Technical Analysis Explained 

Last Updated: April 13, 2021

By Rayner

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In today’s episode, you’ll discover the truth about technical analysis nobody tells you.

So tune in right now…

Resources

The NO BS Guide to Technical Analysis

Price Action Patterns That Work

Price Action Trading: 6 Things To Look For Before You Place A Trade

The NO BS Guide to Forex Indicators

Transcript

Hey, hey, what’s up my friend? I’m sure you know what technical analysis is and you are overwhelmed by things like candlestick patterns, RSI, MACD, Fibonacci, retracement, pullback, trend markets, breakouts.

How do you make sense out of all this madness out there? In today’s video, I’m going to break it down to you step-by-step what exactly technical analysis is all about and how to improve your trading results.

In technical analysis, there are lots of trading tools and techniques out there, but you can pretty much break them down into four categories.

Category #1: Charts

This is where you get things like candlestick charts, line charts, bar charts, and if you want to dive a little bit deeper, candlestick charts can even be broken down into individual candlestick patterns.

This is where you get things like a hammer, shooting star, engulfing pattern, etc. Charts are useful to help you identify the current market condition, whether the market is in an uptrend, in a downtrend or a range. This is what candlestick charts are for.

Also, candlestick patterns are useful to serve as an entry trigger to tell you exactly where to enter a trade. It could be when the price breaks above resistance, or it could tell you when to get out of your trade when setting your stop loss, maybe below the lows of a certain price level. This is the purpose of the candlestick charts.

Category #2: Drawing tools

Drawing tools refer to things like support resistance, trendlines or trend channels. These are drawing tools on your chart. In essence, you’re drawing things on your chart. That’s why we call them drawing tools.

They are useful to help you identify the area of value which is especially important for discretionary traders or price action traders. By drawing support resistance, you can identify where potential buying or selling pressure might come in. Drawing tools are mainly useful to identify areas of value.

Category #3: Trading indicators

These could be things like RSI, MACD, Fibonacci, moving average indicators, etc. They are very versatile because there are many types of different indicators out there.

Indicators can have many purposes, for example, they can help you identify your area of value, for example, in a trending market, the price tends to respect the 50-period moving average and bounce off it several times. The 50-period moving average in this case can serve as an area of value.

At the same time, you have tools like the Average True Range indicator, which can help you manage your trades by setting proper stop losses. For example, let’s say the price has come into an area of support.

You don’t want to set your stop loss just below the lows of support as the price might spike to hit your stop loss and reverse up higher. How do you give it some buffer so that you don’t get stopped out too early?

You can use a tool like the Average True Range indicator to determine what is the historical volatility of the market—it could be 20 pips for the forex market, or it could be $5 for certain stocks.

Once you’ve identified the historical volatility, you can take that number as a buffer and add it below the low of support. If the low of support is $100 while the ATR value is $5, your stop loss can be $100 minus $5 which is $95.

This is how the ATR indicator can help you manage your trades to set up proper stop losses.

Category #4: Volume

I don’t use volume in my trading, but there are other traders out there who swear by it. (Who am I to say that it doesn’t work.) Most traders use volume to identify the strength or weakness of a trend.

In a trending market, the price makes higher highs and higher lows. For people who use volume, they want to see a decrease in volume during a pullback. Then when the price breaks out to a new high, they want to see an increase in volume.

When they see this “pattern”, then they’ll think that the trend is healthy. This is how volume comes into play. Some traders want to see an increase in volume during breakouts, as they find that such breakouts have a higher probability of working out.

Again, I don’t use volume in my trading, but other traders use it. I’m just sharing this other aspect of technical analysis that you can consider.

Now the final question is…

How to use technical analysis in your trading?

There is so much out technical analysis knowledge out there and I’ve only covered four broad categories. And within these categories, there are even subcategories within them. How can you make sense of all this technical analysis knowledge out there?

Very simple, I have two guidelines for you.

1. Know the purpose of it

I’ve explained to you some of the purposes of all these technical tools. For example, charts can help you identify the market structure, drawing tools to help you define your area of value.

You must know the purpose because without knowing the purpose, then it’s going to be very difficult to know what fits your needs. Make sense?

2. Take what you need and discard everything else

Yes, I’ve shared with you four different categories of technical analysis, but it doesn’t mean that you must use everything from all four categories. It doesn’t mean that you have to use all indicators. Remember that I just shared with you that I don’t even look at volume in trading.

In essence, my trading is boiled down to just those three categories. And if you want to take things a step further, you can maybe just focus on charts and price action, which is just the first category. That’s fine if it works for you.

To only take what you need, you must know the purpose of your tools. And once you know the purpose based on what you need, you can discard everything else. This is really what a technical trader is all about because everything else will be noise to you.

Let’s do a quick recap about what technical analysis is about…

Recap

  1. Charts can be used to help you identify the current market structure and market conditions, be it line charts, bar charts, candlestick charts, etc. There are also candlestick patterns, which are more microscopic.
  2. Drawing tools like support resistance, trend lines, trend channels to help you identify your area of value.
  3. Indicators like Average True Range, moving average, RSI, MACD, etc. can help you to manage your trades, identify areas of value and much more.
  4. Volume might help you assess the strength or weakness of a market, or even breakouts, etc.

With that said, I wish you good luck and good trading. I will talk to you soon.

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