Is technical analysis important?
Yes it is. Technical analysis can help you decide not only where and when to exit a trade, but also where or when to enter a trade. By identifying past patterns that are likely to repeat, technical analysis is a very helpful tool for identifying possible probabilities and selecting trades with good opportunities. It is very difficult to stay profitable all the time, but without the use of risk management we would say that it is almost impossible.
Chart patterns
Chart patterns are the essence of technical analysis. Using a series of curves or lines, the chart pattern is a graphical representation of price movement. Factors such as human behaviour can cause fluctuations in the cost of a financial asset. These patterns form the basis for technical analysis and help identify trend movements with the price of an asset.
If you are a trader yourself, you know that the ability and understanding to recognise patterns can greatly improve your chances of guessing where the price in question will move. The most common type of chart pattern is a trendline, but there are others, such as pennants, flags, wedges, double and triple tops (and bottoms), and head and shoulder formations.
It is worth noting that patterns can be formed in any time span from seconds to months. Sometimes ticks are added to a bar, line or candlestick level chart. Chart patterns are not based on science or physics; their success depends largely on the number of market participants who take note of them.
The following two chart pattern types are available:
- Continuation chart pattern: common continuation patterns include flag patterns, pennant patterns and triangle patterns. This pattern helps traders establish opportunities to continue the trend.
- Reversal chart patterns: A common expression is "the trend is your friend until it mixes". Reversal patterns try to find where trends end, the opposite of continuation patterns. The aim is to find trading opportunities to reverse a particular trend.
Some of the most commonly used reversal patterns are:
- triple top
- triple bottom
- head and shoulders
- head and shoulders
- double bottoms
- double tops.
These patterns work as well as they actually do (a recurring pattern in larger price movements) due to the fact that chart patterns work over a variety of time frames.
Here is good point from technical traders in Thailand: "ฉันทามติทั่วไปของผู้ค้าด้านเทคนิคคือราคาใน ฟอเร็กซ์ exness ประเทศไทย มีข้อมูลที่จําเป็นทั้งหมดเช่นการรับรู้มูลค่ายุติธรรมและความเชื่อมั่นของตลาด. รูปแบบแผนภูมิตรวจสอบสินทรัพย์ทุกประเภทตั้งแต่สกุลเงินหุ้นพันธบัตรและสินค้าไปจนถึง cryptocurrencies."
"The general consensus of technical traders is that price contains all the essential information such as perceived fair value as well as market sentiment. Chart patterns examine every asset class, from currencies, stocks, bonds and commodities to cryptocurrencies."
Chart Pattern Psychology
Market psychology is a driving force for chart patterns. All prices and their formations are reflected in selling and buying pressure (using a chart guide). The driving force that plays a major role in shaping these prices is, of course, supply and demand.
Due to the universal laws of supply, demand and emotion, it does not matter what time frame you choose to trade the chart patterns. This is because the orders are given by humans.
Here we have listed the three most important steps to a top-down approach to trading chart patterns:
When deciding which time frame to trade, always keep in mind what type of trader you are.
For example, the daily chart and 4 hours can be used to scalp the market, or for swing trading.
Intraday charts with 5 and 15 minutes are generally used for scalping the market and day trading.
The weekly-monthly time frame is good for position trading.
- Depending on your chosen time frame, you should identify the dominant trend for that time frame.
- Once you have identified a dominant trend, you can identify chart patterns to time the market.
Never trade based on chart patterns alone unless you have a frame that is set last to end up trading based solely on your emotions.
