Now that you know about chart types and timeframes, it’s time to study the actual price movements of various assets. Note that the things related to price chart analysis, such as technical analysis, work for all assets. In this lesson, we’ll focus on analyzing the raw data from a price chart, known as price action.
Trends and corrections
A trend represents the general direction of an asset’s price movements. Trends can move upwards (bullish), downwards (bearish) or sideways (ranging).
- An uptrend is characterized by prices making higher highs (HH) and higher lows (HL). It looks like a series of peaks and troughs, with each peak higher than the previous one and each trough higher than the previous one.
- A downtrend, conversely, shows prices making lower lows (LL) and lower highs (LH). This is a series of decreasing peaks and troughs.
- A ranging or sideways market doesn’t show a clear uptrend or downtrend. Prices instead fluctuate within a range.
Corrections, on the other hand, are temporary price reversals of an overall upward or downward trend. They are typically smaller in magnitude than the overall trend and do not indicate a change in the overall trend.
Tip #1: As a beginner, follow the rule, “The trend is your friend.” This means opening Up trades during an uptrend and Down trades when there is a downtrend. It’s believed that if there’s a trend, it’s more likely to continue than reverse. Thus, trading in the direction of a trend generally produces higher rewards with lower risks than trading against a trend or on a correction.
How to spot a trend
Visual analysis is a simple but efficient way to determine price trends. Look for HHs and HLs for uptrends and LHs and LLs for downtrends.
Use trendlines to mark trends on the chart. Click the Technical Analysis icon in the chart window, choose drawing instruments, and pick Trendline. Draw a line that connects the lows in an uptrend or highs in a downtrend. This can help you visualize the trend and plan your trades accordingly. When you project this line to the future, the price will likely bounce from it the next time it approaches the line.
You can also use technical indicators to spot a trend. For example, a Moving Average (MA) can smooth out price data. The price above the MA typically signifies an uptrend, while the price below the MA signifies a downtrend.
Overall, the best option is to draw a trendline and use an indicator to confirm the trend’s direction.
In an uptrend, the trendline is drawn through the lows of the price chart. In many cases, it’s possible to also draw a parallel line connecting price highs, resulting in a trend channel. Still, in an uptrend, the line going through lows is more important because once the price breaks below it, it means that the trend has changed.
Tip #2: Each timeframe contains a different period of price action. Looking at a 1d timeframe, you’ll see what has happened to an asset’s price over the previous months. If you switch to 1h, you can observe the price action for the past several days in greater detail. Naturally, the trends in these timeframes will be different. So, as explained in the previous lesson on timeframes, always check a bigger timeframe to see what the longer-term trend is.
Support and resistance
These are key levels on a price chart. They act as visual barriers for the price. When the price reaches one of these levels, it will likely reverse direction.
- Support is an area below the current price, where buying pressure may exceed selling pressure, causing the price to bounce upwards. It acts as a floor that the price is not likely to break through.
- Resistance, conversely, is an area above the current price, where selling pressure could surpass buying pressure, pushing the price downward. It acts as a ceiling that the price is not likely to break through.
Identifying support and resistance
Here are a few types of support and resistance levels.
1. Swing highs and lows
A swing high is a candlestick with at least two LHs on both the left and right, and a swing low is a candlestick with at least two HLs on both sides.
2. Psychological levels
Prices ending in “00” such as 1.4000 or 105.00 often act as key support and resistance levels. This is due to the psychological impact these round numbers have on traders.
3. Moving Averages
MAs, especially longer-term ones, can also serve as dynamic support or resistance levels.
4. Trendlines
These can provide diagonal support and resistance levels, helpful for identifying potential areas of interest in trending markets.
Once you identify potential support and resistance areas, you can draw horizontal lines on the chart. This visual aid helps you know when to act as the price approaches these levels in the future.
Tip #3: Generally, the more often a support or resistance level is tested (by the price reaching, but not exceeding or “breaking” it), the stronger that level is. This can make the level a more reliable barrier for future price action.
Tip #4: When the price breaks through a support or resistance level, it often happens that the roles of the levels are reversed. Once breached, a resistance level can become a support level, and vice versa.
You can use support and resistance to find entry and exit levels for your trades, especially if you combine them with trend analysis. If the price reverses upwards from support and there is an upward trend, it’s a good opportunity to open an Up trade. Conversely, if the price moves downwards from resistance and there is a downward trend, you can consider making Down trades.
Next
In the next lesson, you’ll learn about technical indicators to help you better understand what’s happening on a chart and forecast future price moves.