Academy · Stage 2
Technical analysis tools
The chart tools most traders actually use — support and resistance, trendlines, moving averages, RSI, MACD, Bollinger Bands, Fibonacci, volume and candlestick patterns — and what each is for.
Technical analysis is the study of price to judge where it is likely to go. It works because large numbers of participants watch the same levels and react to them. It is not prophecy; it is a way of defining where you are right, where you are wrong, and how much you stand to make or lose.
Price structure
Support and resistance. Levels where buying or selling has repeatedly appeared. Previous highs and lows, round numbers, and prior breakout points. The most important tool on this page; everything else is secondary.
Trend. Higher highs and higher lows define an uptrend; lower highs and lower lows a downtrend. When that sequence breaks, the trend is in question.
Trendlines and channels. A line connecting successive lows in an uptrend, or highs in a downtrend. A parallel line forms a channel. Useful for spotting pullback entries and exhaustion.
Chart patterns. Head and shoulders, double tops and bottoms, triangles, flags and wedges. They describe consolidation and the likely direction of the next move. Treat them as context, not triggers.
Candlestick patterns. Each candle shows open, high, low and close. Patterns such as the engulfing candle, hammer, shooting star and doji describe a shift in control within one or two bars. Most useful at a support or resistance level, nearly meaningless in the middle of nowhere.
Indicators
Moving averages. The average price over a set number of periods. The 20, 50 and 200-day are the most watched. Price above a rising average is bullish context. Crossovers between averages are widely used trend signals but lag the market.
Relative strength index (RSI). An oscillator from 0 to 100 measuring the speed of recent gains against losses. Above 70 is conventionally overbought, below 30 oversold. Divergence — price making a new high while RSI does not — is its most useful signal.
MACD. Moving average convergence divergence. Shows the relationship between two moving averages and a signal line. Crossovers and histogram shifts indicate momentum turning. Better on daily charts than on very short timeframes.
Bollinger Bands. A moving average with bands two standard deviations above and below. Narrow bands mean low volatility and often precede a large move; price touching the outer band is not itself a signal.
Average true range (ATR). Measures volatility in price terms. The correct way to set stops and size positions: a stop of 1.5 times ATR adapts to the market instead of guessing.
Volume. In stocks and futures, the number of shares or contracts traded. A breakout on rising volume is more credible. Spot forex has no central volume; tick volume on your platform is a rough proxy.
Fibonacci retracements. Horizontal levels at 38.2, 50 and 61.8 percent of a prior move. Widely watched, so they tend to become support and resistance. Use them to locate pullback zones, not as standalone entries.
Timeframes
Analyse on a higher timeframe than you trade. A swing trader reads the weekly and daily charts for direction and uses the four-hour chart to time entries. Signals that contradict the higher timeframe are lower-probability.
Putting it together
A workable approach for most traders: determine the trend on the higher timeframe; mark support and resistance; wait for price to reach a level; look for a candlestick or momentum signal at that level; place the stop beyond the level using ATR; size accordingly. Four or five tools, applied consistently, beat twenty applied at random.
Chart illustrations for each concept are in production: sixteen annotated charts covering structure, patterns, moving averages, RSI divergence, MACD, Bollinger squeeze, ATR stops, Fibonacci and volume.
RISK DISCLAIMER
Praevis publishes education and market commentary. Nothing here is investment advice. Trading forex, stocks and CFDs carries a high level of risk and may not be suitable for all investors.