CHAPTER 4
Technical Analysis Part 2
ANDREW EMMERSON P. ABILGOS
Subject Instructor
What is Technical Analysis?
• In a nutshell, technical analysis is the study of
historical price movements to predict future
price movements.
• There is a standard disclaimer that “past
performance is no guarantee of future
results,” a statement that tends to call into
question the validity of using past price data
to forecast future price developments.
What is Technical Analysis?
But technical analysis is able to get beyond
those concerns based on two main
considerations:
• Markets are made up of humans. The emotional
forces that dictate buying and selling decisions
are reflected in historical price patterns that
appear over and over in all manner of financial
markets. As long as humans are still making the
decisions you’ll be able to look at past behavior
as a guide to what is likely to happen in the future
What is Technical Analysis?
• Technical analysis is widely practiced in all
markets. This is the self-fulfilling prophecy
aspect of technical analysis. The greater the
number of traders who focus on technical
analysis, the more likely their actions will
reflect the interpretations of technical nalysis,
reinforcing the impact of that analysis
What is Technical Analysis is
NOT?
• Despite its name, technical analysis is not
some engineer-designed, surefire, guaranteed
method of market analysis.
• Technical analysis involves a high degree of
subjectivity where individual interpretations
can vary significantly.
• Technical analysis requires a great deal of
patience, practice, and experimentation based
on individual preferences and circumstances.
What is Technical Analysis is
NOT?
• Certain technical approaches work better in
some currency pairs than others.
• Overall market conditions of volatility and
liquidity also influence which technical
approach works best.
• No single, magical technical indicator or
approach always works.
Forms of Technical Analysis
Technical analysis can be broken down into
three main approaches:
• Chart analysis: Visual inspection of price charts
to identify price trends, ranges, support, and
resistance levels
• Pattern recognition: Identifies chart formations
or patterns that provide specific predictive
signals, such as a reversal or a breakout
• Momentum and trend analysis: Looks at the rate
of change of prices for indications of market
sentiment regarding the price movement.
Findings support and resistance
One of the basic building blocks of technical
analysis is the concept of support and resistance
• Support: A price level where buying interest
overwhelms selling interest, causing a price
decline to stop, bottom out, or pause. Think of
support as a floor for prices in a downmove.
• Resistance: The opposite of support. Resistance is
where selling interest materializes and slows or
overpowers buying interest, causing prices to
peak, stall, or pause in a price rally. Think of
resistance as the ceiling in a price advance.
Findings support and resistance
Support and resistance levels are identified
based on prior price action, such as highs and
lows and short-term (minutes to hours)
consolidation or congestion zones (where prices
get all stopped up and can’t move one way or
the other for a period of time). Support and
resistance can also be determined by drawing
trend lines.
Findings support and resistance
Findings support and resistance
Not all support and resistance are created equal
• The longer the time frame of the price point, the
greater its significance. A weekly high/low is
more important than a daily high/low, which is
more important than an hourly high/low, and so
on, down the time scale.
• Trend-line strength is also a function of time
frame and durability. A trend line based on daily
charts tends to be stronger than a trend line
based on hourly prices. A trend line that dates
back six months has greater significance than one
that’s only a week or two old
Findings support and resistance
Not all support and resistance are created equal
• The strength of support or resistance levels
during a retracement depends on the
strength of the support or resistance during
the prior directional move. A retracement
refers to a price movement in the opposite
direction of a previous price advance or
decline. The distance that prices reverse, or
retrace, is called a retracement.
Findings support and resistance
Different trading styles focus on different types
of support and resistance:
• Tests and breaks of short-term support or
resistance levels are the meat and potatoes
of intraday trading. Short-term traders focus
on the nearest support or resistance levels (for
example, 5- or 15-minute or hourly highs/lows
and trend lines) as guides to the immediate
direction of prices.
Findings support and resistance
Different trading styles focus on different types
of support and resistance:
• Tests and breaks of longer-term support and
resistance levels are the fuel that fires longer-
term trends or defines medium-term ranges.
Medium- to longer-term traders typically
focus on longer-term support or resistance
levels, such as daily/weekly highs/lows, and
trend lines drawn off them, to guide their
trading
Waiting for confirmation
• Confirmation refers to price movements that
verify, or confirm, a technical observation that
suggests a particular outcome. For example,
certain chart patterns are useful predictors of a
potential reversal in price direction. But note that
the starting point in this case is that prices are
moving in a trend or steady direction. Blindly
following a pattern that suggests that a trend is
about to end is very risky. After all, the trend is
your friend, so why would you take the risk of
going against the trend?
References
• Brooks, K. & Dolan, B. (2015). Currency
Trading for Dummies. 3rd Edition. John Wiley
& Sons, Inc., Hoboken, New Jersey
