Learn about Support Lines, Resistance Lines, and Candlestick Charts in this Technical Analysis Tutorial
Understanding the basics of technical analysis can help take your trading expertise in the markets to the next level. This tutorial series will always be completely free and represents my understanding of the topics that have served me well in the stock market and the cryptocurrency market. This is my way of giving back to the investment community and doing so in the same manner that I was able to enhance the skillset; various online resources providing helpful guidance in the financial investment realm.
Support Lines in Technical Trading...
The support line is an identified price through which a horizontal line can be drawn that can be typically visually seen since the price of the asset has touched it several times but has not passed through it for a given length of time and reversed to the upside. It can be an hour, a day, a month, a year – this all depends on the strategy you are using. The support line is seen to be stronger and more credible the more times that the price has historically been unable to move past it, unless specific patterns occur that suggest that the support line will be broken. Think of the support line as a floor to the price action.
So why does it happen? Technically it is because the downtrend is expected to pause and reverse due to a concentration of demand and buying interest, because buyers are looking to buy at the support level in the hopes that they are getting a good deal as history suggests that it will move to the upside. Traders place market orders and limit orders to trigger when the price gets closer to the support line. Why? That’s where psychology comes in – traders use historical price action to predict future price action and if enough traders are playing these technical chart games and believe in the noticeable support line then it becomes a collective self-fulfilling prophecy. Think of it as a herd mentality approach.
Now there is a lot to keep in mind here – volume plays a big role, other technical indicators play a big role, if a support line is broken and the price rips through it, it will typically continue to drop until it hits another support line or important technical indicators come into play. If the price reaches the support level and the support price holds, then it will likely reverse back to the upside.
Resistance Lines in Technical Trading...
The resistance line is an identified price through which a horizontal line can be drawn that can be typically visually seen by drawing a line through the peaks of a stock chart since the price of the asset has touched it several times but has not significantly broken through it for a given length of time and has typically reversed to the downside. It can be for a minute, an hour, a day, a month, a year – this all depends on the strategy you are using. The resistance line is seen to be stronger and more credible the more times that the price has historically been unable to move past it, unless specific unique patterns occur. So the most basic, basic trading strategy would be to sell near the resistance line and then buy near the support line. Think of the resistance line as a ceiling to the price action. Also, consider it to be a glass ceiling that if banged on enough by the price action, will typically crack and break through, especially if certain chart patterns occur which we will cover in a different video.
So why do resistance levels occur? well technically it is because the uptrend is expected to pause and reverse to the downside due to a concentration of selling pressure, because sellers are looking to sell near the resistance level in the hopes that they are making a prudent decision as history suggests that it will move to the downside. Traders put in market orders and limit orders to trigger when the price gets closer to the resistance line. Why? That’s where psychology comes in – traders use historical price action to predict future price action and if enough traders are playing these technical chart games and believe in the noticeable resistance line then it becomes a collective self-fulfilling prophecy. A herd mentality of sorts. Traders react to the resistance line in anticipation of past trends continuing into current and future price movement.
Now there is a lot to keep in mind here – volume plays a big role, other technical indicators play a big role, if a resistance line is broken and the price rips through it, it will typically continue to go up until it hits or forms another resistance level or important technical indicators come into play. If the price reaches the resistance level and the resistance price holds, then it will likely reverse back to the downside.
Candlestick Charts in Technical Trading...
Candle Sticks have the ability to give a lot more information about price movement than simple line charts. They paint a clearer picture of what has occurred during a specific time period and can help forecast price movement based on patterns of trading behavior.
A candlestick has 5 important indicators – the open and close, the high and the low, and the color of the candlestick. The colored part is called the real body. This is the range between where the price started and where it ended during a specific time period. The color green means price went up during that time period, the color red means it went down during the given time period. The shadows or (wicks) show the highest and lowest price during that time period.
Doji candles have a horizontal line for a body (no color), because they opened and closed at the same price.
Long legged Doji – lots of indecision, but if it comes after strong bullish or bearish momentum it can have important implications.
Gravestone Doji – when spotted at the resistance line can mean the uptrend will be reversed to the downside
Conversely, the Dragonfly Doji is a bullish reversal signal that the downtrend will reverse to the upside and it’s especially significant if spotted near the support line.
Candlesticks paint a clearer picture not when looked at in isolation, but when observed in context with what is happening with the momentum, volume, and other technical indicators such as support, resistance, trend lines, etc. it can be a very helpful tool to spot likely reversals.
Nothing is a sure thing when it comes to trading, but the objective is to have the odds in your favor by being able to read trading behavior and taking advantage of herd mentality. Remember, these basic principles tend to be universal and if traders all over the world are using these technical indicators and basing decisions off of them, then the price movement is likely to follow this candlestick pseudoscience.
**I am not a financial advisor, this opinion-based video is meant to be used for entertainment purposes only**
