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johnberry

Technical Analysis for Beginners!

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For those of you who don't already know, I wanted to show you guys a chart and give you guys an intro to technical analysis. As you can see, there are three components of technical analysis (Support/Resistance, Trend, and Momentum).

5aa7105c369e2_techanalysis.thumb.jpg.515284e6cfa79d7bf3ed2f98e048dea4.jpg

Edited by TheNegotiator

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As im a complete beginner, can you give me some more insight into what you are trying to show here?

 

1. Is this an uptrend? because it looks like 2 sideways trend with some crazy fundamental based action in the middle.

2. Why is the second support line draw at ~6.85 and not at 7.00 or 6.60?

3. Where and why do you enter the trade?

Edited by iznogoud
mispelt support..

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The ultimate question is did you profit on this chart, because the pudding or story is in the volume ramp prior to the breakout. In my opinion whats in the circle does not show support (three highers or more), not enough data to determine a trend, and yes the chart does some fundamental qualities. I ask if you made profit from the chart because I would like to know how you place the trade considering the downside and upside reversals in the circle?

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For those of you who don't already know, I wanted to show you guys a chart and give you guys an intro to technical analysis. As you can see, there are three components of technical analysis (Support/Resistance, Trend, and Momentum).

 

When it comes to tech analysis, just like everything else, I like to make it as simple as possible. What did Einstein say: Everything should be made as simple as possible, but not simpler.

 

Nice.

 

For me, you can only trade 2 ways:

 

1. With the trend.

2. Against the trend.

 

If I am trading with the trend, I am looking for this:

 

trend2.jpg

 

A NICE trend. I am looking for a big trend, new highs, continuation patterns, that go on as long as they go on. I don't care what time frame this is, monthly down to minute, if I'm trading the trend, that's my goal.

 

Once I know what I am looking for, I can find indicators that work with that style of trading. Indicators that let me know a breakout has occurred and that the trend is still in tact. I can use only price and volume, moving averages, Bollinger Bands, Donchian Channels, Keltner Channels, etc.

 

The other way I can trade is against the trend. If I am trading against the trend I am looking for this:

 

counter1.jpg

 

A failed breakout. I am looking for that place where trend traders get in and I'm using my knowledge that most breakouts fail and I am trading that to my advantage. This is what you are doing when you are buying support and selling resistance.

 

Once I know that I am looking for this I can look for indicators that can help me. Indicators that signal overbought and oversold levels. Stochastics, RSI, etc...

 

I, myself, prefer to trade with the trend. It just fits in my head better and I like things that fit in my head. :)

 

David John Hall

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good post david

 

how do you know when to trade with or against the trend? Seems like your methods may contradict each other at some point (with/against trend).

 

Hi iznogoud,

 

I put the two methods up as a display of what I believe to be the two most prominent methods of trading (outside of scalping). You're either going with, or against the trend. You have to commit to one or the other. I am famously BAD at trading against the trend (which means buying any type of pullback, support, fading) etc., so I focus on trading with the trend.

 

Lots of traders love buying support though so that works for them. If you buy support you will have a higher concentration of winners but your average gains tend to be smaller -- that's because counter trend moves tend to be smaller.

 

If you trade with the trend then you will have fewer wins because most breakouts fail, but the wins you do get will be big because trends (for the most part) run on longer than you think. How many times have you heard someone calling a top or a bottom yet the trend keeps running and running? Those are the trades that make your year.

WHEN SHOULD YOU TRADE THE TREND OR THE COUNTER TREND?

 

This is the same as asking "How will I know (ahead of time) which breakouts will fail?

 

My answer to that is that you cannot possibly know. Ever. Because if you did know, you would be psychic. When I first started trading breakouts a few years I go I used to get so mad when breakouts failed because I thought you should be able to know which would fail, and I thought that you could know.

 

But then I realized, if I could know which breakouts would fail (ahead of time) then I would never trade a losing breakout -- then I would always make money -- and if you've been trading the market for any amount of time you know that's not true.

 

Still, I didn't believe that and spent the better part of two years looking for the failed breakout predictor. Then I read something that Ed Seykota said about failed breakouts (whipsaws): If you want to avoid whipsaws, stop trading.

 

LOL That's pretty succinct, and true.

 

The best that you can hope for is to know your method and know what to expect.

 

Now, you can, if you want to really mess with your mind, combine the two -- if you use different time frames. For instance, I can trade against the trend on one time frame and with the time frame on another time frame. This works if you like hunting for bottoms or tops, which is also a nearly impossible task.

 

Here are two more charts. One is a daily chart in an obvious down trend...

 

AIBdowntrend.jpg

 

Now, about a week ago, in that same downtrend, on that same stock, there was a sharp, countertrend move, which looks like a strong trend -- on the intraday, 15 minute timeframe.

 

aibuptrend.jpg

 

So even if you were trading against the trend on the daily, you could trade with the trend on the intraday.

 

Why would you want to do this? Because moves against trend can be swift and furious catching a lot of trader off guard.

 

On the daily chart of AIB, if you would have caught that whole trend you would have an 80% gain over 10 months.

 

On the intraday chart if you caught the whole move you would have a 30% gain over only 4 days.

 

It all comes down to what you're looking for and what makes sense to you.

 

David John Hall

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Can you help with the methods and ways with which I can know how to read and understand the charts.

 

Hi Arthur,

 

The two charts represent the result of two types of trades. To understand the charts you would have to go back to what the initial set ups are, and what a trader would be looking for at the time of initiating a trade.

 

For instance, a trend follower is looking for new highs as an entry to the trade. If a stock breaks out to new highs the trend follower believes it has cleared resistance and will run in the direction of the breakout for some time.

 

Here's a breakout trade I took that resulted in a very nice trend:

 

urgenter.jpg

 

Now that is a nice trend. Over 150% from the breakout in a few months. And I caught a good chunk of it, but alas, for reasons that I am sure need work I closed early and left with about a 70% gain...only half.

 

Now, let's take this trade back to the beginning to see how you "read it". As I said, breakout traders are only looking for one thing -- a break to new highs.

 

urgbreak.jpg

 

Here's the initial break. It definitely doesn't look as fun from this angle, and looks pretty terrifying. LOL. This is where the trend traders and counter trend traders do battle.

 

See, if you are a breakout trend trader you are thinking: here comes a new high, time to get ready to take a position.

 

If you are a counter trend trader you are thinking: here comes a new high breakout -- that is bound to fail. Time to get ready to short it.

 

Here's a super close up:

 

urgbreakclose.jpg

 

One small clue is the rise in volume...that tells me the breakout might work as volume is the fuel that makes breakouts fly. When it comes to these, I like to see the charts that I have coined "sneakouts"...which are quiet breakouts that are flying under the radar. There isn't a huge breakout, it just kind of tip toes out the door -- and then runs!

 

Now, once price has broken out you want to look for new highs -- that's your confirmation...like this:

 

urgrun-1.jpg

 

And up and up you go. Of course you've got to keep your nerve and sometimes I can FAIL in this department. LOL But trading's a learning process and the more I focus and more I specialize and get to know my method, the better I become.

 

Now, to look at a breakout that straight out fails.

 

ucbifail.jpg

 

Here you see UCBI make a strong breakout, on good volume and then...just...die.

 

This is why -- when breakouts fail -- it's time to bail!

 

My rule of thumb is if it closes below the breakout zone you got faked out -- so close out and move on to the next. This will happen at least 50% of the time when you are trading breakouts.

 

Here the counter trend traders caught a really nice trade. they were thinking: breakout, yeah right. This is going to fail and they sold into it...and they were right. Good for them. That's how this game is played.

 

Hope that helps!

 

David John Hall

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