Technical Analysis

Essentials
CONTENTS

3 FUNDAMENTAL ANALYSIS
7 TECHNICAL ANALYSIS
14 INDICATORS

Technical Analysis Essentials 2

FUNDAMENTAL ANALYSIS
“The roots of education are
bitter, but the fruit is sweet.”
Aristotle
Contents

5 What is Fundamental Analysis?

6 Economic Calendar

Technical Analysis Essentials 4

What is Fundamental Analysis?
Fundamental analysis is a method of evaluating the
intrinsic value of a security. It is done by studying
macro factors like the overall industry and economy
state, as well as micro factors like revenues, prof-
its, and expected growth. The goal is to produce
a number that can be compared with the current
price of the security to understand whether it is
overvalued or undervalued.

As opposed to the technical analysis used for ob-

serving short-term trends, fundamental analysis is
usually applied by traders who are looking for long-
term investment.

Investors employing fundamental analysis tend to

draw information from economic news, government
reports, and company financial statements.

Technical Analysis Essentials 5

Economic Calendar
Investors use an economic calendar to monitor
events that have a high probability of impacting the
financial markets, like interest rate decisions, payroll
numbers, changes in the gross domestic product,
and the consumer price index.

Each day in the calendar lists multiple influential

events in chronological order so that traders would
be able to research and prepare. Every event has a
volatility level that indicates the likelihood of that
event impacting the markets. Usually, there are
three levels, the highest of which means the event
is expected to have a significant impact, while the
effect of the other two will depend on other factors.

Technical Analysis Essentials 6

TECHNICAL ANALYSIS
Contents

9 What is Technical Analysis?

10 Support and Resistance

11 Trend
13 Chart Time Frame

Technical Analysis Essentials 8

What is Technical Analysis?
Technical analysis is a method of attempting to
forecast future price movements based on a securi-
ty’s historical data. The assumption is that the price
is subject to crowd psychology, which makes it move
in identifiable patterns. The key factors to be ana-
lyzed are price movements and volume.

Multiple technical indicators have been developed

by analysts over time. Some are focused on recog-
nizing the current trend, while others help determine
the strength of the trend. The most common indica-
tors of trend trading are:
• Moving Averages
• RSI
• MACD
• Bollinger Bands

Technical Analysis Essentials 9

Support and Resistance
A support level is where a price has the propensity
to stop and bounce back when it falls. On the other
hand, a resistance level is where a price is likely to
bounce off when it rises. The more a price touches
a level and bounces back, the stronger that level
becomes.

Once a price breaches a support level, that level

often becomes the new resistance level. The same
concept applies to breaking out of a resistance lev-
el.

People tend to consider round numbers as psycho-

logical barriers, so trading history shows that sup-
port and resistance levels can often occur at round
numbers, like $50, $60 or $100.

Technical Analysis Essentials 10

Trend
An excellent way to start with technical analysis is to
understand trend patterns. Trend trading is a strat-
egy of buying a security when its price trend goes
up or selling when it goes down, assuming that price
movements will continue. Investors close their posi-
tions only when they expect a reversal.

There are two kinds of trends. An uptrend occurs

when a price is gradually rising and is expected to
continue growing. Downtrends are the opposite of
uptrends and are associated with the bearish mar-
ket.

Before a reversal breaks a trend, there is often a

sideways pattern in-between. It is when the price
goes relatively flat for a period, indicating the ab-
sence of a trend. However, an investor should be
careful not to mistake small ups and downs for a
reversal, as they are common for any trading price.

Technical Analysis Essentials 11

Trend
Each trend consists of four stages. The first stage is
consolidation, which occurs when the price bounc-
es up and down in a sideways pattern, not knowing
which way to go next. Then there is the breakout
2 when the price goes beyond the support or resis-
tance line. That is the earliest entry opportunity for a
trader. The third stage is the continuation. It occurs
when price continues to go in the same direction. The
last stage is always exhaustion. The price begins to
3 move in a sideways pattern or completely reverses
direction.

Technical Analysis Essentials 12

Chart Time Frame
Using a suitable time frame is an essential part of
trading, yet there is no single answer for everyone.
That is because usually, an investor uses several
time frames, depending on their trading style. First,
they try to find a trend by observing the main time
frame they are interested in, then choose a time
frame above and below it to verify it.

A swing trader, who focuses on the daily charts,

would look for the primary trend in a weekly chart,
then choose a 60-minute time frame to recognize
the short-term trend.

A day trader could use a 60-minute chart to find the

main trend and a 5-minute chart to seek a current
trend.

A long-term investor could use a 1-week time frame

to find a trend, a monthly chart to confirm it and a
daily chart to choose an entry point.

Investors should keep in mind two things. First, the

smaller the time frame, the more the chart is pol-
luted with noise in the form of insignificant ups and
downs. Second, it is common for a security to be in
an uptrend in one time frame and in a downtrend in
another.

Technical Analysis Essentials 13

INDICATORS
Contents

16 What’s a Technical Indicator?

17 Moving Average

19 MACD
21 Bollinger Bands

23 RSI

Technical Analysis Essentials 15

What’s a Technical Indicator?
A technical indicator is a mathematical calculation
employed by traders to predict future price move-
ments based on historical price and volume data.
Indicators either overlay on price chart data, like
Moving Averages and Bollinger Bands, or they are
shown below or above the chart, like MACD and RSI.
Those that are added outside the chart are called
oscillators.

An important thing to remember is that experienced

investors tend not to make decisions based on a
signal from one indicator. They usually confirm with
at least one other technical indicator to make sure
it is not a false positive.

Technical Analysis Essentials 16

Moving Average
A moving average is a widely used indicator that
removes random price fluctuations in order to rec-
ognize the trend direction and identify support and
resistance levels.

The basic type of a moving average is called a Sim-

ple Moving Average. It represents the arithmetic
mean of the closing prices from a specified number
of days. For example, the 10-day moving average
is calculated by adding the closing prices from the
past 10 days and dividing that sum by 10.

Technical Analysis Essentials 17

Moving Average
Traders often use Simple Moving Averages for 20
days, 50 days and 200 days.

When a security price is above its 20-day moving

average, it is a sign of a short-term uptrend. If it
is below the moving average, then the price is in a
short-term downtrend.

When the price is above its 50-day moving aver-

age, it is considered to be a relatively strong up-
trend. On the other hand, the price being below the
moving average is a sign of a downtrend.

The 200-day moving average is rather insignificant

as it takes too long to turn.

Overall, the strongest signal of an uptrend is having

the 20-day above the 50-day, which is above the
200-day. If the order is flipped the opposite way,
that would indicate a strong downtrend.

Besides a simple moving average, another popu-

lar type of this indicator is an Exponential Moving
Average. It has a rather complicated formula and
gives more weight to recent prices.

Technical Analysis Essentials 18

MACD
MACD is an acronym for “Moving Average Conver-
gence Divergence.” It is a trend-following indicator
that shows a histogram based on the difference be-
tween two lines: the MACD line and the signal line.
The MACD line is calculated by subtracting a 26-
day exponential moving average from a 12-day ex-
ponential moving average. The signal line is a 9-day
exponential moving average of the MACD itself. The
histogram gets bigger as the two lines diverge and
it disappears when they cross each other.

When the MACD crosses the signal line, it is per-

ceived as the start of a new trend. Falling below
the signal line indicates a signal to sell, while rising
above it suggests it is time to buy.

Technical Analysis Essentials 19

MACD
If the security price starts to move in a direction
different from the MACD, a reversal of the current
trend is likely to occur.

Sometimes, an investor might see a rapid rise of the

MACD, which indicates that the asset is currently
overbought, but will soon return to the average vol-
ume.

Technical Analysis Essentials 20

Bollinger Bands
Bollinger Bands® are an indicator of volatility that
was developed by technical analyst John Bollinger.
It places two bands above and below a moving
average. When they narrow, it means the market is
quiet and a sharp price move in either direction be-
comes more likely. If the bands widen significantly,
the increased volatility might indicate the end of an
existing trend.

Almost all price movements occur between the two

bands, so when a breakout happens, some traders
consider it a trading signal. Others think that is a
misconception and do not believe that breakouts
imply the price is going to continue in that direction.

Technical Analysis Essentials 21

Bollinger Bands
Bollinger Bands® are not meant to be used as a
standalone indicator, as they only provide informa-
tion on volatility. It is advised to complement them
with two or three momentum and volume indicators,
like MACD and RSI.

Technical Analysis Essentials 22

RSI
RSI stands for “Relative Strength Index.” It is a mo-
mentum oscillator that measures the velocity and
magnitude of price movements on a scale from 0 to
100. When the index is at 70 and above, it is tradi-
tionally considered overbought, while 30 and below
is looked upon as oversold.

RSI can be used to confirm trends. If a downward

trend is occurring, the index should be found fluctu-
ating between 10 and 50. When the RSI breaks out
of that level, it often corresponds with the breakout
of the price as well. The same goes for an uptrend,
except that the index moves between 50 and 90.

Technical Analysis Essentials 23

RSI
If the RSI line and the price line both experience
trends, but in the opposing directions, that diver-
gence can signal a price reversal. Although, it must
be noted, that when a trend is strong, divergences
are likely to appear without breaking the trend.

Technical Analysis Essentials 24

 T H A N K YO U F O R C H O O S I N G O U R S E R V I C E .
W E W I S H YO U S U C C E S S F U L T R A D I N G !

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