Basic techniques:
- Identifying support and resistance
The lows mark the support and the highs mark the resistance. The more height, width, and volume, the more strength of support and resistance levels. Buy at the break out and stop at the little bit lower than the support level.
- Identifying a trend and a trading range
Trendlines - up, down, flat, 1-2-3 Reversal Method, Angle (uptrend degree) or Slope (downtrend degree) (Increase angle or slope sign possible running out of stream or panic selling)
For longer term trading, use logarithmic scaling; for short term trading, use arithmetic.
- Understanding different types of gaps
Common gaps - no higher volume gap. Before use fading the gap, make sure to wait for confirmation of the directional change.
Breakaway gaps - At least 100% increase of the normal volume on the gap day. On the days following the breakaway gap, volume should remain higher than normal for several days in a row. Once volume confirms the gap, enter as early as possible, and place the S/L at the lower rim of the gap.
Continuation gaps - At least 50% increase of the normal volume on the gap day. The next day confirmation is neede in order to enter the trade, and place the S/L at the lower rim of the gap.
Exhaustion gaps - ie, islands that offer excellent trading opportunity. Enter a trade when price moves back into the gap, and place a S/L at the last support.
- Recognizing basic chart patterns
Double Top and Bottom - Entry point at the right side of patterns at the neckline with S/L at the second bottom or top.
Triangles
Symmetrical triangles are continuation patterns, enter at break of the trendline, S/L at the last support.
Ascending triangle is a continuation pattern, make sure the trend prior to its formation is an up trend. Enter at break of the trendline, and S/L slightly below the last minor support.
Desceding triangle is just opposite of ascending triangle.
H&S Top and Reversed H&S Bottom - Make sure the volumes match the patterns.
Wedges
Falling wedge is a bullish pattern, and upward wedge is a bearish pattern.
Flags and Pennats are continuation patterns. So only trade with bull plag or bullish pennant on the uptrend; bear flag or bearish pennant on the downtrend.
Rectangles are continuation patterns. 2 ways to trade rectangles (Bullish stock on an uptrend, ):
1. Entry point at the lower channel, and S/L below the support. Take profit at the upper channel.
2. Entry point at after breaking the resistance level and pulling back to re-test the previous resistance level which is current support level , S/L just below the last resistance, i.e., current support level
Rounded bottoms and tops
Round bottoms are bullish and round tops are bearish. From the rim to the bottom, 38% retracement is normal and 62% is extreme.
- Understanding volume
Climactic volume comes at the end of a hard run. At least 100% more than the normal vlume confirms a possible reversal of the short-term trend.
Advanced techniques:
- Moving averages - Trend-following indicator
Most popular setting are 10, 20, 50, 100, and 200 period EMAs.
- Moving average convergence divergence (MACD) - Trend-following indicator, MACD and Signal lines are delayed indicator, but the Histogram is a leading indicator
- When MACD line (fast - solid line) and signal line (slow - dash line) are cross each other, the trading signals are generated.
- Overbought and oversold conditions: The distance btw the MACD line and the signal line becomes larger, it is possible that the security is overextended.
- The most powerful signal the MACD can generate is a divergence.
- MACD histogram: trading signals are generated based on a. the slope of the histogram changes direction; b. an extremely strong signal, there is a price divergence with the MACD histogram.
- Stochastic oscillator - Trend-following indicator
- Reference lines are at 20% and 80%
- When %K the fast line rises above %D the slow line, a buy signal is generated.
- Overbought and oversold levels - Stochastic oscillators work well in a sideway market, but they generate a lot of false signals when the market is in a trend. When either %K or %D falls below 20% level and then rises above that level, a buy signal is generated. When it rises above 80% level and then falls blow that level, a sell signal is generated.
- Divergence - Bullish divergence occurs when prices establish a new low but stochastic fails to follow suite. A strong buy signal is given as soon as stochastic turns up from its second bottom. The best buy signals are those in which the first bottom is below the 20% reference line and the second is above it.
- Relative strength index - A good leading indicator
- Reference lines are at 30 and 70.
- It generates similar buy and sell signals as Stochastic Oscillator, but it is best combined with the trend of the bigger picture.
- Chart Patterns - it works better with classical TA, such as trendlines, support and resistance, triangles, and H&S
- Divergences - It gives best signals for this indicator.
- On-balance volume (OBV) - A leading indicator
- OBV generates trading signals based on its breakout and breakdown.
- Divergences - An OBV bullish divergence occurs when the price hits a new low while OBV establishes a higher bottom.
- Accumulation/distribution - A leading indicator
- Time segmented volume (TSV)
