Technical analysis tutorial

>>Intro

Ok… technical analysis this is a huge topic to cover, there are hundreds of books and websites out there teaching different systems and methodologies. Im not going to try and even compete with these but instead give a brief outline of what I use and what works for me.

I subscribe to the philosophy KISS (keep it simple stupid) . The more complicated you make something the more lightly it is to fail, that applies to everything in life not just trading. What’s the point in having 20 indictors on your charts when you can produce good results with just one or two.

There’s no secret formula to trading its all about having an edge and hitting those high probability opportunities every time you get the chance. You have to think of your self like a casino and know that out of every 100 trades on average your gonna nail as an example 70% of them, if youve used correct risk/reward money management and played the setups correctly then you've done your job. Losing is part of the game and the cost of doing business, it should hurt when you lose but if you execute your edge and strategy correctly your'll be up over the long term. Its when you make idiotic mistakes (and most of us make them) when you need to be hard on yourself. Its difficult enough to grow an account trading good setups and pissing money away though sloppy mistakes is just not good enough.

>>Trading Sessions

There are three main trading sessions devided up to reflect the diffrent time zones. Asian (Tokyo)

European(London), Ameriaca(New York)

The european session is traditionally the most liquid and best time to trade this starts at 8:00am GMT (London Open), Followed by america and then Asia. Recently i have noticed that some of the best moves have occured late on in the American session around 6-8pm UK time. So it is possible things maybe starting to change regarding best times for volotility in the markets.

>>Market Correlation

Financial markets are all interconnected correlation is key and you need to keep a handle on what’s going on in the big markets even if you don’t trade them. In my opinion stocks are king I follow the ‘S&P 500’ stock index if this market is rallying and has bullish sentiment more often than not the US dollar will be weak (bearish) and other commodities such as gold and oil will follow suit and also be in bullish mode... when indicies are performing strongly.

>>News

I don’t trade fundamentals but always keep half an eye on the scheduled news events throughout the day. You’ll find that many of the news releases have no impact at all on the markets its normally already priced into the markets already. Unscheduled news events are what can really muck up trades such as government intervention or press releases from National banks such as the FED and ECB ,fortunately they don’t happen very often.

The most important data releases are:

>Interest rate announcements and central bank policy statements

>Employment numbers, Non-farm payrolls(First Friday of every month) and jobless claims (Thursday)

>GDP figures

>CPI- inflation figures

>Retail sales

>Home sales

>Consumer confidence* and other sentiment indicators

If you wish you can use a 'squark' service that will keep you updated on news events thoughout the day, you can pay a subrsription for this sevice but many brokers these days have their own service and allow their clients to use them for free.

>>Trading Style

I am primarily a swing/day trader I mainly use daily charts on which to base trading decisions. Trading intraday or scalping the markets is very hard, my advice to anyone new would be to start with the higher time frames, they are far more relaxing to trade. You can potentially place set and forget orders at 10pm every night when new daily candles are formed. Then just check your orders at the same time the next day. I know some people who make a good living doing just this.

>>Mentoring

If you've got some spare capital available its probably worth investing in a mentor it will accelerate your learning curve, Choosing one is a personal decision, be careful though there are plenty of so called 'experts' ready to take your money. If you can find someone that has worked on the trading desk at a bank or prop house even better they tend to have a more rounded approach to compared to someone that’s been trading there own account all their life. The mentor i used was a bit of a colorful character a highly educated chap, ex pro poker player turned trader he worked in a prop house briefly but found it too restrictive and was only aloud to trade one market. I don’t think he mentors anymore he gave up fairly quickly I guess he can make a lot more money trading than teaching others to do it. I cant recommend anyone specifically but the forums 'trade to win' and 'forex factory' will have people advertising their services.

Support and resistance probably the most important concept to grasp in technical analysis, In its simplest form its basically an area where price reacts to buying or selling pressure. Its essentially a way to identify in any given market high probaility areas where price will react again due to past market movments.

Horizontal Support and resistance lines

Drawing your own horizontal S&R lines on the chart is an effective way to plot where price may react if the market trades at that level again.

Below is a screen shot of EUR/USD on hourly chart as you can see price reacted in a bullish bias strongly three times at the red S&R line, thus supporting price at this level. When price finally broke through on the forth attempt it eventually retraced back to the S&R line this time price reacted as resistance and bounced off this previous support area.

This method is great for getting you into the start of moves in an oversold/ overbrought market, generall rule of thumb i use is to to take profit at the first trouble area (resistance). You can usa a 1:1 risk/reward ratio with this method but this is a personell thing and people develop their own trading style over time. The key is to not to be two anal about where you put your stops, placing them a couple of ticks above below swing high or swing low price levels will only see you get whipsawed out of alot of trades.

Diagonal support and resistance lines/ Trend Lines

Diagonal S&R is also a widely used method , you can see in the screen shot below of the ‘S&P 500’ that the market has formed a wedge pattern. The two manually drawn in lines show that price is ranging between these two points.

This type of S&R can be useful for breakout plays, as shown in the screenshot when price broke through support it retraced briefly and bounced off the lower support line to react as resistance. The market then collapsed and broke down heavily to the south.

Other forms of Support and Resistance

Round numbers

When markets hit significant psychological levels/round numbersyou will often see markets bounce 50’s and 100’s levels are key areas to watch out for.

Pivot Points

Daily and weekly pivot points are used widely by many intraday traders as a form of support and resistance. You will often see price clatter into these dynamic levels and bounce. They are great for taking a few ticks out of the market if you’re a scalper./ short term trader

Moving Averages

Popular moving averages used by traders such as the 1hour 20 are used as S&R, price will frequently bounce off these levels.

The way I trade is very simple.. I purely draw my own support and resistance lines on a naked chart across the weekly and daily time fames across the various markets I trade. These lines give me potential high probability trade opportunities when price travels towards these areas correctly.

Ideally when looking to play counter trend bounces off support and resistance lines I like price to move aggressively into the level as your more likely to see a better reaction off the level. I find that if price consolidates just before a level the trade set-up does not work as well. Its true at least with this style of trading that the most uncomfortable trades tend to work the best.

When my levels coincide with other levels that other traders are looking at I sometimes opt to increase the bet size as there is an even higher chance that price will react at that particular level.

-Confluence levels I look to take advantage of

-Daily Pivot Points

-Weekly Pivot Points

-Previous days high/low

-Previous weeks high/low

-Fibonacci retracement levels

-20 exponential moving average (daily chart)

Some of these confluence levels can also be a great help in finding the best places to put stops and take profit targets.