Understanding Technical Analysis
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Understanding Technical Analysis

Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through the use of technical studies, indicators, and other analysis tools.

 

Technical analysis boils down to two things:

 

identifying trend

identifying support/resistance through the use of price charts and/or timeframes

Markets can only do three things: move up, down, or sideways.

 

Prices typically move in a zigzag fashion, and as a result, price action has only two states:

 

Range – when prices zigzag sideways

Trend – prices either zigzag higher (up trend, or bull trend), or prices zigzag lower (down trend, or bear trend)

Understanding Technical Analysis Chart

Why is technical analysis important?

Technical analysis of a market can help you determine not only when and where to enter a market, but much more importantly, when and where to get out.

 

How can you use technical analysis?

Technical analysis is based on the theory that the markets are chaotic (no one knows for sure what will happen next), but at the same time, price action is not completely random. In other words, mathematical Chaos Theory proves that within a state of chaos there are identifiable patterns that tend to repeat.

 

This type of chaotic behavior is observed in nature in the form of weather forecasts. For example, most traders will admit that there are no certainties when it comes to predicting exact price movements. As a result, successful trading is not about being right or wrong: it’s all about determining probabilities and taking trades when the odds are in your favor. Part of determining probabilities involves forecasting market direction and when/where to enter into a position, but equally important is determining your risk-to-reward ratio.

 

Remember, there is no magical combination of technical indicators that will unlock some sort of secret trading strategy. The secret of successful trading is good risk management, discipline, and the ability to control your emotions. Anyone can guess right and win every once in a while, but without risk management it is virtually impossible to remain profitable over time.

 

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Chandelier Exit
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Chandelier Exit

 

The Chandelier Exit is basically a volatility-based system that identifies outsized price movements. Le Beau defined volatility by using the Average True Range, which was developed by Welles Wilder, creator of RSI and the Average Directional Index. ATR uses the prior close, current high and current low to determine the “True Range” for a given period. After some smoothing, the daily True Range values evolve into the Average True Range for a given period of time.

By setting the Chandelier Exit for longs three ATR values BELOW the period high, the indicator provides a buffer that is three times the volatility. A decline strong enough to break this level warrants a reevaluation of long positions. The opposite applies to short positions. The Chandelier Exit for shorts is set three ATR values ABOVE the period low, which provides a volatility-based buffer. An advance strong enough to exceed this level warrants a reevaluation of short positions.

Chandelier Uptrend and forex signals

Sometimes chartists will see a strong uptrend, but not know where to jump on and when to exit. The Chandelier Exit can be used to define the trend and set a trailing stop-loss. The example below shows Eaton Corp (ETN) breaking out in early November and starting an extended uptrend. The Chandelier Exit defined this uptrend quite well as it followed price action steadily higher. This trailing stop-loss could have been used to control risk for new long positions.

With the Chandelier Exit providing the stop-loss, traders would then need to find an indicator to trigger buy signals within this trend. A sensitive momentum oscillator can be used to capture short-term oversold conditions. The indicator window shows StochRSI, which is the Stochastic Oscillator applied to RSI. Dips below .20 reflect short-term oversold conditions. A subsequent move back above .20 suggests that the uptrend is continuing.

forex signals Chandelier Downtrend

Some stocks are more volatile than others and require a bigger buffer, which means the multiplier should be increased. The Hewlett-Packard (HPQ) example shows the stock in a clear downtrend for most of 2012. A normal Chandelier Exit (22,3.0,short) would have triggered some stops just before the downtrend continued. Notice how HPQ moved above the dashed gray line several times during this downtrend. Chartists should increase the ATR multiplier for more volatile stocks, such as techs. In this example, the red Chandelier line allows for more volatility by using 5 as the multiplier. HPQ held this Chandelier setting until the breakout in mid-December, which signaled the start of an uptrend.

The Chandelier Exit is good for stops, but chartists need to use basic chart analysis or a momentum oscillator to time entries. The Commodity Channel Index (CCI) can be used to identify short-term overbought conditions within a downtrend. CCI becomes overbought with a move above +100. A subsequent move back below +100 signals that momentum is turning down again.

The Chandelier Exit is mostly used to set a trailing stop-loss for forex signals during a trend. Trends sometimes extend further than we anticipate and the Chandelier Exit can help traders ride the trend a little longer. Even though it is mostly used for stop-losses, the Chandelier Exit can also be used as a trend tool. A break above the Chandelier Exit (long) forex signals strength, while a break below the Chandelier Exit (short) forex signals weakness. Once a new trend begins, chartists can then use the corresponding Chandelier Exit to help define this trend.

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What is Technical Analysis? Technical Analysis and Forex Signals is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions

What is Technical Analysis?

Technical Analysis and  Forex Signals  is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.

Use Technical Analysis to generate your free forex signals

At the turn of the century, the Dow Theory laid the foundations for what was later to become modern technical analysis. Dow Theory was not presented as one complete amalgamation, but rather pieced together from the writings of Charles Dow over several years. Of the many theorems put forth by Dow, three stand out:

Price discounts everything

Price movements are not totally random

“What” is more important than “Why”

Technical analysts and  Forex Signals provider consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical. Psychological or logical may be open for debate, but there is no questioning the current price of a security. After all, it is available for all to see and nobody doubts its legitimacy. The price set by the market reflects the sum knowledge of all participants, and we are not dealing with lightweights here. These participants have considered (discounted) everything under the sun and settled on a price to buy or sell FREE forex Signals  . These are the forces of supply and demand at work. By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it going?

Even though there are some universal principles and rules that can be applied, it must be remembered that technical analysis is more of an art form than a science. As an art form, it is subject to interpretation. However, it is also flexible in its approach and each investor should use only that which suits his or her style. Developing a style takes time, effort and dedication, but the rewards can be significant.

 

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