In quite a lot of my posts I share charts and speak about them along with price estimates for future movements. This post serves to explain to you from a high level how to interpret my charts, and also provides some basics for you if you wish to perform your own technical analysis.
I have added a Definitions page which will include all of the terms and abbreviations that I use from now on and will be referred to on every post.
Substack has launched an iOS app for those of you using apple devices. I am an android peasant and can’t tell you if its good or not, but check it out if you have an iPhone or some other such trappings of royalty.
Table of Contents
Candlesticks and Time Frames
Keeping It Simple
Backtesting
Support and Resistance Zones
Interpreting Market Structure
Fractal Nature of Markets
Conclusion
1. Candlesticks and Time Frames
We are going to go over some basic terms here so that you can look at the charts I post and understand the basic things that you are seeing. First, I use TradingView as my primary place to chart and do technical analysis. You can create an account for free, and draw on any trading pair you want. They offer some paid features and functions, but I don’t believe they are necessary as the free portion of the site works very well. I do not pay for TradingView.
On TradingView once you go to “Chart” you can enter any trading pair you want and get a chart. The default chart, and the one I primarily use to display information is a candlestick chart.
In which, price is presented in colored bars called “candles”. Each candle represents a specific period of time. So if you choose the 1 day timeframe, each candle will be open for an entire day. If you choose the 15 minute timeframe, then each candle will only represent 15 minutes of trading. Simple enough. Below is an image of a candle taken from the BTC/USD 1 day chart.
Taking a look at the 2nd candle, we’ll go over some of the basics of how to read a candle. First, the body of the candle, is highlighted in green because price moved up during this day that is represented by the candle. If the candle is red, price moved down. The bottom of the body of a green candle, represents the opening price ($29,538.29). The top of the body is the closing price ($29,841.69). The opening price is the price of the very first trade within the day represented by the candle. The closing price is the very last trade within that candle.
When price closes below the absolute session high, a vertical line is created above the closing price that goes all the way to the session high. When above a candle, this is called a wick. When price goes below the opening price and then moves back above the opening price, a vertical line is created below the opening price that goes to the session low. This is called a pin-bar.
Whether you plan to actively trade or not, you should be able to look at a candlestick chart and identify this basic information as well as understand roughly how much time each candlestick represents. If you don’t know what time frame the chart is on, the chart is worthless to look at. A 1 month chart, and 1 minute chart are vastly different in what they represent, and in what they can tell you about price moving forward. The entirety of the 1 minute chart might represent only a portion of the most recent candle on the 1 month chart. A 1 minute chart might tell you the market is bullish, while the 1 month chart is obviously bearish. Which one is more relevant to your most recent trade/open position?
Trick question. The most relevant chart is dependent on you. If you were making a trade that is only going to be open for 2 or 3 hours, then the 1 month chart is going to be worthless for you. If you are going to hold for 2 or 3 years, then the 1 month chart is more relevant. But, if you are already in your position and are monitoring for any changes, the shorter term chart will show trend changes before the longer term. There is no right answer, there is instead only a best option depending on your current needs and open risks.
2. Keeping It Simple
If you do decide to dive into Technical Analysis because you want to be a trader, you might see some heavily cluttered charts full of a million indicators. People that make charts like that are doing so to hide one thing… they don’t know what they’re doing.
Most of the technical indicators people use are lagging indicators, in that they only can tell you what happened after it’s already happened. That is useless for structuring a trade, what you want are leading indicators that can sufficiently warn you about what’s going to happen. The more indicators you clutter your chart with, the more you can be distracted from the price action in each candlestick. It may sound odd to those of you that do trade, but I trade on a naked chart, I draw my lines just for posting them here, but they stand out to me so brightly on a naked chart that I have no need to draw them personally. All that you need to know is the market direction and price points where significant volume of buying or selling has occurred, and you can fairly accurately predict what’s going to happen.
It’s important to avoid the temptation to want to clutter up your chart with tools in order to feel like you are doing something. These serve more often to confuse you and should only be added after you’ve tested them extensively and are comfortable with how they work. Most people, when starting in these markets will often add indicators to their charts that they are unfamiliar with and will let that influence their trading.
But how do you get used to an indicator without putting it on a chart you are trading?
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