Technical analysis is the observation of historical price behavior in order to find out insights and determine the possible future movements in the markets by using technical indicators, studies, and other specific tools.
The technical analysis ends up at two main things:
1. identifying trend
2. identifying support/resistance through the use of price charts and/or timeframes
Markets have only three moves: Up, Down, or Sideways.
Prices typically go in a zigzag fashion and as a result, price action has only two states:
1. Range – when prices zigzag sideways
2. Trend – prices either zigzag higher (up trend, or bull trend), or prices zigzag lower (downtrend, or bear trend)
Why decisions are based on technical analysis?
Technical analysis is a smart tool which can help you decide not only when to invest and where to invest, but also, when and where to leave the market, so you keep your capital safe.
How can you use technical analysis?
This analysis is based on the theory that the markets are chaotic, which means nobody knows what will happen for sure, but at the same time, price movements are not 100% random. In a few words, the Chaos Theory in mathematics proves that within a state of chaos there are identifiable patterns that tend to repeat.
We can mention here the weather forecast, a type of chaotic behavior. Like the weather forecast, most traders will say that they are not able to predict the exact price movements. As a result, being successful at trading is not being right or wrong. It is about determining probabilities and placing the positions when the conditions are in favor. Determining probabilities includes forecasting the market direction when to enter into action, where to open the positions, and equally crucial is determining risk/reward ratio.
With all we said above, there is no certain formula to unlock the secret of trading strategy. The keys to success are smart risk management plan, self-discipline, and the ability to control emotions. Anyone can guess right and win every once in a while, but without risk management, it is virtually impossible to remain profitable over time.
Bullish and Bearish Flags
Bull flags form after a price spike that peaks out and slowly forms a short-term reversion downtrend. The starting points for the trend lines should connect the highest highs (upper trend line) and the highest lows (lower trend line) to represent the flag portion.
Bear flags form after a large price collapse that attempts a short-term up trend reversion. These are the opposite of bull flags. The trend lines connect the lows and highs starting from the bottom.
THE MARKET NEVER SLEEPS.
So should you.