Technical Analysis

Technical AnalysisTrading Guide - Free Ebook
This article is provided for general information and educational purposes only. Any opinions, analyses,
prices or other content does not constitute investment advice or recommendation. Any research has not
been prepared in accordance with legal requirements required to promote the independence of
investment research and as such is considered to be a marketing communication. XTB will accept no
liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly
or indirectly for use of or reliance on such information. Please be aware that information and research
based on historical data or performance does not guarantee future performance or results.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of
retail investor accounts lose money when trading CFDs with XTB Ltd. Youshould consider whether you
understand how CFDs work and whether you can afford to take the high risk of losing your money.
Publication by XTB Ltd.

Technical analysis only considers price movement, ignoring the fundamental factors, since all
these factors affecting the market price are assumed to be contained within these movements.
Therefore, when it comes to technical analysis, all that needs to be examined is the price itself.
Of course, an unexpected event - such as a natural disaster or geopolitical tensions - may affect
a certain market, but a technical analyst is not interested in the reason. A technical analyst
focuses on the chart itself and the shapes, patterns and formations occurring on the chart.
Technical analysts are searching for repeating price patterns that could herald a trend
continuation or a trend reversal. These are very important tools used in technical analysis. Price
patterns can help us identify turning points on the market, as well as define the strength of a
given price movement.
Price Patterns
Price patterns are divided into two groups:
● Trend reversal patterns

● Trend continuation patterns
You can look for price patterns on chosen time intervals depending on your trading strategy.
However, you should remember that patterns forming over a longer period of time are more
reliable than those observed on shorter intervals.
Continuation patterns
The first group of price patterns are called continuation patterns, which confirm further market
movement in the direction of the current trend. Keep in mind that opening positions should take
place after the whole pattern is created, and an important level for each pattern is broken.
Triangles
The first group of continuation patterns are triangles, which are created by two converging
trend lines. There are three types of triangles: symmetrical, ascending and descending. A
triangle is completed when one of its trend lines is broken by the market price. To define the
minimum price objective for the price move that could occur after a triangle is created, you
should mark the distance between two trend lines taken at the beginning of triangle formation,
and then put this distance in the place where the trend line was broken. The best environment
for trading triangles is in a strong developed trend.
Source: XTB Research
Rectangles
Other effective continuation patterns are rectangles. Rectangles can be very useful as a
formation that forms during a trading range when there’s a pause in the trend. The pattern can
be easily identified by simply comparing the highs and lows.
Typically, the longer the price remains within the formation, the more dynamic the move after
the breakout.
Flag and Pennant
Flags and Pennants are short-term continuation patterns that mark a small consolidation
before the previous move resumes. These patterns are usually preceded by a sharp advance or
decline with heavy volume, and mark the midpoint of the move.
● The flag pattern forms what looks like a rectangle, but the flag is not perfectly flat and
will have its trend lines sloping.
● The pennant is a formation that looks similar to symmetrical triangles, but is smaller in
size (volatility) and duration.
Even though flags and pennants are common formations, identification guidelines should not be
taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline.
Without a sharp move, the reliability of the formation becomes questionable, and trading it could
carry added risk.
Trend reversal patterns

Trend reversal patterns indicate the weakness of the current trend and initiation of a movement
in the opposite direction. They are like a black cloud after a sunny day.
The ones that appear on the local tops indicate the possible reversal of an uptrend. On the other
hand, the ones that appear on the local lows indicate the possible reversal of a downtrend.
By using price patterns, you can also calculate the minimum price objective for the fall or rise,
which should occur after the pattern is completed.
Head and Shoulders Pattern
This is one of the most popular trend reversal patterns. It’s built from three price peaks with the
highest peak in the middle. The head and shoulders pattern requires a neckline, which is the line
that connects local lows reached by the price between the head and two shoulders. When the
market price cuts the neckline, this is a signal that a downtrend could be starting. To find a
minimum price objective for the fall, you need to mark the distance between the head and the
neckline, and then put this section in the place where the neckline was broken.
Each pattern observed on the local tops has its equivalent on local bottoms, indicating the end
of a downtrend and the beginning of a growth trend. They constitute the mirror image of
formations occurring on tops. The head and shoulders pattern at the bottom is called an inverse
head and shoulders pattern.
Let’s have a look at a real market example:

The head and shoulders pattern is a strong signal, especially when prices break the previous
structure’s high. This is the first indication of weakness, after which prices retrace to support
level and continue moving higher.
Double top and double bottom formation
Other examples of the pattern and its mirror image are the Double Top and Double Bottom.
The double bottom looks like the letter “W”. When this pattern is spotted, it signals a possible
reversal. Prices have reached their lows and the bulls are starting to take control.
Meanwhile, the double top is shaped like an “M”. The formation occurs in an uptrend when
prices have reached a high, and bounce from the top before making their way lower. The
minimum price objective for M and W formations is measured by taking the high or low of
formation to the last point of resistance or support.
Our example shows a double bottom formation created in a strong downtrend. The second
attempt to break the first bottom was done with higher volatility (wick and huge spread on
candle), which can eventually lead to a reversal.
Wedges
Wedges are similar to triangles, but unlike their peers, they herald a reversal of a trend. They are
similar in construction to a symmetrical triangle in that there are two trend lines - support and
resistance - which band the price of a security. It’s usually a long-term pattern, which means that
it takes a long time for the wedge to be formed, but its impact could be powerful.
There are two types of wedges:
● Falling (bullish) wedge- a bullish pattern that begins wide at the top and contracts as
prices move lower (as shown on the chart below). In contrast to symmetrical triangles,
which have no definitive slope and no bias, falling wedges have both.
● Rising (bearish) wedge- a bearish pattern that begins wide at the bottom and contracts
as prices move higher and the trading range narrows. In contrast to symmetrical
triangles, rising wedges definitely slope up and have a bearish bias.
So how do you trade wedges? If you recognise a pattern that could be realised, it may be worth
opening a trade after a breakout. If the price breaks from the pattern and then it breaks below
the previous low or high (depending on which wedge you’re actually trading), it may be worth
opening a trade.
Wedge patterns are extremely common in forex charts, and they can be useful on any
timeframe.
Rounding bottom and rounding top
The Saucer is a lesser-known pattern, but its impact could be even more powerful. The saucer
is a formation that indicates that a price has reached its low and that the downward trend has
come to a close. The saucer suggests that a new dawn is coming, and potentially a new trend.
It’s also known as a rounding bottom, and is the opposite of a rounding top. Both patterns signal
a reversal of a trend and both are long-term patterns. The only difference is that while the
saucer is formed as price reaches its lowest point, rounding tops are formed when the price
peaks.
However, one thing should be remembered. Due to the long-term outlook of these patterns and
their components, the signal is a bit more difficult to identify. So if you’re keen on trading those
patterns, you should be both patient and careful.
Candlestick
Patterns
While some traders focus on line charts, others prefer trading with candlesticks. While classic
patterns can be used in both, candlesticks could provide additional technical signals. Because
of their construction and the information on the price that comes from the construction of the
candlestick, some interesting patterns could be recognised and identified.
Trend reversal patterns

Trend reversal patterns indicate the weakness of the current trend and initiation of a movement
in the opposite direction. For example, if you’re trading the EURUSD and you recognise a
specific reversal pattern, you could open a trade that contradicts the current trend. It is
important to remember, however, that most reversal patterns require further confirmation. So if
you recognise a pattern, but the price doesn’t move in a specific direction, it means that a
potential reversal has been negated.
Here are some of the most popular trend reversal patterns:
● Bearish and Bullish Engulfing

● Bearish and Bullish Harami
● Evening and Morning Star
● Hanging Man
● Shooting Star
Once you recognise one of these patterns, you should wait for a candlestick that confirms the
signal. For example, if the EURUSD has been on the rise and you see a bearish engulfing candle,
you should wait for the second bearish candlestick that will confirm the strength of the signal.
It’s a general rule for all of the patterns, so keep this in mind while looking for one of them.
Bearish and Bullish Engulfing
Engulfing candlesticks are reversal patterns that can be either bullish or bearish, depending on
whether they appear during a downtrend (a bullish one) or an uptrend (a bearish one). The first
candlestick should be quite small, followed by a one whose body completely engulfs the
previous candlestick.
Bearish and Bullish Harami
Harami is a two candlestick pattern in which the second candlestick has a small body that’s
completely contained within the range of the previous one, and has also an opposite colour.

These are also the so-called harami crosses, where the construction is exactly the same. The
only difference is that the second candle is doji - a candlestick with a narrow body.
Morning and Evening Star
A morning star is a bullish reversal pattern consisting of three candlesticks - a long-bodied

black candle extending the current downtrend, a short middle candle that gapped down on the
open, and a long-bodied white candle that gapped up on the open and closed above the
midpoint of the body of the first candlestick.
An evening star is a bearish reversal pattern that continues an uptrend with a long white body
candlestick, followed by a gapped up small body candlestick, then a down close with the close
below the midpoint of the first candlestick.
Both patterns could also appear with a doji candlestick as the second one. There’s no difference
in the outcome, the only one is a minor difference in the look of the second candlestick.

Hanging Man
A Hanging Man forms when a security moves significantly lower after the open, but rallies to
close well above the intraday low. The resulting candlestick looks like a square lollipop with a
long stick. If this candlestick forms during an advance, it is called a Hanging Man. The hanging
man formation does not mean that the bulls have definitively lost control, but it may be an early
sign that the momentum is decreasing, and that the direction of the asset may be getting ready
to change.
As you can see, the pattern is quite similar to the hammer. The only difference between them is
the nature of the trend in which they appear. If the pattern appears in a chart with an upward
trend indicating a bearish reversal, it is called the hanging man. If it appears in a downward
trend indicating a bullish reversal, it’s known as a hammer.
Shooting Star
Another common reversal pattern is called a shooting star, which can indicate the potential end
to a bullish trend. A shooting star is a pattern that consists of just one candle. It has a small
body and a very long upper shadow. The colour of the body can be either black or white, but a
stronger sell signal is generated when the body is black. In order for the candlestick to be
considered a shooting star, the formation must be on an upward or bullish trend, and the
distance between the highest price for the day and the opening price must be at least twice as
large as the shooting star’s body.
The long upper shadow of a shooting star implies that the market tested a resistance level, only
for sellers to push prices lower. After an uptrend, the shooting star can signal to traders that the
uptrend could be over, at least in the short term.
Trend continuation patterns

Trend continuation patterns are used by candlestick traders to confirm further market
movement in the direction of the current price trend. They often appear after a long period of
stabilisation or correction on the market. So when you see such a pattern that is also confirmed
by the following candlestick, you could open a trade consistent with the trend.
Here are the most popular continuation patterns:
● Three White Soldiers

● Three Black Crows
● Upside and downside Tasuki Gap
● Mat hold
Three white soldiers
The three white soldiers is a pattern that consists of three bullish candles which have a similar
construction. Each candle closes higher than the previous one. Candlesticks with no shadows
increase the strength of this continuation pattern.
Three black crows
The three black crows is a pattern that consists of three bearish candles which have a similar
construction. Each candle closes lower than the previous one. Candlesticks with no shadows
increase the strength of this continuation pattern.
Upside and downside Tasuki Gap
An upside Tasuki gap is a white candle that gaps up from prior white candles. If this gap is not
filled, it means the bullish trend has maintained control. If it is filled, it means the bullish trend
has likely reached the end.
Meanwhile, a downside Tasuki gap is a continuation pattern with a long, black body followed by
another black body that has gapped below the first one. The third candlestick is white and
opens within the body of the second one, then closes in the gap between the first two
candlesticks, but does not close the gap.

Mat hold
The Mat hold is probably one of the most interesting patterns that can be found on a chart. It is
considered a very reliable one, but it’s also a very rare one. The pattern signals that the security
will continue its previous directional trend. The pattern is initially indicated by the first, significant
candlestick in one direction or another, followed by three small opposite trending candlesticks.
The fifth one then continues the first candlestick’s trend, pushing higher or lower, in the same
direction as the first movement.

Indicators and
Oscillators
Indicators and oscillators are tools that help identify the prevailing trend and sentiment, and are
also used to determine turning points as well as entry and exit points. In this section, we will
introduce you to the most popular, commonly used indicators and oscillators.
Some of the most popular indicators are:
● Moving averages: SMA/EMA

● Bollinger bands
Some of the most popular oscillators are:
● MACD
● RSI
Bollinger bands
Bollinger bands are volatility bands placed above and below the moving average. The volatility
is based on the standard deviation, so the wider the bands are, the higher the volatility.
Let’s take a look at when we should be possibly looking to buy, as well as what selling signals
we could look out for using Bollinger bands.
Uptrends
● If an uptrend is strong, it will reach the upper band on a regular basis. Reaching the
upper band shows the given asset is pushing higher, and buying activity remains strong.
● When the price pulls back within the uptrend, if it stays above the middle band and then
moves back to the upper band, it shows a lot of strength.
● During an uptrend, the price shouldn’t break below the lower band; if it does, this
indicates that the uptrend has slowed and may be reversing.
Downtrends
● If a downtrend is strong, it will reach the lower band on a regular basis. Reaching the
lower band shows that selling activity remains strong.
● When the price pulls back (higher), within the downtrend, if it stays below the middle
band and then moves back to the lower band, it shows a lot of strength.
● During a downtrend, the price shouldn’t break above the upper band; if it does, this
indicates the uptrend has slowed and may be reversing.
Oscillators
Oscillators take their name from the fact that they oscillate (in a manner similar to a sine wave)
around a horizontal line called the line of balance. This refers to your price points and zero
momentum, which is the point at which the momentum does not rise or fall. When this is the
case, we say that the market is stable and that a directional trend is yet to be observed.
Oscillator characteristics
● Determines when the price is susceptible to correction (when the market is exhausted in
the prevailing trend).
● Gives a signal to sell in the overbought zone, and a signal to buy in the oversold zone.
Shows divergence between oscillators and price, which can be helpful when making trading
decisions.
MACD
The MACD indicator was developed by Gerald Appel. It shows the difference of the two
exponential averages moving with nine-period exponential average of the difference as a signal
line. Currently, a typical MACD indicator is defined as 12-26-9, where the average 12 and 26
day-old calculates the difference, and 9-day average is a signal line.
The result is a smooth oscillator that can give signals to the transaction: the intersection of the
zero line, divergences, and the intersection of the input signal in overbought or oversold zones.
Let’s move to trading signals which are generated by MACD.
The MACD buy signal is generated when the MACD (blue line) crosses above the MACD Signal
Line (red line). Similarly, when the MACD crosses below the MACD signal line, a sell signal is
generated. We could also place trades based on MACD when the blue line crosses the zero line.
In this case, the buy signal is generated when the blue line crosses above the zero line, and the
sell signal when it crosses below.
The MACD moving average crossover is one of many ways to interpret the MACD technical
indicator. Using the MACD histogram and the MACD divergence warnings are two other
important methods of using the MACD.
RSI (Relative Strength Index)
The RSI is a technical momentum indicator that compares the magnitude of recent gains to
recent losses for determining when the underlying asset is overbought or oversold. In general, it
should signal when a potential correction of the recent move could occur.
The RSI is probably the most common oscillator and is typically used for 14-day periods. An RSI
value falling within the 0 to 30 region is considered oversold. Traders assume that an oversold
currency pair is an indication that the falling market trend is likely to reverse and can be treated
as a buy opportunity.
On the other hand, the RSI value falling into the 70 - 100 region of the scale is regarded as being
overbought. This signal suggests that the resistance level for the given asset is near or has been
reached and the rate is likely to fall; traders would interpret this as a sell opportunity. For
example, if you see that the RSI for EURUSD has risen above 70, a sell signal is generated and
you could sell the pair.
Pros and cons of the RSI
Technical indicators and oscillators can be useful tools. They can show when a trade could be
opened and in which direction it could go. However, it’s worth remembering that they are based
on the past, and not on the future.
This means that from time to time they can send a false signal that may lead to a loss. That is
why a responsible trader should not always trust them, but use them as a confirmation or a
negation of a signal.
This article is provided for general information and educational purposes only. Any opinions, analyses,
prices or other content does not constitute investment advice or recommendation. Any research has not
been prepared in accordance with legal requirements required to promote the independence of
investment research and as such is considered to be a marketing communication. XTB will accept no
liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly
or indirectly for use of or reliance on such information. Please be aware that information and research
based on historical data or performance does not guarantee future performance or results.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of
retail investor accounts lose money when trading CFDs with XTB Ltd. Youshould consider whether you
understand how CFDs work and whether you can afford to take the high risk of losing your money.
Publication by XTB Ltd.

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Technical Analysis​Trading Guide - Free Ebook

Publication by XTB Ltd.

Price patterns are divided into two groups:

● Trend reversal patterns

Source: XTB Research

Source: XTB Research

Flag and Pennant

Source: XTB Research

Trend reversal patterns

Head and Shoulders Pattern

Source: XTB Research

Let’s have a look at a real market example:

Source: XTB Research

Double top and double bottom formation

Source: XTB Research

There are two types of wedges:

Source: XTB Research

Rounding bottom and rounding top

Source: XTB Research

Trend reversal patterns

Here are some of the most popular trend reversal patterns:

● Bearish and Bullish Engulfing

Bearish and Bullish Engulfing

Source: XTB Research

Bearish and Bullish Harami

Source: XTB Research

Source: XTB Research

Morning and Evening Star

A morning star is a bullish reversal pattern consisting of three candlesticks - a long-bodied

Source: XTB Research

Source: XTB Research

Source: XTB Research

Source: XTB Research

Trend continuation patterns

Here are the most popular continuation patterns:

● Three White Soldiers

Three white soldiers

Source: XTB Research

Three black crows

Source: XTB Research

Upside and downside Tasuki Gap

Source: XTB Research

Source: XTB Research

Some of the most popular indicators are:

● Moving averages: SMA/EMA

Some of the most popular oscillators are:

Source: XTB Research

Source: XTB Research

RSI (Relative Strength Index)

Source: XTB Research

Pros and cons of the RSI

Publication by XTB Ltd.

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Technical AnalysisTrading Guide - Free Ebook