Technical Analysis Guide – Part 1

Technical Analysis Guide - Part 1

This Blog is created to provide you with information about types of trends and Candlestick patterns . These are the base foundation of technical analysis.

Technical Analysis

Technical Analysis (or TA) is about forecasting the direction of prices through the study of past market data, primarily price and volume. Technical Analysis helps identify trading opportunities using the actions of Market Participants through charts, patterns, and indicators. Technical analysis helps traders and investors navigate the gap between intrinsic value and market price by leveraging certain techniques. Technical Analysis can give you an edge in the markets. However, Technical Analysis alone is not enough to become a profitable trader, You must have a trading strategy with an edge.

Topics to learn in Technical analysis
1. Trend
2. Candlestick Pattern
3. Support and Resistance
4. Supply and Demand
5. Chart Pattern

In this chapter of Blog, we’ll talk about the first 2 parameters. In the next chapter, we’ll discuss chart patterns.

Trend

Technical Analysis Guide - Part 1 - InfoBuket

The trend is a general direction of the market or has a certain tendency to go in a certain direction.
There are 3 types of trends: Uptrend, Sideways, Downtrend

1. Uptrend: Direction of the market in which the market continues to make new Higher High – Higher low is considered as Uptrend.

2. Sideways: Direction of the market in which market continues to remain in range & no further HH-LH is considered as Sideways.

3. Downtrend: Direction of the market in which the market continues to make new Lower High – Lower low is considered as Uptrend.

Candlestick Pattern

There are various types of charts like
> Bar Chart
> Candlestick Chart
> Line Chart
> Heikin Ashi
> Hollow Candle Chart
> Area Chart
> Baseline Chart
> Line Break Chart
> Renko Chart
> Kagi Chart
> Point & Figure Chart

But we mostly talk about Candlestick charts because it’s used worldwide by professional traders.

According to characteristics, candlesticks are of 3 types:

  • Bullish: Types of candlestick suggesting signals that the market will go higher is known as Bullish.
  • Bearish: Types of candlestick suggesting signals that the market will go Lower is known as Bearish.
  • Neutral: Candlestick which puts you in confusion or gives no clear direction is known as a Neutral/Indecision candle.

According to appearance candlesticks can be divided into 3 categories:

1. Single Candlestick Pattern
2. Double Candlestick Pattern
3. Three+ Candlestick Pattern

Japanese Candlestick is invented by Steve Nisson. To know more further about that download the book for free here “Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East“.

Candlestick Structure

candle-structure - Technical Analysis
image source : Google

Single Candlestick Pattern

There are 5 types of single candlestick pattern:

1. Marubozu
marubozu - Technical Analysis

The psychology behind the Marubozu candle is that market opens in one place and continued it move in a single direction up/down till the day-end and some of the participants hold overnight positions also.

It shows the market is in full control of buyers/sellers at that moment. It can drive the market further up/down. It is a very strong bullish/bearish pattern.

2. Inverted Hammer/Shooting Star
shooting star - Technical Analysis

The psychology behind Shooting Star/Inverted Hammer Candle is that as the market opens, it started going up during the session and at the end of the day seller takes over the market and closed it down below/the same place it started. It suggests that the market can be turned around from that place.

The name of the candle comes from the appearance of the day candle of that day, it looks like an inverted hammer.

3. Pin Bar/Hammer
hammer - Technical Analysis

The psychology behind Pin Bar/Hammer Candle is that as the market opens, it started going down during the session, and at the end of the day buyers take over the market and closed above/the same place where it started. It suggests that marketers can turn around from that place.

The name of the candle comes from the appearance of the day candle of that day, it looks like a hammer.

4. Spinning Top/ Indecision Candle
Spinning top - Technical Analysis

The psychology behind Spinning Top Candle is that as the market opens during the session it goes up and down in both directions and closed a little above/below where it started. It suggests that the market is indecision phase. It may continue in the previous direction or change the direction.

5. Doji/Indecision Candle
Doji - Technical Analysis

The psychology behind Spinning Top Candle is that as the market opens during the session it goes up and down in both directions and closed a little above/below where it started. It suggests that the market is indecision phase.

It may continue in the previous direction or change the direction.

Double Candlestick Pattern

1. Bullish Harami
BULLISH-HARAMI - Technical Analysis

It’s a 2 candle pattern. This candle forms a downtrend. The first candle should be long red and the next day’s candle should be small green inside the range of the previous candle. It can be a short-term reversal pattern or trend continuation pattern.

Name Harami means Pragnent. 2nd candle inside 1st one forms the shape of a pregnant woman.

The psychology behind this candle is that market was in a good downtrend with long candles, but suddenly next day market gap up and spent the complete day inside the previous day’s range.

2. Bearish Harami
BEARISH-HARAMI - Technical Analysis

It’s a 2 candle pattern. This candle forms in an uptrend. The first candle should be long green and the next day’s candle should be small red inside the range of the previous candle. It can be a short-term reversal pattern or trend continuation pattern.

The psychology behind this candle is that market was in a good up trend with long candles, but suddenly next day market gap down and spent the complete day inside the previous day’s range.

3. Bullish Engulfing
BULLISH-ENGULFING - Technical Analysis

It’s a 2 candle pattern. This candle forms a downtrend. The first candle should be small red and the next day’s candle should be the long green candle that covers the complete day range of the previous candle. It can be a short-term reversal pattern or trend continuation pattern.

The psychology behind this candle is that market was in a good downtrend with long candles, but the next day market gap down a little/opened at the same place & continue to move upside further and cover the complete previous day’s range.

4. Bearish Engulfing
BEARISH-ENGULFING- Technical Analysis

It’s a 2 candle pattern. This candle forms in an uptrend. The first candle should be small green and the next day’s candle should be a long red candle that covers the complete day range of the previous candle. It can be a short-term reversal pattern or trend continuation pattern.

The psychology behind this candle is that market was in a good uptrend, but the next day market gap up a little/opened at the same place & continue to move downside further and cover the complete previous day’s range.

5. Piercing line
PEIRCING LINE - Technical Analysis

It’s the same as a Bullish engulfing candle, which forms in a downtrend. The first candle should be small red and the next day’s candle should be a long green candle that covers at least 50% or above the day range of the previous candle. It can be a short-term reversal pattern or trend continuation pattern.

The psychology behind this candle is that market was in a good down trend, but the next day market opens the gap down & continues to move upside further and cover more than 50% of the previous day’s range. 

On the day when the market closed the first day, the Buyer who carries an overnight position will see overnight good gain when the market opens the gap-up, so they start booking profit that ultimately leads to a fall on the next day.

6. Dark Cloud Cover
DARK-CLOUD - Technical Analysis

It’s the same as a Bullish engulfing candle, which forms in a downtrend. The first candle should be small red and the next day’s candle should be a long green candle that covers at least 50% or above the day range of the previous candle. It can be a short-term reversal pattern or trend continuation pattern.

The psychology behind this candle is that market was in a good downtrend, but the next day market opens the gap down & continues to move upside further and cover more than 50% of the previous day’s range. 

On the day when the market closed the first day, the Buyer who carries an overnight position will see overnight good gain when the market opens the gap-up, so they start booking profit that ultimately leads to a fall on the next day.

( Sell position closed by Buy order of similar quantity leads to Upmove of the market )

Three Candlestick Pattern

1. Morning Star
MORNING STAR - Technical Analysis

It’s 3 candle pattern forms in downtrend. First candle must be red , second is indecisive candle either Red/Green( Doesn’t matter ) and third candle must be green covering more than 50% of first candle.

The psychology behind this candle is that market was in a good downtrend, but the next day market opens flat and closed with an indecision candle & next day buyers started controlling the market and continue to move upside further and covering more than 50% of the first-day range.

2. Evening Star
EVENING-STAR - Technical Analysis

Its 3 candle pattern forms an uptrend. The first candle must be green, second is an indecisive candle either Red/Green( Doesn’t matter ) and the third candle must be red covering more than 50% of the first candle.

The psychology behind this candle is that market was in a good uptrend, but the next day market opens flat and closed with an indecision candle & next day seller started controlling the market and continue to move downside further and cover more than 50% of first-day range.

So that’s it for now.

Don’t forget to check out our more “Financial Market-related articles” to improve your learning & enhance your knowledge.

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