Getting Started with Technical Analysis

When we start out to learn something new, where do we first head out to? The internet. The internet is filled with knowledgable content if you wish to use it for that purpose and when it comes to learning Technical Analysis, then too there are no surprises. If you’re a beginner who’s just heard the word Technical Analysis then look no further. ‘Getting started with Technical Analysis’ will provide you with a detailed guide on learning technical analysis from scratch.

Start with learning about components of the chart

Be it any professional intraday trader, they always know their charts before entering into a trade. A chart is a graphical representation of the price action datapoints. Charts are the only components that can help you analyse charts quickly and accurately (all by yourself).

Not to forget if you can understand the physcology of the market (whether the price is going to up or down) by looking at the chart itself!

Free online resources to consider:

  • Learn CandlesticksLink
    • The first component that you should learn is Candlesticks. These are sort of the primary components and without understanding what a candlestick is, you cannot just learn the market psychology or technical analysis.
    • Once you are done with understanding what candlesticks are, the next item to learn is about candlestick patterns. No matter what strategy you’re using, just knowing about the candlestick patterns can help you as a confirmation signal. Thus aiding you in taking only fruitful trades and preventing you from the bad ones. You can find various free online resources on this topic.
  • Time FramesLink
    • Once you’ve understood what candlesticks are, the next topic is to learn about different time frames. Why? Well, time frames are your best friend when it comes to intraday trading/ swing trading or just investing. For example, by switching over to a longer time frame you would be able to identify the resistance/support levels (covered later) and the current trend of the stock.
  • Indicators
    • Indicators are widely used and heavily relied on by some traders. In short, Indicators give you signals based on historical data. The fact that they are based on past data makes them very accurate and if you really know how to use them, you can create a winning strategy for yourself too.
    • Click on this link to learn more about indicators.

Learn about basic principles of Technical Analysis

Now that you are familiar with the charts, you might want to learn the basics of technical analysis. For example, you should clearly know what are and how to draw the support and resistance levels on the chart. There are a lot of video series/tutorials on youtube for this. However, we found this version of the explanation quite easy to understand.

Once you understand the basic principles of technical analysis, do learn the patterns that the candlesticks form. We recommend checkout out Sasha’s channel on Youtube (link).

Practise reading the charts before you trade

One problem that arises when you’re soo hooked into reading charts is that you want to practice your analysis instantly. Not that it’s a bad thing, however, we wouldn’t adivce you to use real money just yet.

What you can do is – do paper trading. Paper trading simply means that you trade with virtual money and make/lose virtual money only. All of this is for free and you don’t need to bother about spending cash before you begin to trade. We recommend using TradingView’s Paper Trading feature for this.

Find a source from where you can confirm your analysis

When you’ve paper traded for quite some time and you’re confident that you earn some real cash in the market, it is time to take the leap. All you need to do is open an account with your broker and then get started placing orders.

It is often beneficial to verify your analysis with some other sources before actually taking up any position. Be it from a renowned technical analyst that you follow on social media or software as a service that you’re subscribed to.

Understand that Profit and Loss are part of the game

An often missing component when learning about technical analysis is that people forget about their money management strategies. They only focus on drawing lines on charts and defining levels.

Money management simply means managing your risk apeptite. So that if you book a loss, you can have plenty of backup fund to trade with the next day. Why the next day?

For beginners, it is often recommended to do only one trade per day. This helps a trader to conserve their booked profit and not do overtrading. On the other hand, if you’ve booked a loss then there is a high chance of you taking up another trade to compensate for the lost amount. The term for this is revenge trading (don’t do that).

There are various other free online resources that can teach you more about such methodologies that can help you strategise and plan accordingly.


Lastly, although there are website or articles that have blatantly put in links to books and long articles for you to read, we think that by simply understanding the basics (mentioned above) can set up your fundamentals pretty straight.

You can move to reading books when you thoroghly know the basics and can identify which piece of information is useful and which is not..

We hope you like this article. Do follow us on Twitter for more updates.

Tagged : / /

Which is the best time frame for intraday trading

If you’re just a beginner and have started foraying into the world of trading and investing, you might have heard of the term ‘intraday trading’.

‘Intraday trading’ is also known as Day trading. Since the inception of the internet and especially discount brokers, day trading has seen a huge surge in the number of traders that complete their trade(s) within a day.

Almost all intraday traders take up their position by seeing the candlestick charts and analysing the patterns that the price action forms. While patterns are mostly formed with the candles that the price action forms, it is essential to note that the longer the timeframe you choose, the less number of candles are formed.

Timeframes are essentially the time periods or resolutions where the candles depict whether the bears are strong or the bulls are stronger. So for example, if you’re an investor who’s looking to invest in the market from a long term perspective, you might want to consider looking at the monthly or the weekly chart.

Couple of Tips

Let’s start with some tips first.

If studying a chart for the first time then it is recommended to check the daily and the weekly chart first. You can map out the strong support and resistance level before moving into the smaller time frames.

Next, find out the trend in the daily/weekly chart. Not only this will help you to be cautious of the support or the resistance level that the price action is near at, but it will also help you to know where you want to go long or go short.


Time frame based on strategies

Below are a few strategies which normal traders use in their day to day trading.

Trading Based on Patterns and Price Action

For traders who prefer drawing patterns on the charts and trendlines, then it is best to utilize the 5, 10 and 15-minute time frame for this. Remember the higher the time frame, in this case, the more accurate the pattern can be.

If, however, you’re an experienced trader who likes to be ‘involved’ at the moment, the 1 min chart can also be helpful.

Trading Based on Scalping Technique

Scalping strategy

Scalping is another way of profit booking. Many established and cash-rich traders prefer using this technique instead of the above one. Scalpers trade on candles rather than patterns meaning that they wait for gains in points rather than whole numbers and prefer to exit their position within minutes or even seconds.

For that reason, a 1 min or a lesser time frame chart would suffice for them.

Time frame based on indicators

If you actively use lagging or leading indicators for your trades then here are the time frames you should follow:

For intraday purpose, if you’re using a lagging indicator (like MACD, Bollinger Bands and so on) then it is advised to use a 5 min chart. A 1 min chart can also be considered in this case however note that the accuracy might get affected.

If in case you prefer using leading indicators like stochastic or an RSI indicator, then it is recommended to use a higher time frame rather than a lower one. This is because, in lower time frames, there are high chances that the stock may instantly go into an overbought or an oversold zone making you a scalper rather than an intraday trader.

However, if you’re a scalper who prefers indicators then for a leading indicator, you might want to use a 5 min time frame chart, whereas for a lagging indicator a 3 min time frame chart would also do.


We hope you like this strategy and try to implement it the next time you take up a trade.

Do follow us on Twitter for more updates on Technical Analysis.

Tagged : /

Drawing Support and Resistance lines correctly – Setting correct targets and stop-loss

Often at times after taking up a trade, you would have experienced a huge profit at first (while the price action is yet to hit your target), but then suddenly the price action reverses and hits your stop-loss. Sad right?

So what went wrong? Why was there an instant reversal and why did the price action did not hit your target?

There are high chances that the resistance/support level that you drew on the chart as your potential target/stop-loss was wrong. And you can’t blame anyone for that, as knowledge is vastly available on the internet and sometimes it is confusion that plays a part in your analysis being wrong and the rest of the time its incorrect knowledge fed to you.

Before moving forward, let’s clear out one Myth:

If the price action breaks down and reaches the support level, then it is sure to bounce back.

This is a huge misconception when taking up the trade and there is no guarantee that the trend will reverse from the support level or bounce back for that matter.

Same is the case with resistance level. If the price is moving up and is at the resistance level then it is not guaranteed that it will come down.

Support

An area where the price increases due to lower supply or higher demand. What this essentially means in simple terms is that this is an area where the buyers see that the price is at a very attractive level and so they enter into the trade. Thus when they enter, the price shoots up creating green bull candles.

While many of experts call this area – a line, for you to take up this trade successfully, you should take up this trade only if the bounce back crosses the area of the rectangle or if there is a breakdown and the price breaks the area of the rectangle and continuing its downfall.

Resistance

An area where the price reduces due to higher supply or lower demand.

The meaning of this in simple terms is that this is an area where the sellers see that the price is at a very attractive level and so they enter into the trade. Another reason for the formation of a resistance area is that often the buying volume decreases, as a result the sellers overpower the buyers and the price hits that resistance area.

Drawing Support and Resistance levels

Drawing support and resistance levels is fairly simple. All you need to do is

  • switch to your convenient time frame
  • Zoom out the chart 5 times
  • Draw the obvious support/resistance levels that you can see with the naked eye (Notice that when the price action breaks out, the resistance level will act now as support level and vice versa)
  • Adjust the areas so that the area captures maximum wicks/candles and where you could see an immediate bounce back.
Support and Resistance levels

Strategy to prevent trading at false breakouts/breakdowns

A common strategy that almost every trader follows to prevent trading at false breakouts/breakdowns is to wait for the second candle to break the breakout’s/breakdown’s high or low respectively.

This strategy will not only confirm that it is a pure breakout/breakdown, but it will also allow you to book handsome profits if you’re trading with large quantities.

The stop loss should be the breakout candle’s low (if it breaks the resistance) or the breakdown candle’s high (if it breaks the support level). And yes always remember that breakout is when the resistance is broken whereas breakdown happens when the support level is broken.

How can I obtain 90% accuracy in taking up a trade based on this strategy?

To obtain 90% accuracy, you’d have to use another tool or an indicator for confirmation of a breakout/breakdown. We prefer using an MACD indicator in our trades as it is widely used and a highly reliable indicator.

Combine MACD with the concepts above and you get a powerful and a 90% accurate trading strategy.

We’ve expalined this strategy in our previous post.


We hope you like this strategy and try to implement it the next time you take up a trade.

Do follow us on Twitter for more updates on Technical Analysis.

Tagged : / /

Simple MACD strategy with 90% accuracy – Book profits in the stock market easily.

We’ve all waited for the right time to buy/sell a stock when the MACD gives us the respective signal, however, most of the time the signal that we receive is either a false signal or the price action turns against our favour.

Before we start with the topic let us recap a bit and understand how and what MACD is.

Almost 1 out of 5 traders in the stock use the MACD signal to confirm their strategy and decide whether they want to go long or go short. Now let’s understand what MACD actually is.

MACD – Moving Average Convergence Divergence is a lagging indicator and is praised by investors for highest accuracy that it provides. It is often said that if you’re unhappy with the results of other indicators and you want to test out a new indicator so as to improve your ‘win’ percentage, then you should definitely consider giving MACD a chance.

How to read?

The MACD graph contains a zero line. This is often regarded as the baseline or the ‘neutral line’ and a MACD (Blue line) wave hovers over this zero line (see the image attached). Notice that there’s another wave in orange. This wave is called as the ‘Signal wave’ or ‘Signal line’.

The 0 line

MACD is calculated from the following method:

26 EMA - 12EMA = MACD line
9 period EMA of MACD line = Signal line

It is to be noted that the signal line gives the buy and the sell signal to the investors.

When to Buy?

An investor should go long when there is a crossover of the Signal and the MACD line below the 0 line.

Buy signal

When to Sell?

An investor should plan to close their long position or take their short position when there is a crossover above the 0 line.

Sell signal

If you can see the graphs in the example above, the price action started to go up when there was a crossover of the Signal line and the MACD line below the 0 line.

If you would have taken up this trade then you would have easily booked 60 points in your favour.

How to improve accuracy and avoid false signals?

This is the most common problem that is faced by traders/investors when it comes to applying this signal in real-time. At Bytemine, our analysts realized that one way of increasing the accuracy and making sure the trade is successful is to only take the position:

  • When there is a crossover below or above the 0 line (as discussed above)
  • By taking the position after the second candle (with respect to the crossover) has closed.

Let’s understand this by an example:

In the image above, the crossover happened when there was a big green candle formed. Now to avoid false signals, always ensure that you do not buy during this time. Only take the buy position if the second candle’s close is above the previous candle’s high.

Although, in this case the price did not move as expected, however since our stoploss was placed at the previous candle’s low, we would have eventually booked a profit in this trade.

The same procedure applies to when you are shorting a stock. Only take the trade if the second (the latest) candles low is below the previous candle’s low – all this when the crossover of the Signal line and the MACD line is above the 0 line.

How to achieve 90% accuracy?

Achieving 90% accuracy is possible, yes. However, as a trader/investor you’d have to be careful in taking up the trade and making sure that the price action fulfills all of the setups discussed above.

Once you’re sure, then check the Support and Resistance levels of the stock in different time frames. Draw horizontal lines and mark the potential resistance and support zones. Switch back to the time frame that you prefer trading in and check where does the price action resides now.

If it is near a support level and there is a BUY signal being generated by MACD then you can surely take up that trade. On the other side, if there is a sell signal generated by MACD and if the price action is near a potential resistance level, then you can surely take your short position.


We hope you like this strategy and try to implement it the next time you take up a trade.

Do follow us on Twitter for more updates on Technical Analysis.

Tagged : /