Does the technical analysis work on the commodities market
Learn Technical Analysis: The Basic Concept (2021)
Would you like to learn technical analysis of stocks and forex? Bingo! Then you are right here. My name is Ingmar Folk from CoinFlip Trading Consult. Over the years I have developed and tried many strategies.
Now I'll explain this to you Basic concept behind the chart analysis in trading, why it works, which one Tools are the best and how to use them properly. So that you don't make expensive trading mistakes, I will also criticize and address pitfalls.
Let's step on the gas! And off goes Luzi ...
Let's start at the very beginning and first illuminate the essence of technical chart analysis. We then go into the differences to fundamental analysis and other analysis methods for stocks, Dax and Forex before we turn to the best tools and strategies for technical analysis. At the end you will get solid tips for learning and the practical application of the technical chart analysis on the way.
What is technical analysis?
With technical analysis (TA) in trading, future price changes are predicted from past price movements. Traders interpret different price patterns, either directly in the chart or via indicators.
Technical chart analysis tries to depict the current opinion of market participants on a share, a currency pair or a commodity. The determination of the so-called "fair value" for a security does not matter. This is what fundamental trading analysis is about.
The purpose of the chart analysis is to derive favorable buying and selling times. In the analysis process, only the behavior of the financial market players is examined. The price history and trading volume of a security provide the basis for this.
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Technical analysis: nobody cares!
At its core, technical analysis is about trends. More precisely, in order to identify trends and trend changes at an early stage. Chart analysts are not interested in why something is trending or the trend is reversing. Remember: Technical analysis does not ask the question, what exactly led to a price movement?
Whoever needs to know the exact reason for a price movement in order to be able to enter the market with enough confidence will not be happy with the technical analysis.
The following video gives you the absolute basics of technical chart analysis (for absolute beginners) in three minutes:
Scientific background for chart analysis
Technical chart analysis is based on the following axiom: All relevant information from the past and future is priced into the price of a security. For this reason, price forecasts are possible with the help of chart analysis.
This consideration assumes the inefficiency of the capital markets. Price-relevant information may only be incorporated into the price with a time delay. In efficient markets, it would not be possible to forecast the price with the help of the price itself.
All approaches to technical chart analysis are based on repetitive, observable price events that are more likely to lead to similar price developments in the future.
Differentiation between technical chart analysis / chart technology and technical analysis
A fine distinction within the technical analysis has already been touched out, now I'll make it more specific: For technically oriented traders there is still the subcategory chart technique or chart analysis.
Where is the line between these two methods?
Here is the answer: If a trader speaks of the so-called chart technique, or technical chart analysis, it is all about the use and interpretation of the pure price chart (security price). Well-known technical chart approaches are:
- Dow theory
- Market technology
- Candlestick pattern
In addition, the well-known and popular chart patterns (SKS, W formation, etc.) are part of the classic chart technique.
In the technical analysis of the financial markets, on the other hand, the main focus is on the use of technical indicators (e.g. RSI, Fibonacci fans, etc.). These are largely derived from the price chart. A software program uses formulas to calculate new forms of presentation of the price data from the price data in the chart and prepares them optically. As a rule, this artificially calculated data is placed as additional charts under the main price chart of a security. In some cases they are also directly visible on the main chart.
This makes it possible to include further criteria for or against a trade in the decision-making process at a glance. I will explain the most important tools and chart patterns of these two technical analysis methods as well as their correct use to you in a moment.
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Technical analysis versus fundamental analysis
A widely used and contrary approach to the technical analysis of the financial markets is the so-called fundamental analysis. The price chart plays a subordinate role in this type of investment decision-making. On the other hand, basic figures on companies or economies are important. In order to emphasize the benefits of technical analysis, it is worth making a direct comparison with fundamental analysis.
Excursus on fundamental analysis
During the fundamental analysis, reports from the auditing companies, profit / loss accounts, regularly published balance sheets, management, dividend policy, sales, the competitive situation and production capacity are carefully examined. But there is more! A Fundi (fundamental analyst) also follows the decrees and notifications of the Ministry of Economic Affairs and Finance, he observes production indicators, price statistics and much more. There is a lot of work behind a good fundamental analysis and the results offer a lot to discuss.
All the analysis methods and values just mentioned are combined in an estimate of the fair value of the company. If the "Fundi-Analyst" comes to the conclusion that the current price is above its estimated value, he sees this as an opportunity to buy the security and vice versa.
Many fundis smoke their skulls with so many numbers and the legitimate question is: Is it worth the effort, because: Often times, the funder buys his share and has to watch it fall below his purchase price ... and fall and fall.
He then has to admit to himself: Despite extensive and careful analysis, he was totally wrong with the time of purchase.
How does this happen?
What Fundis do not pay attention to
Fundamental factors undoubtedly have an influence on the supply and demand situation. What the Fundis do not take into account, however, is the current mood of market participants. Sentiment implies irrationality and stock prices are influenced to a large extent by irrational decisions made by people.
The stock exchange price, on the other hand, reflects all the emotions of the market participants and the fundamental situation. A stock market price reflects the moods of thousands of people. Rational moods, irrational moods. It reflects the needs of investors who elude the possibility of rational analysis.
Nevertheless, all of these factors ultimately express themselves in an event that must be described as rational: the course. Everyone sees him and can judge him where he stands. It is the price that the buyer and seller agree on and enter into a transaction in the security in question. It contains all the crucial information. Exchange traders often speak of information that is "escalated" (anticipated) in the course.
This includes all information available from fundamental analysis, as well as investor sentiment about a security or market.
Stockbrokers look to the future and they build price based on investor expectations. While the fundamental analyst is still busy analyzing the current status of a company.
For you as a budding technical analyst who will largely base your decisions on the course, it means keeping an eye on price trends. As long as a trend has not been broken, it can be assumed that it will continue. No matter what assessment a fund may come to, because the unpredictable influencing factors of the stock exchange prices are powerful because human emotions are powerful. But every trend on the stock market ends at some point.
Why? Emotions alternate. This usually happens on the stock exchange with the appearance of certain patterns. And it is precisely these patterns in the price chart that are examined by technical analysis or the so-called chart technique.
Such patterns are quite reliable and occur in a similar way, because humans do not change their basic behavior such as panic, greed, euphoria and fear. Our emotional behaviors have remained the same for thousands of years and they will probably still move stock prices in a thousand years just as they do today.
Reading tip: Learn to trade with 1o videos
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Technical analysis vs fundamental analysis - pros and cons
Let's start with the benefits of fundamental analysis of stocks and markets ...
Advantages of fundamental analysis
- It is based on tangible economic figures for the company and the general economic environment.
- It is very suitable for long-term investments, as it tries to calculate the intrinsic value of a company (this is what the stock market price tends to aim for in the long term). This intrinsic value can be used as an anchor price (orientation price) for entry and exit in stock trading.
- Fundamental analysis tries to answer the question of the quality of a company or the overall economic situation (the basis of a good investment).
Disadvantages of fundamental analysis
- It takes time (not ideal for short-term trading).
- It requires good knowledge and skills in interpreting company figures.
- It is only partially suitable for managing the risk of a trade after entering.
- It does not take into account current market sentiment (bullish, bearish, euphoric, fearful), but stock prices are also moved by investor sentiment, not just rational facts.
Advantages of technical chart analysis
- It can be used for very short term trading.
- It does not require any knowledge of business and macroeconomic relationships.
- She plays into the cards of visually inclined people who are not number jugglers by nature.
- It is well suited to managing the risk of a trade (stop loss, trail stops, target zone determination based on past price developments).
Disadvantages of technical chart analysis
- There are innumerable ways of interpreting the price trend (vagueness). For this reason, you have to think carefully about which chart analysis methods you want to use.
For the sake of completeness, I would like to briefly introduce you to another interesting and proven analysis approach for trading.
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Seasonality analysis in trading is a fundamental and stand-alone method for inferring trading opportunities. In this form of decision-making, for or against a trade, seasonal trends in the financial markets are analyzed. They are statistically proven in almost all asset classes. They are particularly pronounced in the raw material markets.
Seasonal price trends are an ideal addition to technical chart analysis. They can be used as an external indicator and combined with all other analysis methods to create a sophisticated trading strategy.
Now let's go into the details of the technical analysis and take a close look at the most useful tools ...
The most important tools for technical chart analysis
At this point, I'd like to introduce you to the most useful technical analysis tools for trading ...
Trend lines are used to connect high and low points. They are used to visualize price trends in the chart. Modern chart software automatically creates a trend channel from this. My opinion on this: split. Trend lines can be helpful if they are clearly identified. Problem: The unique identification. In practice, you will quickly notice: Almost every trader draws his or her favorite line on the chart. As it best comes across to him. Then he usually constantly adapts them to unimportant extreme points and the line always runs differently. The benefit from it? Hardly available, except for pure purposes of chart analysis. How so? Because as a trader you find chart brands that hardly anyone else finds important.
Support and resistance levels
These lines are horizontal painting art. Trend lines, on the other hand, run diagonally. So you connect local lows or highs, which are at almost the same price level. My opinion: Yeah, it's better. How so? Because these chart levels can be nailed down more clearly and thus more market participants can concentrate on the same zones in order to make their decisions. Advantage: There are usually more stop orders in the market at these points in the chart. You can use this. Either by hoping that key market players will keep the course above or below these levels. Or, for quick gains in the direction of the triggered stop orders when prices break the level.
This is where things get controversial. The fact is: every financial market really always forms similar chart formations. But! I stress the adjective similarly. It doesn't mean the same. This is the main disadvantage of chart patterns: It is - as is so often the case - the viewer's subjectivity. There are a few relatively clear course structures. Most of the time, however, these patterns in the chart are so far-fetched that the observer does not know exactly how to interpret a situation on the chart. The most clearly interpreted formations are:
Image description: This chart shows a classic double bottom (two circles). If I trade this chart formation, I am not hoping for an increased hit rate. I use double bottoms or tops to enter the market with a small, sensible initial stop loss (below the local price low at the bottom) and thus create a good risk-reward ratio. Ideally, I trade with overarching trends. As a result, the CRV will continue to increase as long as the trend is not far advanced. Being able to properly assess trend progress is a valuable skill as a trader. My opinion on chart patterns: Yes, as a discretionary trader they flow into my decision-making every now and then. For autotraders, however, they can hardly be used productively.
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The so-called Elliott waves are a direct further development of the Dow theory. I'm sorry: But whoever came up with this story must have been a real marketing genius or have had too much time.
Before I draw my sarcastic conclusion on this technical analysis variant, I would like to briefly discuss the basic methodology of the Elliott waves.
The Elliott Wave Theory has primarily set itself the task of describing the state of the market. Exact price forecasts with the help of the waves were originally only an accessory. Which made sense from my point of view!
The theory proposed by the US American Ralph Nelson Elliott in the 1920s. In essence, he wanted to use the theory to describe the psychological behavior of investors. In his view, the mood of market participants always fluctuates between optimism and pessimism.
In order to make this mood change visible in the price chart, Elliott began to number individual market swings. A bull or bear phase in the market always consists of three so-called impulse waves that set the trend. They are each interrupted by two corrective waves running against the main trend. Both types of waves are broken down into further sub-categories. The names of these subcategories of impulse and corrective waves were derived from the appearance of the course of a wave.
The best known "wave formations" are:
- Diagonal triangles
- Zig Zag
- Horizontal triangles
A distinction is also made between different cycles. Elliott numbered everything he could get his hands on from the Great Super Cycle (centuries) down to the minute chart. This is also the reason for the “fractality” of the Elliott waves.
For me, the approach is well-intentioned, but in practice it degenerates into a confusing, breadless art.
My conclusion on Elliott waves
You count and count and count, look silly out of your trader's jacket and keep counting. Then you revise your counts from the beginning and suddenly nothing is right anymore. What do you do then? You start counting waves again. You keep doing this until you notice that you have miscounted again. Fortunately, that doesn't happen on paper charts these days. Just the need for erasers ... doesn't matter. However: Elliott waves are the most cumbersome, most subjective and one of the most difficult forms of technical analysis to learn. And nobody can tell you for sure whether forecasts made with it are only 1% above chance in the long term. My opinion: You can hardly do more work for questionable value as a trader.For fast intraday trading, Elliott waves are even more of a nuisance from my point of view.
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Chart types for technical trading analysis
Another possibility of technical analysis results from the various representations of the price movements in the chart. The trader's universe of analysis ranges from simple line charts to Renko charts and candlestick charts. The most frequently used variant is called candle charts. They are well suited for spotting chart patterns of all kinds, but there are also specific candle chart formations. We'll get to that in the next section ...
What is the role of candlesticks in technical analysis?
Candlesticks give traders most of the information about what is actually happening on the stock market in a compact and quickly accessible essence. This form of chart presentation comes from the Far East of Japan. Candlesticks are used in technical analysis in a number of ways. Many traders interpret so-called candlestick formations in order to make short-term price predictions.
What is it all about?
With candlestick formations either individual candles or a sequence of at least two candles are considered.
The most famous candle formation, which consists of only one candle, is the so-called Doji. With this candle, the opening and closing prices are almost at the same price level. This is interpreted by candlestick traders as indecision in the market. A Doji should primarily be traded in trends, either as a trend reversal signal, or as a signal to resume the trend within a price correction. The entry usually takes place above the high or below the low of the Doji candle:
One of the most popular candlestick formations is called the engulfing pattern. It occurs as a bullish or bearish signal and consists of two consecutive candles:
In this popular chart formation, the second candle always surrounds the candle body of the previous one. An engulfing pattern is also used in the teaching of candlestick trading to anticipate a change in trend. In the uptrend, according to the textbook, a long position is entered above the pattern when the market is in a correction (downtrend vice versa).
In my trading, pay attention to some formations from the candlestick analysis. However, I never trade them on their own as an entry signal, but use them as support within a larger trading scenario. As always, I focus on those who are the most popular. Tip: If you know how other traders act at a certain point in time, it is not uncommon for nice trades to result in the opposite direction if the original signal fails.
This article on candlestick chart patterns shows you more important candle patterns and how they are traded.
You will also find all the basics and a meaningful application of candlesticks in this video tutorial:
Steve Nison and technical analysis of the candle charts
Anyone looking to trade candlestick charts should look to Steve Nison. He is probably the best-known western representative of the candlestick universe and has written some outstanding works on it. Many of his book treatises have now also appeared as audio or DVD courses.
Worth mentioning are:
- Technical analysis of the candlesticks - all important formations and their practical use (German)
- The Candlestick Course (audio book, English and German)
- Strategies for profiting with Japanese Candlestick Charts (complete course with DVD, English)
Steve Nison's autodicactic courses are not the cheapest, but they are worthwhile for mastering the hands-on use of candle chart formations from Japan.
Let's come to another popular technical chart analysis tool of the modern age ...
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So-called technical indicators are considered the Holy Grail for many newcomers to trading. Why are they so popular? I don't know, I haven't done a poll about it yet. But I can guess:
- Indicators are ideal for baking testing
- They are technical and numbers heavy (many people hope this will give them more confidence and security in their trading)
- And indicators are marketed in a way that plays into the hands of newcomers to the stock market: With little effort, a high degree of accuracy and thus profits.
What more do you want
Technical indicators: the two main groups
Not every trader is aware that all technical indicators derived from the chart can be basically divided into two groups:
Oscillators are observed in sideways markets in order to signal turning points in the price based on oversold or overbought values.
Trend followers, on the other hand, should confirm prevailing price trends or define new trends.
The fact is: Almost all indicators are derived from the price chart and are calculated on the basis of data from the past. These supposed prodigies of technical analysis by no means provide you with additional information about the state of the market. Technical indicators are neatly prepared summaries of the price trend.
My opinion on this technical analysis tool
The predictive power of individual technical indicators is close to what feels like zero! They merely pretend that the trader is safe and that it does not exist. For me, they are simply superfluous in terms of trading success. And let's be honest: do you really need a calculated indicator to be able to assess the trend correctly? Total nonsense. If you want to work with decision-making indicators, you should actually use relevant ones. They have to be calculated independently of each other and please do not trust just one of them. Such indis can be:
- Moving averages
- Average True Range (ATR)
- Trin or tic
- Relative strength of a value (but read directly from the price trend)
- Various fundamentals
- Possibly sentiment indicators
Now you know about the most important and well-known technical analysis tools. In the next chapter I will tell you what you should pay attention to as a day trader when using technical analysis ...
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The technical analysis in day trading
In principle, technical analysis is suitable for all time frames. Whether in day trading or on the daily chart, the principle remains valid. However, day traders should know which tools your market is looking for the most. There are times when certain tools and strategies come in vogue and work better because more traders are looking to them. From my own experience I have to say that the simplest methods of technical analysis bring the greatest benefits in day trading. These include:
- Support / resistance lines
- Moving averages
- Fibonacci retracements
- Selected candlestick patterns
In some cases, clearly defined chart formations can also serve well, such as:
- Double tops, bottoms
If you use chart formations as a day trader, always make sure that they are clear and unambiguous. In this way you ensure that enough other traders become aware of it and a “self-fulfilling prophecy” becomes more likely.
Why is that important?
A “self-fulfilling prophecy” makes the course of the course more predictable and you can use the herd behavior of the other day traders in your favor. Tip: Do not use the combination of many different analysis tools when day trading. You will not gain any additional advantage, but you will make your life difficult because decision-making will be delayed and difficult.
In day trading, quick and clear decisions have top priority.
At this point you should be aware of the correct handling of the TA in day trading. However, there are still a few additional questions about technical analysis to be clarified. This includes the subject of software, books and training. Let's go to the final spurt of this article ...
What software is there for technical analysis?
Nowadays every reputable broker provides their customers with solid software for technical analysis of the price chart. It is usually included in the price of the trading platform.
With some brokers, however, the analysis software leaves a lot to be desired, or the practical handling is not for the trader. In this case it is possible to use external technical analysis software. Which provider you should choose depends above all on your personal preferences and requirements. If you trade with the Fibonacci approach, Tradingview is a good choice. This stock exchange service provider placed great emphasis on a practicable implementation of the Fibo analysis method.
Other well-known analysis software solutions are, for example:
- Sierra Chart
- Ninja trader
In the meantime, hardly any provider offers pure chart analysis software, with many offers you can also trade directly from the analysis tool. To make this possible, some software providers have again entered into partnerships with brokers.
The book "Technical Analysis of Financial Markets"
Are you looking for a worthwhile book on technical analysis? Well, then watch out: the author John J. Murphy describes in his standard work "Technical Analysis of Financial Markets" all the relevant basics on this omnipresent topic in the trading scene.
In the original English edition with the title "Technical Analysis of the Financial Markets", the book was published in 1999 by the American publisher Prentice Hall Press. There have now been several reprints. In the German version by Finanzbuch Verlag, the ham is over 600 pages long and includes a workbook.
What can you expect from the classic about technical analysis?
First of all, it must be said: Murphy's writing style is easy to read and understand. The author dispenses with endless strings of technical terms and foreign words, so that even beginners can easily follow.
It is remarkable how impartial Murphy is when it comes to conveying the content. He leaves it to his readers to decide which methods would be best suited and does not try to impose his own opinion on others.
The book is divided into 19 sections:
- The philosophy of technical analysis (TA)
- Dow theory
- Chart types
- Candlestick charts, bar charts, chart scaling
- Reversal and continuation formations
- Open interest
- Long-term charts
- Moving averages, oscillators
- Point & Figure Charts
- Elliott waves
- Time cycles
- Trading systems
- Money Management and Trading Tactics
- Intermarket analysis
- Stock market indicators
- Summary of all chapters (checklist)
John Murphy and Technical Analysis: My Conclusion
If you are interested in technical analysis of the financial markets and are looking for a good book on it, there is no getting around author John Murphy. In his classic ham for TA he gives you an optimal overview of the most important tools of this popular trading methodology. Murphy clearly addresses the pros and cons without wanting to convince you of any particular approach. The standard work on technical analysis is rounded off by a workbook, which can be used to deepen theoretical content as required. Rating: Worth reading.
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How can you learn technical analysis?
Learning technical analysis is not difficult, the magic formula is: first theory, then practice!
Specifically: Study the best books on the subject, then watch good videos. Before you use your technical analyzes for trading decisions, you should extensively "dry out" various strategies and tools in the chart.
It's best to start right away: In the following video about trend lines you will learn all the basics about one of the most popular analysis methods of private traders, and how you can enter into profitable trades with the help of the trend line approach:
What training is there for technical analysis?
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