price trend of a stock changes direction. The price therefore is likely to continue in the reversal direction for an extended
period of time. These reversals where there is change of direction can happen either in an upward or downward trend.
Why is it so important to distinguish between retracements and reversals?
Knowing the di erence between the two is important for traders who have to contend with di cult decisions whenever either occurs.
A trader needs to decide:
Should he hold throughout the sell-o , which could result in large losses if the retracement turns out to be a larger trend reversal.
OR Sell and re-buy if the price recovers, which could result in money lost on broker fees/commissions and result in a missed opportunity if
the price recovers.
OR Sell, which could result in a missed opportunity if the price recovers.
Retracements vs Reversals
. Retracements do not produce large increases in trading volume. Reversals, In contrast, major reversals are generated by the intense
selling o by professional nancial bodies.
. Retracements do not generate many popular chart patterns and the ones they do, are mainly limited to a few minor candle patterns.
Reversals are very serious events and can create numerous famous chart formations.
. The Retracements are temporary and do not normally last for longer than a week. Reversals have much longer lifespans and may last for
weeks, if not, months.
. Retracements are created shortly after large price movements have been initiated whilst Reversals can occur at any time.
Let's look at common TECHNICAL INDICATORS that are used to monitor retracements/reversals are:-
. Fibonacci retracements.
. Trendline levels.
. Supports, resistances and pivot points.
Fibonacci Retracements
The Fibonacci Retracement Indicator is very popular in technical analysis for determining where future support and resistance levels might
be. Knowing where a price might have di culty rising above or falling below can assist the trader in predicting entry and exit points to trade.
This indicator is based on the relationship between numbers in a series (expressed as ratios) that was determined by the mathematician
Leonardo Fibonacci.
The Fibonnaci Retracement indicator takes two extreme points on a chart (a major high and major low) and divides the distance between the
two points into levels at 0%, 23.6%, 38.2%, 50%, 61.8% and 100%. Using Fibonacci's mathematical equation, this indicator determines possible
future support and resistance lines at the points on the chart where these percentage levels are plotted.
The percentages show the pro t percentage you would make if you entered/exited your trades on each level, eg if you choose to exit your
trade at the 61.8% level you would be predicting the price to reach that level and could expect to make a 61.8% pro t on your trade. Each level
shows where you can expect support/resistance and the next level is based on expectation of the price breaking through the previous level.
You would use this indicator by dragging it from a recent low to a past high.
Using this knowledge the trader predicts the future support and resistance levels and can use these levels to enter or exit trades as below:
BUY: Enter a long trade/exit a short trade at a predicted support level.

SELL: Exit a long trade/enter a short trade at a predicted resistance level.
Let’s look at an example of how you can combine support and resistance levels with Fibonacci levels.
Market Shapes of Recession
Possible causes of Recession
Let's look at the possible causes of a recession leading to these di erent market shapes:
Financial crisis (reduced lending)

Large-scale fraud
Deregulation (Leads to unscrupulous lending and investing practices, which can lead to bank or investment fund failures)
An Energy crisis (power station malfunction, lack of funds for maintenance)
Currency devaluation (ZAR vs USD)
Decline in consumer con dence (increase in interest rates, lack of job creation)
Supply-Demand imbalance (hihger interest rates redue the demand for certai products)
When consumers borrow more than they can a ord to
High interest rates (reduces spending)
Economic slowdown after a war/virus/political uncertainty
Credit crunch (lack of lending and high interest rates)
When banks stop lending to each other (credit crunch
Recessions don't last forever. At some point, the economy will reopen and start growing again, although the recovery is unpredictable and may not
resemble the previous, healthier state.
L shape recovery
We will be looking at the following shapes that appear during market recessions:
L-Shape
U-Shape
V-Shape
W-Shape
L-SHAPE RECOVERY
In an L-shaped recovery, there is a steep decline caused by the decrease in economic growth followed by a slower upward slope indicating a long period of
stagnant growth. In an L-shaped recession, recovery can sometimes take a few years.
L-shaped recoveries are characterized by persistently high unemployment, a slow return of businesses investment activity, and a slow rate of growth in
economic output, and are associated with some of the worst economic occurrences through history.
A common thread in L-shaped recoveries is a massive scal and monetary policy response to the preceding recession, which may slow down the
economy’s recovery process.
Economic slowdown after a war

Credit crunch
When banks stop lending to each other
Economic decline
all are indications of an L-shape decline. The recovery to this shape is very long and di cult to recover from. Refer to the article below by David Rodeck
and his reference to an L-shape recovery.
Forbes.com (Advisor/Investing)
Alphabet Soup: Understanding the Shape of a COVID-19 Recession

David Rodeck - David Rodeck Contributori Advisor (July 15, 2020, 2:21pm)
L-Shaped Recession: An Extended Downturn

The worst-case economic scenario for the COVID-19 crisis is that it causes an L-shaped recession — also referred to often as an L-shaped recovery. In this
outcome, growth falls and does not recover for years, creating the long shape of the L. The o cial recession may end within a few quarters, but the
recovery to a pre-recession level of economic output may take years.
Japan went through an L-shaped recession in the 1990s. There was a steep market crash at the beginning of the decade, which was followed by a credit
crunch, government missteps and then other economic problems around the world, including the 1990-91 U.S. recession. The country saw more than 10
years of slow economic growth, which is known today as Japan’s lost decade.
Is an L-Shaped Recession Likely?

If everything goes wrong in dealing with the COVID-19 crisis, there is the potential for an L-shaped recession. This could happen if we cannot control
coronavirus outbreaks, which would lead to years-long shutdowns and sluggish growth, if not outright stagnation.
While an L-shaped recession is possible, most experts do not think it will happen. Only 8% of companies predict that an extended recession, that lasts until
2022 or longer, will happen, according to EY.
Cahn also believes we will avoid the worst.
“I am too optimistic about the world to predict an L-shaped recovery,” he said. Cahn noted that the economy’s fundamentals remain strong, even now.
“Expanding productivity, a well-trained workforce, rule of law, and e cient capital markets are still intact, which will drive growth long into the future.”
U Shape Recovery
U-SHAPE RECOVERY
It is called this as major measures of economic performance take the shape of the letter “U” during these periods.
U-shaped recoveries occur when a recession occurs and the economy does not immediately bounce back, but runs along the bottom for a few quarters.
A U-shape establishes when certain metrics, such as employment, GDP, and industrial output sharply declines and then remains depressed over a period
of 12 to 24 months before bouncing back again. A U-shape recovery is due to long-term uncertainty. The corona virus (2020) placed the world markets
into a possible U-Shape recovery. Recovery of these markets will recover at varying rates.
For further reference peruse the below article by Elliot Smith (CNBC) (4/5/2020)
HSBC expects a ‘jagged U-shaped recovery’ and backs these currencies to thrive
The global economy is most likely set for a U-shaped recovery with a “jagged bottom” after the coronavirus crisis, and will bene t currencies in countries
with strong scal positions, according to HSBC.
Speaking to CNBC Monday, Head of Global Foreign Exchange Strategy David Bloom outlined the bank’s game plan in the event of L-, U- and V-shaped
recoveries, emphasizing that analysts should be making plans for all eventualities.
In a U-shaped scenario, the economy fails to respond immediately to exits from lockdowns around the world, but the expectation for a delayed rebound
remains in place with multiple “false dawns,” Bloom suggested, causing a “jagged bottom” to the U curve.
Jagged U
He suggested that while the situation is unlikely to worsen beyond last month’s unprecedented crash in oil price futures to negative $40 and tens of
millions of job losses, the assumption of a V-shaped recovery similar to the one that emerged after the nancial crisis was optimistic.
“It is much more likely that we are in this kind of U with a jagged bottom scenario, and the (U.S.) dollar kind of does well but this is your NOK (Norwegian
krone), your yen, your Aussie, your Kiwi,” Bloom told CNBC’s “Squawk Box Europe.”
“Some of them have great scal repower to keep trying to push this economy. Even if it doesn’t come, they’re doing another scal package and they’ve
got the money.”
While the dollar and the Japanese yen are expected to bene t from the initial rise in volatility, central to HSBC’s backing of the Norwegian krone, Australian
dollar and New Zealand dollar is their respective governments’ low debt levels.
This gives them more room for scal stimulus as federal governments continue to try to shore up their economies, and these policy moves will likely
emerge as a key driver of currency movement once the health crisis subsides.
The losers in this scenario, Bloom projected in a research note last week, include sterling and the Canadian dollar, since both governments’ scal room is
limited, while the euro would struggle on the back of stressed nances in Italy and Spain.
V Shape recovery
V-SHAPED RECOVERY
A V-shaped recovery is characterised by a sharp, economic decline followed by a quick and sustained recovery. It forms a continuation pattern.
A V-shaped recovery is di erent from an L-shaped recovery, as it remains in a slump for a shorter period of time than the L-shape.
In a V-shaped recession, the economy su ers a sharp economic decline eg. an increase in interest rates, weaker currency etc, but quickly and strongly
recovers. These recoveries are generally spurred on by a major shift in economic activity caused by increased consumer demand and spending. Refer to
the below article by the Bank of England's chief economist, Andy Haldane (29/7/2020)
UK on course for a V-shaped recovery, says Bank of England (The Guardian, UK)
The Bank of England’s chief economist, Andy Haldane, has insisted that Britain is enjoying a V-shaped recovery, despite concerns among rival central bank
policymakers that the economy is struggling after high-pro le job cuts that are expected to send unemployment higher.
Haldane, who has become a controversial gure in recent months for his comments that the UK is in the middle of a quick turnaround, said the UK
economy had recovered about half of the massive fall in output that took place in March and April when the Covid-19 lockdown was most intense.
He told MPs on Monday that the economy had been growing on average at about 1% a week since May and the bounce-back in activity extended to the
regions outside London and the south-east.
“Roughly half of the roughly 25% fall in activity during March and April has been clawed back over the period since,” he said. “We have seen a bounce-back.
So far, it has been a V. That, of course, doesn’t tell us about where we might go next.”
But he clashed with fellow monetary policy committee (MPC) member Silvana Tenreyro, who said the economy was struggling to grow and would stumble
over the course of the next few months as consumers maintained physical distancing. Last week, o cial gures showed the economy grew by a lower-
than-expected 1.8% in May.
Tenreyro said the threat of rising unemployment meant Britain’s economy was probably heading for an incomplete V-shaped recovery.
Speaking to members of the Treasury select committee, the London School of Economics academic said she was less con dent than Haldane about the
signals from experimental “fast” indicators that he cited as the basis for his optimistic view of the recovery so far.
“Spending is going to su er because of the perceived health risks and this will feed into higher unemployment and lower incomes,” Tenreyro said, adding
that the UK faced a downward spiral as lower incomes in turn caused lower levels of employment.
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Tenreyro voted to increase the Bank of England’s stimulus programme at the last meeting of the MPC in June, while Haldane voted to preserve the current
level of the Bank’s intervention.
Haldane also said the UK could face in ation pressures after the coronavirus crisis even if unemployment remained high, owing to a potential lack of
quali ed workers for jobs that remain in demand.
He said he saw both upside and downside risks to in ation over the medium term. “There has been some fracturing of domestic and global supply chains,
raising the costs of some goods and services. And it is possible a higher long-term equilibrium rate of unemployment could cause the earlier re-
emergence of wage pressures.”
But Tenreyro disputed his outlook, saying that while a no-deal Brexit may cause a temporary barrier to goods arriving from the EU, triggering a spike in
prices, the trend was for consumers to be reticent about spending, forcing rms to cut prices.
“In June I judged that demand was falling behind supply and there needed to be a further stimulus from the Bank,” she said.
W-Shape Recovery
A W-shaped recovery occurs when an economy passes through a recession into recovery and then immediately turns down into another recession.
These major performance indicators eg. a decline in consumer con dence - a virus where a vaccine is produced - consumer con dence increase, but the
vaccine fails and the consumer con dence drops once again. When charted, form the shape of a letter. Recovery is short-lived and a decline continues.
W-shaped recessions can trick traders into getting back in too early due to the brief recovery.
A W-shaped recession begins like a V-shaped recession, then turns back down again after showing these false signs of recovery. This recovery is also
called "double-dip recessions" because the economy drops twice before full recovery is achieved. Refer to the below article by David Rodeck - speci c
reference to the W-shape recovery section.
Forbes.com (Advisor/Investing)
Alphabet Soup: Understanding the Shape of a COVID-19 Recession

David Rodeck - David Rodeck Contributori Advisor (Jul 15, 2020, 2:21pm)
W-Shaped Recession: Quick Recovery, Second Decline

In a W-shaped recession, the economy begins to recover rapidly, but then falls into a second period of decline. This is also known as a double-dip recession
—the two economic declines create the shape of a W.
The U.S. experienced a W-shaped recession in the early 1980s. After weathering the second oil crisis and elevated in ation in 1979, the economy fell into a
brief recession in 1980, but then rapidly started growing again. The Federal Reserve was still worried that in ation was too high and raised interest rates to
ght it. This pushed the country back into another recession in July 1981, which lasted until steady long-term growth resumed in late 1982.
Is a W-Shaped Recession Likely?

Robert Johnson, professor of nance at Creighton University, fears that the COVID-19 crisis could turn into a W-shaped recession.
“Americans may end social distancing prematurely and that a secondary outbreak of coronavirus could force another round of social distancing, stalling
the recovery,” said Johnson. If this happens, Johnson believes the recovery could be much longer than most people anticipate—a matter of years, not
months, as the country battles new rounds of infection.
He is also pessimistic about the recent stock market rebound.
“The recent rise in the equity indices appears based more on FOMO (fear of missing out) than on medical developments for dealing with the pandemic,” he
said. Johnson predicts that markets could test previous lows set in March.
Technical Indicators
WHAT IS A TECHNICAL INDICATOR?
An indicator is a mathematical calculation based on a security’s/currency price and/or volume. The result is used to predict future prices.
Technical Indicators within the analysis are used to analyse the market.
They are designed to analyse movements in price. Long- or short-term traders will use di erent paramaters/settings to do analysis when trading the
market.
Why Use Indicators?
Indicators are used to either alert the trader to a trend reversal

to con rm the entry and exit points of a trade and
to predict price direction
It is recommended to use a combination of indicators in your trading plan, that compliment each other and that you are comfortable using to predict your
trades.
Oscillators are the most used technical indicators, which run within a range or band. Oscillator is the di erence between two moving averages on a chart.
It represents overbought and oversold conditions.
The word ‘oscillate’ means ‘to move within a range between two bands'. Momentum measures the rate-of-change (how quickly does it change) of a
currencies price. As the price of a currency rises, price momentum increases.
There are two types of Oscillators: LEADING AND LAGGING indicators.
Leading indicators look at possible future direction over a shorter time frame. Earlier in technical analysis we covered time frames and how the shorter the
period selected for an indicator, the quicker it will react to price movement. Quicker reaction means higher chances of false signals. We also determined
that no one indicator can be used as the sole determining factor for your trading decisions, that you need to con rm predictions with other indicators and
importantly how the market is a ected by market sentiment and therefore by market news.
Pro's and Con's of Leading Indicators
Leading indicators are bene cial as they assist with:
Early signaling for entry and exit levels.

Generate more signals, allowing more opportunities to trade.
Early signals allow you to enter a trade earlier and therefore gain higher returns but this could also be a false signal.
If used in a upward trending market, the leading indicator helps identify overbought conditions and if used in a downward trending market, the leading
indicator helps identify oversold condition.
Conservative traders will use lagging indicators to help them to trade with con dence avoiding the possibility of false signals, waiting for con rmation.
Lagging Indicators are indicators that look at past prices to predict the future movement of a price. These are trend following indicators and are best used
in strong trends as they do not lead the price movement. As they are lagging they are not bene cial in a sideways market.
Pro's and Con's of Lagging Indicators
Lagging indicators provide greater con rmation signals

It should not be used in a sideways market as it will give many false signals
Used in longer trends, this indicator will keep the trader in the trade for longer
The signals from a lagging indicator tend to be late. By the time an entry signal occurs, a signi cant portion of the move has already occurred.
IMPORTANT TO NOTE: With leading and lagging indicators, the likelihood of false signals is determined by the period you set in the indicators setting. The
greater the period you choose, the less chance of false signals. The smaller the period you select, the greater the chance of false signals.
So to recap, leading indicators signal earlier than lagging, shorter periods react faster to price movement than longer periods and no indicator can
guarantee price movement.
Leading and Lagging Indicators
Examples of Leading and Lagging Indicators we will cover in this Module:
LEADING INDICATORS
Stochastics
Relative Strength Index (RSI)
Williams % R
Volume
LAGGING INDICATORS
Moving Averages
MACD
Bollinger Bands
Parabolic SAR (Stop and Reverse)
Moving Averages (Lagging)
We will look at FOUR types of the moving average indicator:

Linear Weighted Moving Average (LWMA)
These moving averages react di erently to price movements but are lagging indicators. The SMA reacts to price movements slower than the EMA.
However, the rate at which either of the indicators reacts is determined by the period you set in the indicator setting. The greater the period you set, the
slower the indicator reacts. The shorter the period you set, the quicker the indicator reacts. However, as previously indicated, you must remember that
the quicker the indicator reacts the more false signals it will produce.
Moving averages are used to determine trends as well as to determine entry and exit levels.
You use two moving averages to signal buy and sell levels. You do this by plotting a slower moving average along with a faster moving average. When the
faster moving average crosses over the slower moving average from underneath it, it signals an entry for a long trade (or an exit for a short trade) and
when the faster moving average crosses over the slower moving average from above the slower moving average it signals a sell in a long trade (or an entry
for a short trade).
Moving averages look at past prices over a determined amount of periods to calculate the direction of trend and signal possible entry/exit levels or
support/resistance levels. Each type of moving average places weight on di erent points of past price and react di erently to price movement.
The simple moving average is calculated based on the number of periods you have set it to calculate by. It adds the total last closing prices for the
speci ed time periods eg days you set and divides the total by the number of the speci ed time period eg days.
When the faster moving average crosses over the slower moving average from underneath it, it signals an entry for a long trade (or an exit for a short
trade) and when the faster moving average crosses over the slower moving average from above the slower moving average it signals a sell in a long trade
(or an entry for a short trade).
WHEN AND HOW DO WE USE THE SMA?
Manual calculation is not needed as all trading platforms will automatically do the calculation for you when adding the indicator to your chart.
We use the SMA to smooth out the volatility and make it easier to view the price trend of the security. If a SMA points up it is interpreted as the security
price is increasing, if it points down, it is interpreted as the security price is decreasing, showing a possible entry or exit for a long or a short (buy or sell).
The longer the time frame for the moving average, the smoother the simple moving average. The shorter the time-frame, the more volatile as it reads
closer to the source data.
You may add more than one SMA to a chart, each with di erent time periods (days).
In the image below, two SMA's are plotted. A 14 day period SMA and a 50 day period SMA. The 14 day reacts quicker to the smoother 50 day average. The
50 day being the slower average and therefore showing a smoother average, will show the price movement prediction expected over the longer range.
The 14 day period being the quicker average to reach, shows the prediction of price movement in the shorter range.
01:18
You would use these two indicators to give you buy and sell signals by:
BUY (go long) - when the 14 day SMA crosses up and over from under the 50 day SMA .
SELL (go short) - when the 14 day SMA crosses down and over from above the 50 day SMA.
Drag and Drop the objects to show which is the faster MA, which is the slower MA and nd 2 sell signals and 1 buy
signal
 Check
The Exponential Moving Average focuses more on the most recent periods of the trade, placing more emphasis on what traders are doing in the market
now. The shorter the period you set for the EMA, the quicker it will react. This will give a buy signal earlier than a slower EMA.
The Exponential moving average is calculated based on the number of periods you have set it to calculate by. It adds the total last closing prices for the
speci ed time periods eg days you set and divides the total by the number of the speci ed time period eg days.
WHEN AND HOW DO WE USE THE EMA?
We use the EMA to smooth out the volatility and make it easier to view the price trend of the security. If a EMA points up it is interpreted as the security
The longer the time frame for the moving average, the smoother the simple moving average. The shorter the time-frame, the more volatile as it reads
closer to the source data.
In the image below, two moving averages have been plotted. A 10 day period SMA and a 10 day period EMA. As you can see, the EMA reacts quicker to
price movement.
In the below image you would enter/exit your trade by:
BUY: enter a long trade when the EMA crosses above over the SMA from under it.
SELL: exit a long trade when the EMA crosses below the SMA from above it.
You may add more than one EMA to a chart, each with di erent time periods (days).
In the image below, two EMA's are plotted. A 14 day period EMA and a 50 day period EMA. The 14 day reacts quicker to the smoother 50 day average. The
50 day being the slower average and therefore showing a smoother average, will show the price movement prediction expected over the longer range.
The 14 day period being the quicker average to reach, shows the prediction of price movement in the shorter range.
02:13
Drag and Drop the objects to show which is the EMA and which is the SMA and nd 1 sell signal and 1 buy signal
 Check
Linear Moving Average (LWMA)
A linear weighted moving average (LWMA) is a moving average calculation that puts more weight on recent prices, with the most recent price having the
highest weighting. Each prior price is given progressively less weight. The weights drop in a linear fashion. LWMAs are quicker to react to price changes
than SMA and EMA. The shorter the period you set for the LWMA, the quicker it will react. This will give a buy signal earlier than a slower EMA/SMA.
WHEN AND HOW DO WE USE THE LWMA?
We use the LWMA to smooth out the volatility and make it easier to view the price trend of the security. If a LWMA points up it is interpreted as the security
The longer the time frame for the moving average, the smoother the LWMA. The shorter the time-frame, the more volatile as it reads closer to the source
data.
01:28
In the image below, two moving averages have been plotted. A 10 day period LWMA and a 10 day period LWMA. As you can see, the LWMA reacts quicker to
price movement.
How to enter/exit a trade with a LWMA:
BUY: enter a long trade when the LWMA crosses above over the SMA from under it.
SELL: exit a long trade when the LWMA crosses below the SMA from above it.
Drag and Drop the objects to show which is the EMA and which is the LWMA and nd 1 sell signal and 1 buy signal
 Check
The Smoothed Moving Average (SMMA) is an Exponential Moving Average with a longer period applied. The SMMA weights recent prices equal to past
prices. It uses a longer period to determine the average, giving a weight to the data as the average is calculated. This means that the past data is not
removed but has minimal impact on the moving average. Its main purpose is the smoothing out of short-term uctuations.
In the image below, two moving averages have been plotted. A 14 period SMA and a 21 period SMMA. As you can see, the SMMA reacts slower to price
movement.
How do we interpret the SMMA?
BUY: enter a long trade when the SMA crosses above over the SMMA from under it.
SELL: exit a long trade when the SMA crosses below the SMMA from above it.
01:23
Drag and Drop the objects to show which is the SMMA and which is the LWMA and nd 1 sell signal and 1 buy signal
 Check
Adaptive Moving Average (KAMA)
Kaufman's Adaptive Moving Average (KAMA) is a moving average that was developed by Perry Kaufman. It is a powerful trend following indicator which is
based on the Exponential Moving Average (EMA) and responds to trend and volatility. It is used to smooth out the noise of price action and indicates a
change in price direction when the price crosses the EMA. Price can also bounce o the KAMA, which can act as dynamic support and resistance.
The default settings for KAMA are:
Period – 10 days (based on a daily time frame) - Note: MT5 defaults at 9

Shift - 0
Fast EMA - 2
Slow EMA - 30
Apply to: Close
How do we interpret this indicator
As this indicator is used to indentify market trends and reversal
It is used to identify the general trend of current market price action. When the price line is higher than the moving average, it shows an uptrend. As
compared to the Simple Moving Average the KAMA indicator is less likely to generate false signals. When the price line is moving under the moving
average, it indicates the existence of a downtrend.
BUY: Enter a long trade when the price moves above the KAMA
SELL: Exit a long trade when the price moves below the KAMA
NOTE: It is often used in combination with other signals and analysis techniques.
01:22
Drag and Drop the objects to show where the Adaptive Moving Average signals a buy and a sell signal
 Check
Double Exponential Moving Average (DEMA) (Lagging)
The DEMA uses two Exponential Moving Averages (EMAs) to eliminate lag (delayed reaction to price movement). It is used to help con rm uptrends when
the price moves above the average and downtrends when the price moves below the average. The DEMA responds quicker to price movement than the
EMA as it lters out noise. However ltering out noise means the indicator can generate more false signals. A longer period DEMA will react slower to a
shorter period DEMA.
Default settings for the DEMA:
Period: 14 Shift: 0
Apply to: Close
How do we interpret the DEMA?:
BUY: Enter a long trad when the price moves above the DEMA
SELL: Exit a long trade when the price moves below the DEMA
01:12
Drag and Drop the objects to show where the Double Exponential Moving Average signals a buy and a sell signal
 Check
Triple Exponential Moving Average (TEMA) (Lagging)
The Triple Exponential Moving Average (TEMA) smooths out the moving average eliminating noise. It uses multiple EMAs and removes some of
the lag. When prices cross over the TEMA from below in indicates a possible upward trend. When prices cross over the TEMA from above it
indicates a possible downward trend.
Default settings for TEMA:
Period: 14 Shift: 0
Apply to: Close
How do we interpret the TEMA?
BUY: Enter a long when the price crosses the TEMA from below and is trading above it.
SELL: Exit a long when the price crosses the TEMA from above and is trading below it.
01:30
Drag and Drop the objects to show where the Triple Exponential Moving Average signals a buy and a sell signal
 Check
Well done! Knowledge stash increased x 5!!
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Relative Strength Index (RSI) (Leading)
The Relative Strength Indicator (RSI) uses a moving average that oscillates (moves) between two levels of 0 - 100,
showing overbought/oversold conditions. These two levels are 30 and 70. When the price reaches or passes through the 70 line downwards towards
the 30 level, it is an indication of overbought conditions. When the price moves below the 30 line it is an indication of oversold conditions.
Default setting for the RSI:
Period: 14
Apply to: Close
How do we interpret the RSI:
BUY: When the moving average dips below the RSI 30 line and rises back above it, it signals an entry level for a long trade or exit level for a short trade.
SELL: When the moving average rises above the RSI 70 line and drops back below it, it signals an exit level for a long trade or an entry level for a short
trade.
A movement from below the centerline (50) to above indicates a rising trend. A rising centerline crossover occurs when the RSI value crosses ABOVE the
50 line on the scale, moving towards the 70 line. This indicates the market trend is increasing in strength, and is seen as a bullish signal until the RSI
approaches the 70 line. A movement from above the centerline (50) to below indicates a falling trend. A falling centerline crossover occurs when the RSI
value crosses BELOW the 50 line on the scale, moving towards the 30 line. This indicates the market trend is weakening in strength, and is seen as a
bearish signal until the RSI approaches the 30 line.
To add the 50 Line:
Go to Paramaters
Move to the next tab adjacent to Paramaters called Levels, click on Levels
Click on Add
Type in 50 into the empty block
Click OK
Traders will use this indicator to signal entry and exit levels. The recommended settings would be an RSI Period of 14 days and an Exponential Moving
Average (EMA) period of 14. The more conservative trader would use a 21 day EMA.
The below example shows where you can see the buy and sell signals generated using the RSI and the SMA and EMA con rmations. Once the price
becomes overbought or oversold and you obtain an entry signal, you should always wait for some type of con rmation that a price reversal has occurred.
02:22
Drag and Drop the objects to the indicator line and show where the RSI signals 1 buy and 1 sell
 Check
Bollinger Bands (Lagging)
Bollinger Bands is a widely used indicator that measures the volatility of the price movement. Remember, high volatility means greater volumes are being
traded (in either direction) ie there is more buying and selling taking place and lower volatility means there are lower volumes (less buying/selling) being
traded.
Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average. They show the movement of price action
between these two bands on either side of a moving average. When the volatility is high, the bands will be further apart and when volatility is low the
bands will be closer together (when very close, it is called a squeeze). It is considered by traders to be a potential sign of increased volatility and possible
trading opportunities.
The default settings for Bollinger Bands are:
Period: 20
Shift: 0
Deviation: 2.0
Apply to: Close
Remember, you are able to adjust these settings to your own preferences, these are the accepted default settings.
In the below example you can see the upper and lower bands of the Bollinger band moving according to price action around the moving average. Note
how when the volatility is low the bands contract (come together) and the higher the volatility the further apart the bands are.
The Bollinger Bounce:
A very important point to note about Bollinger Bands is that price always tends to return to the middle of the bands. This is because the bands act as
mini support and resistance levels (levels the price has di culty rising above or below). The longer the time frame of the chart the stronger the bands
are. This means that in the longer time frame there is less chance of the price breaking through the bands than in the shorter time frame.
As you can see in the below image the price tends to bounce o the bands (mini support/resistance levels) and returns to the middle of the band (the
moving average).
The Bollinger Squeeze:
The Bollinger Squeeze indicates indecision/uncertainty/consolidation in trading. Volatility is low and this could mean that a potential breakout (the price
moving through the band's support/resistance levels) is going to occur as shown in the example below.
The Bollinger Bands squeeze can be used in trading to signal possible breakouts and the opportunity to enter a trade early, before a price move. It is
advisable not to act on the rst candle that breaks through but wait for con rmation by a second candle showing the price action is continuing in the
direction of the breakout.
02:36
Drag and Drop the objects to show where the Bollinger Bands signal high and low volatility
 Check
Stochastic (Leading)
The Stochastic Indicator is used to predict buy and sell signals by indicating overbought and oversold conditions. It is the combination of two moving
averages plotted on a chart with the addition of showing overbought and oversold conditions.
The Stochastic Oscillator always ranges between 0% and 100%. A reading of 0% shows that the security's close was the lowest price that the security
has traded during the preceding time periods. A reading of 100% shows that the security's close was the highest price that the security has traded
during the preceding time periods.
The two moving averages oscillate (move) between two lines which form a range of 0 to 100 at two levels of 20 and 80.
When the moving averages CROSS the 80 level in an upward direction, it represents overbought conditions and when the moving averages CROSS
the 20 level downwards, it indicates oversold conditions.
Once again, your trading platform will have the default settings which can be adjusted by you should you prefer. The recommended setting is a 15 day
period with a smoothing of 6 periods and a double smoothing of 6 periods. Let's explain.
On the settings of the stochastic, you will input 4 variables. (Three periods and a method which refers to the type of MA you will select).
The periods are:
. The %K period refers to the number of time periods used in the stochastic calculation.
. The %K Slowing Period. This value controls the internal smoothing of %K. The value of 1 is considered a FAST stochastic; and the value of 3 is
considered a SLOW stochastic.
. %D Period. This is the number of time periods used when calculating a moving average of %K. The moving average is called %D and is usually
displayed as a dotted line on top of %K.
. %D Method. This variable is where one would select whether to use an Exponential, Simple, Time Series, Triangular, Variable or Weighted moving
average to calculate % D.
Let's have a look at a few periods:
Speculative traders settings:
%K = 5 Slowing = 3 %D = 3 Method: Simple
A more aggressive stochastic that a speculative trader would consider.
Conservative traders settings:
A smoother stochastic for a more conservative trader and found to be often used.
Moderate traders settings:
A very smooth stochastic, not many signals, for the moderate trader.
How do we interpret the stochastic:
BUY: Enter a long trade when the faster moving average crosses over the slower moving average from below AND the Stochastic Indicator crosses
the 20 line indicating oversold conditions. The opposite happens when wanting to enter a short trade, where the faster moving average crosses over
the slower moving average from above AND the Stochastic Indicator crosses the 80 line indicating overbought conditions.
SELL: Exit a long trade when the faster moving average crosses over the slower moving average from above AND the Stochastic Indicator is crossing
the 80 line indicating overbought conditions. The opposite occurs when wanting to Exit a short trade. The faster moving average crosses over the
slower moving average from below AND the Stochastic Indicator crosses the 20 line indicating overbought conditions
In the below example you can see the entry and exit signals based on the crossing of the moving averages and the overbought/oversold conditions of the
price.
Remember: Prices can continue to rise even in overbought conditions or fall in oversold conditions. While indicators predict buy/sell signals, not all
signals are true and you can encounter false signals. This is why it is always advisable to use more than one indicator in technical analysis and to use
indicators that compliment each other.
Even though you get the signals a pair can continue to rise after the slow stochastic has reached 80 and continue to fall after the slow stochastic has
reached 20, so beware.
This is just one of many tools used to help you locate winning trades. This indicator is rarely used alone. It is recommended using an additional technical
indicator to supplement the signals you get from the slow stochastic oscillator.
02:05
Drag and Drop the objects to show where the Stochastic signals a buy and a sell signal
 Check
MACD (Lagging)
The MACD (Moving Average Convergence Divergence)
What does this mean?
Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of
prices. The MACD is calculated by subtracting the 21-day exponential moving average (EMA) from the 14-day EMA. A nine-day EMA of the MACD, called
the signal line, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
The default settings for the MACD are:
Fast moving average – 14 days

Slow moving average – 21 days
Signal moving average line – 9 day moving average
Apply to: Close
There are four common methods used to interpret the MACD:
. Crossovers - As shown in the chart below, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell.
Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to
experience upward momentum. Many traders wait for a con rmed cross above the signal line before entering into a position to avoid a false signal
and entering into a position too early, as shown by the rst arrow.
. Divergence - When the security price diverges from the MACD. It signals the end of the current trend.
. Sudden rise - When the MACD rises suddenly - that is, the shorter moving average (14 day) pulls away from the longer-term moving average (21 day)
- it is a signal that the security is overbought and will soon return to normal levels.
. Zero line - Traders use the zero line to anticipate direction. When the MACD crosses the zero line upwards, it will signal positive momentum in the
share price. When the zero line is crossed downwards by the short-term MA, it signals negative momentum, taking the share price further down. As
you can see from the chart below, the zero line often acts as an area of support and resistance for the indicator. If the MACD indicator is either at or
remaining close to the 0 (signal line) then the market is ranging and the signals unreliable.
When trading using the MACD you need to rst ensure the market is trending. It is used in trending markets and should not be used in ranges (sideways
markets).
02:31
If the market is trending, the trader would use the MACD in the same manner as you would moving averages, for entry/exit levels as below:
BUY: Enter a long trade when the faster moving average crosses over the slow moving average from below AND the MACD is not at or remaining
close to the signal line. It crosses over the 0 signal line upwards.
SELL: Exit a long trade when the faster moving average crosses over the slow moving average from above AND the MACD is not at or remaining
close to the signal line. It crosses the 0 signal line downwards.
Drag and Drop the objects to show where the MACD signals 2 buy and 1 sell signal
 Check
Williams % R (Leading)
The Williams %R Indicator is an indicator that uses one moving average in combination with overbought/oversold conditions. It shows the moving
average oscillating between two lines from 0 to -100.
It is calculated using a 14 day moving average and its sensitivity is determined by the time frame you view your chart in. A shorter time frame being more
sensitive than a longer time frame and therefore will generate more false signals.
With the Williams %R indicator oversold conditions are indicated when the moving average moves below the -80 line and overbought conditions indicated
when the moving average moves above the -20 line.
To trade using the Williams %R Indicator you would look for entry and exit levels as below:
BUY: Enter a long trade when the moving average crosses the -80 line upwards indicating oversold conditions. This will indicate a possible Long..
SELL: Exit a long trade when the moving average crosses below the -20 line indicating overbought conditions. The share price starts to decrease
indicating an exit on a Long trade.
As it only uses one moving average, this indicator is especially easy to use for the beginner.
Once again, you are reminded that while an indicator might signal overbought/oversold conditions it does not guarantee a reversal in trend. Remember,
the faster the moving average (shorter the time period), the more false signals it will produce.
Have a look at the below example and note where the price moves into overbought or oversold conditions. You can see that the price drops after moving
into overbought and rises after moving into oversold conditions.
01:14
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Drag and Drop the objects on the indicator line to show where the Williams % R signals a buy and a sell signal
 Check
Envelopes (Lagging)
Envelopes are constructed using two moving averages that run above and below the price range forming bands. These bands are used to signal
overbought and oversold conditions. Prices moving above the upper band signals overbought conditions and a possible sell signal. Prices moving below
the lower band signals oversold conditions and a possible buy signal.
Default Settings:
Period: 14 (MA) Shift: 0
Deviation: 0.100 Method: Simple
Apply to: Close (closing price)
How to interpret an Envelope
BUY: When the price moves above the lower band (MA) from underneath it, it is a possible Buy.
SELL: When the price moves below the upper band (MA) from above, it is a possible Sell.
01:53
Drag and Drop the objects to show where the Envelopes signals a buy and a sell signal
 Check
Parabolic Stop and Reverse (SAR) (Lagging)
The Parabolic Stop and Reverse (SAR) indicator gives an indication to determine trend direction and potential reversals in price. It uses a trailing stop
and reverse method called SAR - (stop and reverse), to identify suitable exit and entry points.
SETTINGS for the PSAR indicator
There are only two key settings for this indicator. Step and Maximum. The Step is the size of the acceleration factor. The default value is set at 0.02. The
acceleration factor starts with this value and then increases by the step size with each new high (or low or short positions), up to the value de ned by the
maximum parameter. The default maximum value is 0.2.
Step: 0.02
Maximum 0.2
HOW TO USE
A dot below the price means the price is moving up, and a dot above the price bar means the price is moving down overall.
There is a dot for every price bar, meaning the indicator is always producing information.
A reversal occurs when the dots ip. If the price falls below rising dots then the dots will move above the price to show that a downtrend is emerging.
When the series of dots is below the share price it is an indication of a potential BUY and if the series of dots is above the share price it is an indication
of a potential SELL.
A shorter time frame produces more dots to follow - Hrs, Min - possibly producing a weaker signal with a greater chance of false breakouts.
A longer time frame produces fewer dots to follow - Monthly, weekly, daily - possibly producing a stronger signal and con rmation.
A reversal in the indicator doesn't necessarily mean a reversal in the price. A PSAR reversal only means that the price and indicator have crossed.
The Parabolic SAR indicator is shown on a chart as a series of dots placed above or below the price (depending on the price momentum). A dot is shown
below the price when the price is trending upward and a dot is shown above the price when the trend is downward.
BUY: Enter a long trade/exit a short trade when the price closes above the upper Parabolic SAR dots.
SELL: Exit a long trade/enter a short trade when the price closes below the lower Parabolic SAR dots.
01:23
Drag and Drop the objects to show where the Parabolic SAR signals a buy and a sell signal
 Check
Standard Deviation (Lagging)
Standard deviation is an indicator is a term derived from the statistical branch of mathematics and is a method used to describe the distribution of a set
of data values. The greater the standard deviation, the more widely spread the values in the data set are. The lower the standard deviation, the more
narrowly spread the values are.
This indicator measures the size of the recent price movement and is used for predicting future volatility (volumes). In other words it helps predict a
future large movement in price. The Standard Deviation compares the current price movement and its past price movement.
When the Standard Deviation indicator line is high, it shows a possible increase in the volatility of the price, be it an upward (Buy/Long) or a downward
trend (Sell/Short).
The Default settings for SD are:
Period: 20. Shift: 0
Method: Simple MA (20 day)
Apply to: Close
01:47
Drag and Drop the objects to show where the Standard deviation signals high and low volatility
 Check

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3/24/2021 Technical Analysis

Site: Stock Market College Printed by: Letladi Paul Lamola

What is Technical Analysis

Why Use Technical Indicators

Support and Resistance

Overbought and Oversold

Retracements and Reversals

Market Shapes of Recession

What is Technical Analysis

What is Technical Analysis?

Why Use Technical Indicators

Indicators serve three broad functions: to alert, to verify and to predict.

These will be covered in detail.

Below is an example of a candlestick graph

The importance of Time Frames when trading Candlesticks

Candlesticks have 3 basic features:

CANDLESTICK BODY: indicating open to close range.

CANDLESTICK WICK/SHADOW: indicating price high and price low.

CANDLESTICK COLOUR: indicating price direction.

The Doji Signal

Find the Doji signal by clicking on the correct candlestick pattern.

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Therefore in a bull market, it is a possible SELL (Short) signal.

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Therefore if found in a bearish market it is a possible BUY (Long) signal.

Find 1 Long-legged Doji signals by clicking on the correct candlestick pattern.

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The Four Price Doji

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Find 1 Hammer signal by clicking on the correct candlestick pattern.

Find 1 Inverted Hammer signal by clicking on the correct candlestick pattern.

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Find the Kicker signal by clicking on the correct candlesticks

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Click on the below image to nd the Hanging-Man Doji signal.

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The Spinning Top Candlestick

Support and Resistance