8/4/2017 Technical Analysis

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Technical Analysis

Technical analysis represent the homework of a trader or investor before

they can make better decision about their activities in markets. There are
various aproaches but roughly we can put them into two main category.
Those traders and investor who give more weight to studying charts and
price action to understand where price may be going - Technicals, and those
who think overal economic climate de nes the direction of the price -
Fundamentals.

1)Trends
Technical Analysis contains lots of different aspects and subjects . One of the
Topics that we are going to cover here is “Trends”.

What is a Trend?

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To keep it simple, say that a trend is really nothing more than a “direction” in
wich a currency pair is trading.

Type of trends?

If you would ask the majority of the traders what they know about trends,
they would probably tell you that there are 3 types of trends; an Uptrend,
Downtrend and a Sideways trend. However, there are in reality only 2 types of
trends.

There is an Uptrend and a Downtrend. A “Sideways Trend” really doesn't

exist, because even if price moves in a “sideways” range, price is still trading
up and down....Also there are only 2 types of orders that can be placed, either
a Buy order or a Sell order. There is no sideways order :-)

We can see that on the left side of the picture, price is trending down and
that it is trending up on the right side of the picture. When price is trending
in either a down or uptrend , it is not trading in a straight line.

If you observe how price tends to move, you will certainly recognize a
“repetitive pattern”.

In a Downtrend, price will tend to move down while making Lower Highs (LH)
and Lower Lows (LL) and in an Uptrend price will tend to move up while
making a serie of Higher Highs (HH) and Higher Lows (HL). So in other words,
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price would have to make new highs or new lows in order to remain in an up
or down trend.

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Start of new Trends

Since we rmly believe in the Supply and Demand dynamics, we expect price
reversals or Trends continuations to take place at a signi cant Higher
Timeframe Supply or Demand levels. See Supply and Demand basics article
here.

In other words we would expect to see a new Uptrend forming at a signi cant
Demand Level and a new Downtrend at a signi cant Supply Level.

A Trend Continuation would most of the time occur once an Unfresh Supply
or Demand zone would break. See RBR & DBD for more info about breaks of
S/D levels.

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The following chart is all about the Higher Timeframe (in this case 4h TF)
trends at Supply or Demand. You can clearly see price trending up in yellow
and down in blue, if you would zoom in, on a LTF, you would see price making
HH's in the yellow box and LL's in the blue box.

And the chart below is a representation of an Unfresh Demand Level that got
broken, allowing the downtrend to continue. Here again, looking at a LTF
such as a 15 min and lower, you would clearly see Lower Highs and Lower
Lows in the blue highlighted areas.

End of a Trend
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We would expect to see a trend ending when price arrives at a fresh Supply
or Demand level. However if the Supply or Demand level isn't Fresh anymore,
two things can happen.

a trend reversal
a trend continuation

There are clues that can help us to determine if a Supply or Demand Level
will hold or not but this in itself is whole other topic See S/D or Price
Compression.

Looking at HH's/HL's and LH's/LL's can also help us in our Trend analysis.
Let's take a Downtrend for an example. We would have been trading down
from a signi cant Higher Timeframe Supply Level, while arriving at an
opposite level, in this case a HTF Demand level, we would look at price
movement, we would like to see price making a new high aswell as HL's. Note
that a Trend is relevant to the Timeframe we are looking at; while on a 4h
Chart we may see an Uptrend, when we zoom in at a Lower Timeframe such
we may see an opposite trend there.

See charts below for an explaination on a chart.

Trendlines
A trendline is a tool that is used to connect the Higher Lows (in an uptrend)
or the lower highs (in a downtrend) . This technique will help visualize the
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current trend and can be used to add “Con uence” to a trade setup.

On the rst chart, we can see that the trendline got broken once price
bounced up from the HTF Demand Level and vice versa for the second chart
and the Supply Level.

Drawing Trendlines
When drawing trenlines, connect the obvious LH's or HL's. In a downtrend,
look for a high followed by two lower highs. In a downtrend, I look for a low
surronded by two higher lows.

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This way we”ll be able to pick the quality Highs and lows from the other ones.
Look at the charts below...  the quality highs and lows are circled, the rest do
not qualify since they do not meet the wanted criteria.

2)Support & Resistance

Now that we talked about Trends, there is another important subject that we
have to cover. In this second part of the Technical Analysis article, we will

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cover Support & Resistance.

What is Support & Resistance?

A Support also refered as “ oor” and Resistance also refered as “Ceiling” is

nothing more than a decision level that rst gets tested and than either
“accepted” or rejected, thus “broken”.

When Price bounces from a Support level, it does so because there was much
more Buying Pressure than Selling Pressure at that particular point and vice
versa for a Resistance level.

It's as simple as that...

What do Support & Resistance look like?

As you can see on the above picture, when price came to test the Resistance
level, a decision was made. In this case the decision was that price was too
high, forcing price to trade down untill it found a Support level.

Let's look at the picture below. Look at the “pattern” in which price behaves
between and at the lines, It is almost like a bouncing ball that is bouncing
from the oor to the ceiling...

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Support and Resistance breakout

If you search for Support and Resistance on the internet, you will probably
nd that lots of sources/traders think that the more a Support or Resistance
level gets tested, the better...

Obviously, this doesn't make sence at all, because every time price comes to
test an S/R level, it consumes the Sell/Buy orders at every touch/retest. So
sooner or later all the orders will get lled and a breakout will have to take
place.

When a breakout will happen, Support will often become Resistance/

Resistance will become Support.

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When we went over the Trends topic, you learned that in order to have an
uptrend, price had to keep on making Higher Highs and Higher Lows and
Lower Highs and Lows for a downtrend, Now you will understand that the
highs in an uptrend, and the lows in a downtrend, will have to get broken for
the trend to continue it's direction.

How to draw a Support/Resistance level?

There are really no xed rules to draw Support and Resistance levels Often
the easiest way to draw a Support/Resistance level, is to use a line chart.

Let's look at a line chart and nd some Support and Resistance levels. Looking
for Key tops and bottoms with at least 2 touches in order to draw a horizontal
line. What we want to nd are turning points or swing points and mark them.

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Sometimes you will see price arriving at a support or resistance level and
trying to break the line, trading above the resistance or below the support
and than quikly pulling back and closing under the resistance line or above a
support line. This is what is called a “false breakout” , or fakeout. A fakeout
happens for different reasons. One of the reasons is that price is looking for
liquidity (a stop loss hunt). We are not able to know how many touches a
support or resistance can accept, we can only know that it often becomes the
opposite once it is clearly broken.

Extra Comments:

-When we get a False Breakout at a support or resistance level, while it's

breaking out, it will very often react to a previous decision point.

HOME EDUCATION FORUM

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HOME EDUCATION
-A support/resistance area is notFORUM REGISTRATION
totally the same MORE
as a Supply or Demand
level.
LOGOUT
A supply or demand level is an area where the real orders are placed while a
support or resistance area is where we can spot the retests of the fresh
supply or demand levels. However, we believe that every historical price lines
such as Support & Resistance are based on a historical Supply or Demand
level.

-Support and Resistance areas can be spotted on any chart and on any
timeframe. However, the Higher Timeframes supply and demand zones are
much stronger than the Lower Timeframe ones.

by Mel

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