Technical analysis is suitable for people who want to gain significant profits by entering the financial markets through short-term trading. Technical analysis tools allow you to predict future price trends and determine the best entry or exit point by examining price changes and volume of transactions on the chart. Note that it is not necessary to use all the tools to analyze an asset, but you can achieve a favorable analysis by choosing a strong strategy and using appropriate tools. However, using the tools together will help you make more confident trading decisions. For more information, we suggest you read the technical analysis training article.
Trading tools in technical analysis
Trading tools in technical analysis are tools that give traders a buy or sell signal to buy or sell an asset. With the help of these tools, price patterns can be recognized and price trends can be predicted. In the following, we introduce the most important technical analysis tools.
Static and dynamic support and resistance levels
Static support and resistance levels are said to be levels that were formed in the past, but over time, their real value has not changed and may act as strong support or resistance again. Determining support and resistance levels is one of the basic topics of technical analysis, which is of great importance. To draw these levels, it is enough to connect the bottoms or peaks formed at different times with the help of a horizontal line. Note that the shadows of the candles should also be taken into account when drawing these lines.
Dynamic support and resistance levels are said to be levels that change over time and according to market conditions, their Rial value. To draw these levels, you need to connect price tops or bottoms. The difference between dynamic levels and static levels is that the peaks and bottoms of dynamic levels change in different time periods; Whereas in static levels, these peaks and troughs are the same over different time periods. Dynamic support and resistance levels are drawn as diagonal lines and can be ascending or descending.
In general, the validity of support and resistance levels depends on the number of collision points, the length of time the price remains at these levels, and the amount of trading volume at these levels. As the number and amount of these parameters increase, the validity of the level will increase. Another noteworthy point is that if these levels are formed on rand numbers, they will usually be more valid.
◊ Be sure to read this article: definition of static and dynamic support and resistance
When the price of an asset is placed between two parallel support and resistance lines, a price channel is formed. Depending on the pressure of supply and demand and the direction of price movement, channels can be ascending, descending or horizontal. Technical analysts use channels to detect price breakouts. A price breakout occurs when the price chart breaks the resistance or support line of the channel and moves out of the channel.
As we said, the channel consists of two lines of resistance and support. Usually, if the price chart hits the support line, the price increases and moves upwards, and if it hits the resistance line, it leads to a decrease in the price and its downward movement. In other words, if you hit the top of the channel, you should be in a sell position and if you hit the bottom of the channel, you should enter a buy position. Of course, this is if failure does not occur.
Indicators are tools that are drawn on the price chart and with the help of mathematical calculations and based on the price and volume of transactions, they provide financial market traders with information such as price trends, price acceleration, etc. This tool is used as a final confirmation and it is better not to use it alone for buying and selling. The most important and widely used indicators are:
Moving Average Indicator
The “moving average” indicator uses the price as data and based on the time period defined for it, provides an average of the past prices in that time period. Then it displays the obtained numbers as curved lines on the graph. In fact, the moving average follows the price trend and has the same movement as the price chart. This indicator has different types, the most commonly used ones are Simple Moving Average and Exponential Moving Average.
◊ Be sure to read this article: Get to know simple and exponential moving average indicators
In the simple moving average, the prices in a period of time are added together and divided by the number of days in the period. (Note that this period can be defined daily, hourly or minutely). The criticism of this indicator is that the effect of all days of the period is the same. While in the exponential moving average, this problem has been solved and more weight has been given to the prices of the last days of the period in the calculations.
One of the practical methods in using the moving average is to use several moving averages in different time periods. In other words, if the short-term moving average crosses the long-term moving average from the bottom to the top, the trend will be upward, and if it crosses from the top to the bottom, the trend will be downward.
In the above image, the blue, purple and pink lines are the 4, 9 and 18 day moving averages, respectively. In the points where the 4-day, 9-day, and 18-day moving averages are placed from top to bottom, we see an upward trend. Also, at the points where this order is reversed, i.e. the 18-day, 9-day and 4-day moving averages are placed from top to bottom respectively, the downward trend has started.
Bollinger Band indicator
The “Bollinger band” indicator consists of three bands, the middle line of which is equivalent to the simple moving average of the price for a defined period of time (20 days). If we multiply the standard deviation by 2 and add it to the 20-day moving average, the upper band will be obtained, and if we subtract it from the 20-day moving average, the lower band will be obtained.
This indicator alone does not issue a buy or sell signal, but only shows areas where overbought or oversold has occurred. In such a situation, you should take help from other methods and analytical tools to be able to recognize the trend and sensitive points for entry or exit.
You can also check price fluctuations with the help of this indicator. In this way, if the upper and lower bands approach the moving average, i.e. the points where you see compression in the Bollinger Band, there is a high probability of changing the trend and creating important trading opportunities.
In the following, we will introduce some important oscillators. The most obvious difference between oscillators and indicators is in the way they are displayed. Oscillators are displayed in a separate space above or below the chart. While the indicators are placed on the price chart. In addition, oscillators have the ability to create divergences with the price chart. The divergence of the chart and the oscillator is one of the most reliable buying and selling signals. While indicators do not have this capability.
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The “MACD” indicator, or moving average converging and diverging index, is one of the technical analysis tools that can detect the direction and strength of the price trend. This indicator is made up of two lines and a signal line. Also, the difference between these two lines is displayed with histogram lines.
If the MACD line crosses the signal line from bottom to top, it indicates an increase in price, and if it crosses from top to bottom, it indicates a decrease in price. The entry and exit signal can be determined based on the location of the MACD line. For example, if the indicator is above zero and the MACD line crosses the signal line from top to bottom, an exit signal is issued and you can sell. Also, if the indicator is below zero and the MACD line crosses the signal line from the bottom to the top of the signal line, the entry signal is issued and you can buy.
In addition, MACD divergence and the price chart are among the things that can be used to identify the direction of the trend and determine the return points. If there is a positive divergence, we have to wait for the price to increase, and if there is a negative divergence, the price is expected to decrease.
“RSI” indicator or relative strength index is a technical analysis tool that fluctuates between 0 and 100 and shows overbought and oversold areas. In fact, with the help of this indicator, we can identify the direction of the trend and return points. This indicator is one of the most popular technical analysis tools and is widely used by financial market traders. Usually, in the RSI indicator, the area between 70 and 100 is considered overbought and the area between 0 and 30 is considered oversold. The closer the RSI gets to 100, the more oversaturation has occurred and the more likely the trend will change and the price will fall. On the other hand, as the RSI gets closer, the saturation in sales increases and the possibility of changing the trend and increasing the price increases.
One of the most important uses of RSI is divergence with the price chart. When there is a divergence between the indicator and the price chart, it indicates the weakness of the current price trend and is considered a warning to change the trend.
In addition to the above, support and resistance levels in the RSI are also of great importance. For example, in uptrends, the 30 level can be a strong support. As in downtrends, the 70 level acts as a strong resistance. Of course, these support and resistances are not just static, but dynamic support and resistance lines can also play an important role in identifying the trend.
The “stochastic” indicator or random oscillator is one of the technical analysis tools that shows the strength of the trend by examining the Close price in a certain time frame. . This indicator also fluctuates in the range of 0 to 100, where the area between 0 and 20 is considered an oversold area and 80 to 100 is an overbought area. In stochastics, the size of the movement is very sensitive to the price and is accompanied by large fluctuations. For this reason, this indicator performs better when the market is neutral.
◊ Be sure to read this article: How to analyze stocks using stochastic indicator?
When you intend to use this indicator and trade in overbought and oversold areas, consider the overall price trend. For example, if the price trend is upward and the stochastic is below the 20 level (oversold area) and is moving upwards, there is a possibility that the price will increase; It means that a possible buy signal has been issued. Also, in downtrends, if the stochastic enters the saturated zone, you should wait for a sell signal, not a buy signal.
From examining the price chart over time, it has been observed that the asset has shown certain reactions after forming a pattern in the price chart. These forms are called “price patterns” that repeat over time, and this feature has made traders sensitive to the formation of these patterns. Analysts use these patterns to detect trend continuation or reversal points. Note that the basis of the formation of these patterns is drawing trend lines. In fact, by drawing support and resistance lines, these patterns are formed on the chart.
Price patterns are generally divided into two categories: “Continuation” and “Retracement” patterns. Continuation patterns indicate a short break in the market trend, and after the formation of these patterns and their failure, the previous market trend will continue. While after the formation of return patterns, the market trend will change. In the following, we will try to point out the most important classical patterns.
◊ Be sure to read this article: types of continuation patterns in technical analysis
The triangle pattern consists of two intersecting trend lines and is placed in the category of continuing patterns. In general, these patterns are divided into three categories, which we will introduce below.
Symmetrical triangle pattern
This pattern consists of two converging trend lines, the slope of one of which is positive and the slope of the other is negative. In fact, the upper side of the triangle acts as resistance and the lower side as support. This pattern can be broken from the top or bottom side. If the downtrend breaks from the lower side, the downtrend continues. Also, in uptrends, if the upper side of the triangle is broken by the price chart, the uptrend continues.
Ascending triangle pattern
This pattern consists of an almost horizontal line as the upper side and a trend line with a positive slope as the lower side. The ascending triangle pattern is usually formed in upward trends, and after the upper side of the triangle breaks, the upward trend of the price will continue.
Descending triangle pattern
The lower side of this pattern consists of an almost horizontal line and the upper side of a trend line with a negative slope. This pattern is usually formed in downward trends and after the price chart breaks the lower side, the downward trend will continue.
The “wedge” pattern consists of two trend lines whose slope is in the same direction; That is, the slope of both is positive or negative. This pattern can be ascending or descending. If the slope of both trend lines is positive, an ascending wedge pattern is formed, and if it is negative, a descending wedge pattern is formed. This pattern can be placed in the category of continuing or returning patterns. It depends on the process in which the pattern is formed.
Pair of peaks and pairs of valleys pattern
Usually, the “pair of peaks” pattern is formed after a strong upward trend and with the formation of two price peaks together. This pattern is included in the category of reversal patterns and after its formation, we should wait for the transformation of the upward trend into a downward trend. In fact, with the formation of the peak pair pattern in the upward trends, a possible sell signal is issued.
The “valley pair” pattern is also formed after a strong downward trend and with the formation of two valleys side by side and below the price level. After the formation of this pattern, we should wait for the change of the downward trend to the upward trend. In fact, the formation of this pattern in downward trends gives a possible buy signal.
Head and shoulders pattern
Sorushane pattern is included in the category of recursive patterns. This pattern is usually formed after an upward trend and with the formation of three peaks, the second peak being larger than the other two peaks. The first and third peaks are called the left shoulder and the right shoulder, respectively, and the second peak is called the head. After the formation of this pattern in upward trends, we should wait for the price to decrease and start the downward trend.
The pattern of “reverse swing” is also the reverse of the swing pattern and is usually formed in downward trends. After the formation of this pattern in the downward trends, we should wait for the beginning of an upward trend and increase in price.
The “Flag” pattern is one of the continuing patterns, which consists of two parts, “Flag Pole” and “Flag Body”. This pattern is divided into two types of ascending flag and descending flag.
◊ Also read this article: Free price action training from zero to one hundred
A bullish flag pattern is formed when the market enters a downtrend with less momentum after a strong uptrend. After the formation of this pattern and its failure, the upward trend is expected to continue.
A bearish flag pattern is also formed when the market enters an uptrend with less momentum after a strong downtrend. After the formation of this pattern and its failure, the downward trend is expected to continue.
Cup and handle pattern
The “cup and handle” pattern is usually formed in upward trends and causes a short-term break in the upward trend of the market. This pattern is included in the category of continuing patterns and after its formation, the upward trend of the market will continue.
The “Rectangle” pattern is one of the simplest price action patterns and is formed when the price is stabilizing. In fact, peaks and valleys are formed from the fluctuation of the asset price between two support and resistance levels, which form a rectangular pattern by connecting them together. The rectangle pattern can be broken from the top or bottom. For this reason, this pattern can be both a return pattern and a continuation pattern.
The important thing about classic patterns is that the signals issued by these patterns are not definitive and you should take help from these patterns along with the tools to achieve the desired result for trading.
◊ Also read this article: Basic analysis training from zero to hundred
Price action is an analytical method that only examines the price chart and predicts the future price trend with its help. Indicators and patterns have complexities that require you to acquire the necessary expertise and skills to use them. While price action charts are very quiet and simple and provide you with the possibility of extracting more information. The most important advantages of this method are the following:
- Price Action makes it possible to get information faster.
- Complete and integrated information is provided to traders.
- Many mistakes caused by using other technical analysis tools are solved with the help of this method.
Here are some of the most important price action patterns:
Pin Bar Hammer pattern
The hammer pattern consists of a candle that has a small body and a long tail. If this sequence is longer at the top of the candle, the hammer pattern will be bearish and if it is longer at the bottom of the candle, the hammer pattern will be bullish. After the bullish hammer pattern is formed, the price trend is expected to be bullish. Also, with the formation of the bearish hammer pattern, we should expect a downward trend for the price.
Inside Bar Pattern
The internal candlestick pattern consists of two candles, the second candlestick is formed within the first candlestick and does not leave it. In other words, the second candle is smaller than the first candle and has a higher floor and a lower ceiling. These patterns are among the return patterns and after that we see a strong movement in the market.
External candle pattern ( Engulfing )
The “external candle” pattern consists of two candles and can be ascending or descending. In the bullish mode, the first candlestick is bearish and the second candlestick is bullish and bigger than the first candlestick. In the bearish mode, the first candle is bullish and the second candle is bearish and bigger than the first candle. . This pattern is included in the category of return patterns, and after that we have to wait for the trend to change.
Key Reversal Bar Candle Pattern
The “key reversal candlestick” pattern consists of two candles and can be bullish or bearish. In the bullish mode of the pattern, the second candle, which is bullish, opens below the Low price of the previous candle and closes above the High price of the previous candle. Also, in the bearish mode of the pattern, the second candle, which is bearish, opens above the high price of the previous candle and closes below the low price of the previous candle. This pattern is included in the category of return patterns and will lead to a change in the trend.
Exhaustion bar pattern
The “tired candle” pattern is formed when a group of market participants get tired after holding the market for a long time and another group takes action. For example, when buyers get tired after a while and sellers come into action, the probability of forming this pattern is high. An important point in forming a pattern is creating a “gap” or “failure”. In fact, pattern formation is associated with chat. The bullish state of this pattern is formed by creating a gap at the bottom of the previous candle and moves upwards with strength to close near the previous candle and at its high price. The bearish mode of this pattern is formed by creating a gap above the previous candle and moves down to close near the previous candle and at its low price.
“Fibonacci” tools are one of the most popular tools in technical analysis, which can be used to analyze the return or continuation of the trend. In fact, Fibonacci tools are resistance and support levels that are drawn in the form of different tools. In Fibonacci tools, paying attention to “percentages” is very important. Fibonacci includes a wide range of which the following are the most important Fibonacci tools.
◊ Also read this article: Free stock market training from zero to one hundred
“Fibonacci retracement” is one of the most important Fibonacci tools that can be used to estimate the end of a corrective wave and find suitable entry points. Important levels in this type of Fibonacci tool include five levels (23.6%), (38.2%), (50%), (61.8%) and (78.6%). In fact, at these levels, the probability of the end of correction and the beginning of an upward wave is high.
Fibonacci Extension _
“Fibonacci extension” is a Fibonacci tool that can be used to determine price targets or estimate price movement after a retracement. In fact, with the help of this tool, you can identify new resistance levels after the price crosses its last ceiling.
“Elliott waves are practical tools in technical analysis that are based on patterns, geometric calculations and psychology. Traders use these waves to identify recurring patterns that form based on market sentiment. In fact, in the Elliott method, price movements and the psychology of traders are examined together to recognize the behavior of the market by identifying recurring patterns. In other words, Elliott described the movement of the market with the help of a pattern consisting of 5 main waves. These waves are divided into the following two categories:
- Kinetic waves that are considered the foundations of the pattern.
- Corrective waves that are formed in the course of correcting kinetic trends.
Elliott waves include three kinetic waves and two corrective waves, which are the first, third and fifth ascending waves and the second and fourth descending waves. If the traders recognize these waves correctly, they can achieve significant profits in rising waves.
To use any of the technical analysis tools mentioned above, you need a strong platform or software. In the following, we will introduce one of the companies that provide you with these facilities.
The website was created
The Rahvard website is one of the products of Basana Financial Information Processing Company, which is known as the largest financial and trading information bank and offers users a complete set of technical and fundamental analysis tools. Among the features of this website, the following can be mentioned:
- Symbol filtering based on technical and fundamental parameters
- Receive specific and instant alerts for desired icons
- View the market map with the possibility of filtering and changing settings
- Providing financial and trading information of various assets
- Providing bulletins, reports, news and videos and educational articles
- The ability to adjust the price chart in different ways
- The ability to download mobile phone applications to use technical analysis tools
- Providing the latest technical analysis tools
Technical analysis is one of the financial market analysis methods that has gained great popularity among financial market activists today. In this method, various tools are defined to check the price charts. In this article, we tried to introduce the most important technical analysis tools so that you can use them to develop an individual strategy. Proper use of any of these tools, based on a strong strategy, can help you make significant profits.