Chapter 6: Technical Analysis

Basics of Chart Analysis

Technical analysis focuses on using historical price data and trading volumes to

forecast future price movements. Key components include:

Candlestick Patterns

Candlestick charts display price movements within a specific time frame, showing

opening, closing, high, and low prices. Common patterns include:

Doji: Indicates indecision in the market; the opening and closing prices are very

close.

Hammer: Suggests potential reversal from a downtrend; has a small body and

long lower wick.

Engulfing Pattern: A reversal pattern where a larger candle completely engulfs

the previous candle's body.

Support and Resistance Levels

Support Level: A price point where buying interest is strong enough to prevent

the price from declining further.

Resistance Level: A price point where selling interest is strong enough to prevent

the price from rising further.

These levels help traders identify potential entry and exit points, as prices often

bounce off these levels.

Using Technical Indicators to Identify Trends and Entry/Exit Points

Technical indicators are mathematical calculations based on price, volume, or

open interest. Common indicators include:

Moving Averages

Simple Moving Average (SMA): The average price over a specified number of

periods.

Exponential Moving Average (EMA): Similar to SMA but gives more weight to

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