What is Technical Analysis?
Technical analysis is a method of analyzing human trading behavior as transcribed on a day trading chart. We use that information to find patterns in securities such as stock, commodities, etc. in order to determine the direction of future price action. Traders can determine the path of least resistance by studying and finding patterns in historical data and price action. It helps traders contextualize how prices are moving and how powerful these moves are. Technical analysis is based solely on the data generated by market participants derived from every order on the market.
What is a Chart?
A chart is a tool both investors and traders use to help them determine whether to buy or sell the stock, option, or cryptocurrency. Charts summarize all the trading for any given time period such as a week, day, hour, or minute. Those periods of price action are plotted together and trends and patterns form.
Charts are where expectations meet reality. Just because a stock looks like it wants to go up or down doesn't mean that it will actually go up or down. Without other buyers, stocks will never move and setups will fail. It is important we realize that nothing works 100% of the time.
The charts are one giant time line. They tell what is happening right now and how we got there. We can then use that valuable information to make a high probability evaluation of where the stock market will move. As day traders, we don't really care what the price is going to do a year from now. We are more interested in what it is doing now and how that might impact price action in the next 30 minutes. We are tying to find actionable ideas for today, not ideas for next year.
Basic Technical Analysis
What are the levels of support and resistance?
Support
A price level where a falling stock price has found buyers that push the price back up. It works because buyers can overwhelm extended sellers.
Resistance
A price level where a rising stock price has found sellers that push the price back down. It works because sellers can overwhelm extended buyers.
Mapping areas of support and resistance
Support and resistance are areas where we expect price to react. We expect a reaction because we have seen the price react from that area before. These areas are strongest when they have multiple points of contact. The more times buyers find support at the lows, and stop sellers, the stronger buyers become.
DTR Method: Draw support and resistance lines at the following areas:
- Daily high and low
- Weekly high and low
- Monthly high and low
- Drag those lines to the nearest areas of price action with multiple points of contact
- Note those levels down and make trading plans around those key zones