Debunking 8 Myths About Technical Analysis
The areas highlighted in green represent rotations in the direction of the trend rips and the areas highlighted in red indicate countertrend rotations pullback. We want to see a strong uptrend establish itself and then use countertrend rotations to enter at a good price and sell into the rotations higher. The market in the chart below is in a downtrend as it is oscillating between lower lows and lower highs. The areas highlighted in red indicate rotations in the direction of the trend rips and the areas highlighted in green represent rotations against the trend pullback. In a downtrend, we want to see a strong move lower and then use countertrend rotations to position ourselves short within the trend.
The end goal is to cover our short trades as the market rotates back lower. You might have noticed swing highs and swing lows labeled on the last two charts. These are important levels we focus on as they represent price extremes which we use to forecast where future market swings may occur. Support and resistance is probably the most basic principle of technical analysis!
Support refers to a level which will likely act as a floor in a market, whereas, resistance refers to a level which will likely act as a ceiling in a market.
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They are simple to spot and that means a lot of eyes will be on these levels. Traders tend to cluster their orders around previous highs and lows so they offer lucrative trading opportunities for us. Rule of Thumb: When a market is trending, swing highs and swing lows tend to reverse roles. This is an important concept I want you to remember!
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During uptrends, swing highs are often breached and tested as support before rotating to new highs. Alternatively, during downtrends, swing lows are often breached and tested as resistance before rotating to new lows. With hundreds of candlestick patterns available on the internet, it is difficult to weed out which are the most reliable. From experience, the engulfing pattern and doji patterns tend to be most reliable.
For our personal style, we prefer hammer or dragonfly dojis as they signal deceleration and offer us the best opportunities to jump in on pullbacks. The below chart offers a nice visual reference to what we look for. The market created a swing high and sold off. This pair then traded back into the swing high and failed to break higher, effectively trapping breakout traders. The next day the sellers stepped in and a bearish engulfing candle was printed indicating sellers gaining momentum.
After this, the market sold off to new lows. After creating new lows, this pair found temporary support and staged a bit of a bounce. After several days of sideways consolidation, the buyers overwhelmed the sellers who bid the market higher by scrambling to cover their shorts. This price action formed a bullish engulfing candle, which led to a move higher over the next several weeks. A key thing naked forex traders need to understand about the market is that it moves in cycles. A typical market cycle may start at a ranging low , start trending upwards , then start a r anging high , then a downtrend will emerge, and then start all over again.
These movements are vital to understand in naked trading. A good naked trader will know to trade in the direction of these trends, not against them. You need to get into the market before the dumb money does. A wise trader also needs to establish how fast the market moving. Essentially, how volatile is the market at this point? Volatility is a good thing because it presents opportunities to get involved in the market , though too much volatility can be dangerous, especially without indicators.
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That said, ranging markets are not completely impossible to trade in naked trading. Naked traders may still use trendlines and support and resistance levels. Draw only the levels you are completely sure about , no more than five at least. More recent lines are more relevant than older lines. If you really want to give naked forex trading a try, but still want confirmation to make a trade, then it would be a good idea to use trendlines or support and resistance levels.
Naked trading may not be for you, but it is still useful to learn. Every trader should try it at least once. Indicators can be used as confirmation that it is safe to make a trade. By naked trading real-time situations, you will also save time as you are not thinking about analysis and missing important opportunities.
This makes trading simpler, less stressful, and more precise. That said, you still need a plan and to set yourself appropriate goals. If you do decide to take up naked trading , then you should be able to spot these common candlestick patterns. Remember though, these patterns are largely subjective. What you label as a pattern, others might not.
The head and shoulders candlestick pattern is very common and can be seen in most trading days. It is a key pattern to look for in naked trading. It is also easy to spot. Quite simply, it consists of two shoulders lower highs and a head the highest point. When you see this pattern, it usually signifies that an uptrend is about to reverse into a downtrend.
If you have a position open, it is a good sign that you should sell before the bear market begins. The head and shoulders pattern also works in reverse as well and can signify that a downtrend is about to reverse into an uptrend. The wedge pattern also known as a triangle pattern can take place in several scenarios and can signify different things depending on the market situation it is found in.
A wedge pattern is defined as a triangle with one long side followed by price getting closer and closer together. The other two sides are drawn with trend lines. Eventually, when prices get too close, there is a breakout and a downtrend or uptrend will emerge. Typically, a rising wedge pattern, where the price is slowly increasing, will end up with a downtrend. And a falling wedge pattern will do the opposite, emerging as an uptrend. Sometimes a wedge pattern will emerge that is neither rising nor falling. These can be harder to predict what direction they will go. Remember to always look for confirmation before entering the trade.
You can check out more price action patterns here. All of a sudden things are starting to make sense.
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Glad to hear that things are coming together for you. Keep me updated on your progress. Hey Justin I just read your comment here about price action.
Al I see on your charts is what is happend not one in the future.