Understanding Technical Analysis_6. Techniques

Lesson 6: Techniques

Traders employ technical indicators and charting analysis to study markets and pin
point trading opportunities as well as the right entry and exit positions.
Candlestick charts have their own patterns, with several making an effort to grasp
the psychology of the market and the regular race between buyers and sellers.
This part discusses five types of techniques that may help you step up your trading
approach.

1. Bullish Engulfing Pattern
This pattern materializes in a downtrend market. It often has two complete
candlesticks spanning two time periods (e.g. one hour or one day). The first
candlestick would be bearish, while the next one is bullish and covers the
succeeding time period. The first candle usually suggests the end of falling prices
and its size can differ from chart to chart. The second candle must be larger than the
first and should cover the body of the previous candle. The larger the second one
and the higher it climbs, the stronger the signal.

2. Bearish Engulfing Pattern
Bearish engulfing patterns appear when the market has been in an uptrend, with a
candle moving in the opposite direction to the trend which covers the previous
candle – indicating a change in sentiment from buying pressure to selling pressure.
The first candle in this pattern signals that the current trend is coming to a close and
its size can also vary from chart to chart. The second or engulfing candle is the one
that suggests the shift in trend and must fully cover the previous candle. Preferably,
the increase should exceed the previous candle high and a new drop should take
place - signaling renewed declining selling pressure.

3. Bullish Divergence
Several traders will rely on technical indicators to identify the market’s direction and
one variation of this method is to spot divergences. This means the price does one
thing while the indicator does something else, signifying that the trend is growing
weak, providing an opening for profit from a move in the opposite direction.

4. Bearish Divergence
For every positive formation there’s usually a negative counterpart and with
divergence, it’s no different. When the market is registering higher highs, but the RSI
is not matching up, then there is a bearish divergence which could suggest that a top
is close.

5. False Breakout
As discussed earlier, no trading approach presents correct data all the time.
However, false signals can offer clues with regards to where the market is heading.
The false breakout tactic is popular among momentum traders. When the price’s
previous fall or climb is broken on the chart, some will deem it as a sign that a new
trend would take place. Still, many times this doesn't occur, although false breakout
could provide us an aggressive trading approach and is a helpful bit of technical
analysis on its own.