If you haven’t read Part 1 yet, you can check back on it here. In this article, we will continue building the foundation that every trader needs to make their first moves in the financial markets. Let’s get started!
Choosing Your Market
There are many different markets to trade, and you need to choose the one that suits you best. Although I won’t make investment recommendations, let’s assume you want to trade coffee. Why should you use technical analysis?
Imagine if you had to dive deep into all the reports and fundamentals of the coffee market. It would take a lot of time, and in the end, you might find that it’s not even a good buy or sell opportunity. This is where technical analysis comes in handy. It applies to any market, even to those you may not be familiar with.
As strange as it may sound, you can analyze a chart without even knowing which asset is being traded. If someone covered the name “coffee” on the chart and said, “Here’s $1, analyze this chart and make a trade for me,” I could simply observe the price patterns and trends. In this case, it’s a downtrend on the 1-hour coffee chart. Even without knowing it’s coffee, I could make a trade based purely on the technical analysis.
The Power of Technical Analysis
This is the magic of technical analysis. It allows us to trade multiple markets without having to be an expert in each one. You can apply the same analysis concepts to stocks, cryptocurrencies, commodities, or any other market.
Now, let’s look at a practical example with Apple stocks. Every asset has a code (or ticker), and Apple’s is AAPL. But you don’t need to memorize these codes; a quick search on the internet will give you the code for any asset you want to trade.
Once you have the code, you select the asset (in this case, Apple stocks) and choose the time frame you want to trade. It could be a daily chart, 5-minute chart, 15-minute chart, etc., depending on your investment horizon. Here, we’ll use the 1-minute chart to start discussing candlesticks.
What Is a Candlestick?
Candlesticks are blocks that represent a trading period. On a 1-minute chart, each candle shows what happened in one minute. If the candle is red, it means the price dropped during that minute. If it’s green, it means the price rose.
A candlestick provides four essential pieces of information: the opening price, closing price, the highest, and the lowest points within that period. For example, if the candle opened at a higher price and closed lower, it will be red, showing that sellers had more strength during that minute.
The shadows (also called wicks) show the price fluctuations during the period. They indicate the highest and lowest points reached within that minute, giving us insight into how the price moved and the balance of power between buyers and sellers.
Understanding Chart Patterns
In addition to looking at individual candlesticks, we also analyze the overall chart to identify trends. An uptrend, for instance, is a progression of higher highs and higher lows, while a downtrend is a series of lower highs and lower lows.
By observing these trends, we draw lines on the chart to help us identify potential reversal points. When a trendline is broken, it can be a strong signal that the market is changing direction. These trendline breaks are often confirmed by volume, an important indicator that shows the strength of price movements.
Support and Resistance
Another fundamental tool in technical analysis is support and resistance. Support is a price level where there is a strong concentration of buy orders, while resistance is where there is a concentration of sell orders.
For example, if the price hits a support level and bounces back up, it indicates that buyers are strong at that level. On the other hand, if the price reaches resistance and falls, it means sellers are taking control at that point.
Conclusion
In this second part of our introduction to trading and technical analysis, we’ve discussed how to choose markets, analyze candlesticks, and identify chart patterns. This is just the beginning, and there is much more to learn, such as more complex setups and the use of technical indicators.
If you’re just starting out, I recommend continuing to watch more lessons and exploring the best chart patterns and technical indicators. And of course, if you want this series to continue, don’t forget to hit the like button and subscribe to the channel!
-> Check out the video: