Step by Step Guide To Identify Trading Breakouts Into Uptrends Using Simple Technical Analysis

If you need help in identifying when a stock has already break out of a trading range and is ready for a rally or move into uptrend, here is a simplified guide.

Call up the chart of the stock you are interested in, and perform the following steps:

1. Volume Analysis

When stocks fall in price, there should be an increase in volume to denote selling or distribution. There is normally a sudden spike in volume when the stock hits a near bottom or bottom. This volume spike shows that selling is exhausted, as the last remaining weak holders of the stock give up in despair as prices continue to drop and throw out their last remaining stocks, causing the volume spike.

Correspondingly, look for an increase in volume as the trend changes and there is an break out in price, when buyers come in to pick up the stock as they perceive the price has gone down low enough.

2. Pattern Analysis

Using Technical Analysis For Trading the Emini-How to Shortcut the 3 Year Learning Curve

Understanding technical analysis and candlestick chart patterns on the Emini can give us very reliable signals for trade entries and exits, and take a lot of the guess work out of trading the Emini futures market. It is very hard to argue which way the trend is heading if the index is making a series of higher tops and bottoms on our chart and the candles are all green. Buying the index in these circumstances is like getting carried up an escalator…it’s an easy trade when you go with the flow.

Unfortunately, many people fight the trend and sell (or worse, go short) at every small down tick, thinking they have picked the top, only to see the Emini rise further immediately. By the time the buyers are finished, these traders have spent their monetary and psychological capital in a futile attempt to pick the top of the market.

Another common mistake traders often make is ignoring all of their technical analysis indicators and being long in a downtrend, and then buying extra Emini contracts as the price falls, or averaging a loss. You can see how dangerous this strategy can be (at least in the short term) in a situation like we’ve experienced several times over the last five years. Always remember – the trend is your friend, don’t ever buck it.

The Hanging Man is a Great Starting Point to Learning Technical Analysis

For full-time investors who rely on volatility and day-to-day fluctuations in security prices, it is an understatement that they must learn technical analysis. Such analysis enables them to make appropriate changes to their positions, but not all technical analysis accommodates short-term trading. For traders who look to take advantage of quick entry and exit points, short-term patterns are their best allies.

As part of the ongoing Learn Technical Analysis Series, we will discuss a short-term pattern known as the Hanging Man. This pattern gives traders an outlook as to the short-term range of that security. And given its gloomy name, investors can immediately identify the pattern as a bearish signal.

When looking for a Hanging Man, investors will need to study the security’s candlestick chart. For those who have just started to learn technical analysis, the candlestick consists of horizontal lines for the open and close, and a vertical line for the day’s range. The open and close lines are squared off, forming the “Real Body” and if the range traded above the open or below close, that part forms the tail, or “Shadow.”

The History and Basics of Candlestick Technical Analysis

The candlestick way of technical analysis traces its roots to Japan from where it originated and now is very popular and used worldwide. Several patterns of candlestick exist on paper as well as on ancient Japanese texts that throw in depth light on the theory and fundamentals of it.

It is said that in the seventeenth century the rice trade carried out by the Japanese was done through such form of technical analysis. In 1900, Charles Dow supposedly used this as the basis to create a modern United States version of candlestick technical analysis. But the real credit of this charting process is bestowed upon Homma, a rice trader hailing from a place called Sakata.

This method is quite useful to get accurate low, high, close, open prices in a given timeframe. While the shadow of the candle, depicts low and high price points, its body the opening and closing prices. Some kind of shading is done to which way the price is going. If the candle is shaded going downwards, it means that the price at which a stock closed, was lower than what it opened up to.

Strong Bullish Reversal Candlestick Patterns

There are many strong bullish reversal candlestick patterns, including the “Abandoned Baby”, the “Morning Doji Star”, the “Three Inside Up”, the “Three Outside Up” and the “Three White Soldiers”. Although there are multiple strong bullish reversal patterns, these are the more important ones to know, understand and recognize.

The Abandoned Baby is a three-day reversal pattern. The first day’s candlestick is dark, which continues a previously established downward trend. A Doji represents the second day of the pattern. This Doji’s shadows (or wicks) trade below the first day’s closing price.

The Morning Doji Star is a three-day reversal pattern. The first candlestick in this pattern represents the first day, which is in a downward trend, thus causing the first candlestick to have a long and dark body. The next day bears a small trading range, opening lower with a Doji. The last day of the pattern closes above the first day’s midpoint.

The Three Inside Up is a three-day reversal pattern. The pattern follows a previously established downward trend. The first candlestick of the pattern, representing the first day, is long and dark. The second day trades up to the first day’s midpoint, with a light candlestick. The third day also comes with a light candlestick, however this candlestick carries the currency pair’s price above the first bearish candlestick.

How to Trade Forex Using Technical Analysis

There are some traders who are simply trading the news and these people are known as fundamental traders. However there are also traders who only trade with indicators and patterns on their charts and these people are known as technical traders. Personally, I am a technical trader and I am going to show you how you can better trade the currency using technical analysis.

Below is some stuff you need to know in order to be able to do proper technical analysis:

1) Candlestick Patterns: This is usually one of the most overlook parts of technical analysis. Most traders do not spend time learning how to interpret candlestick formation and this is why they are unable to trade with success. You do not need to be able to know everything about candlestick but you definitely need to know the various type of reversal patterns or continuation patterns so that you can enter your trade more accurately.

2) Forex Indicators: Once you have familiarized with the candlesticks, you need to spend time to learn the features of different forex indicators so that you know which to choose for your trading plan.

Using Technical Analysis with Fundamental Analysis

Forex trading usually requires three things in order to profit (not including tactics and strategies): a trading philosophy, fundamental analysis and technical analysis. While trading philosophies do not actually make you money, they will help to keep you more disciplined with your account funds. Fundamental analysis deals with the economic, political and world events, surrounding countries and their currencies. Technical analysis involves following trends and patterns from the past to the present, as well as predicting future trends and patterns.

It is ideal to combine your technical analysis with both your trading philosophy and fundamental elements, in order to form a more perfect trading environment.

Learning to read a chart is a basic skill. Each trading platform is different but there are many similarities because of market similarities. Charts all contain these elements:

- The currency pair that is being trading is often displayed in the top left hand corner of most charts

- The time frame you are looking at can usually be determined by looking at the bottom of the chart

- The current price of the pair is usually marked on the far right side of a chart and by the type of indicator on the chart (i.e.: candlestick, line, and dot)

Using Candlesticks and Candlestick Patterns

Many traders and investors in the Forex market use Japanese candlesticks when they conduct technical analysis, as they are unique and allow us to gather information regarding the price actions of particular currency pairs, a lot more effectively.

Candlestick analysis is very popular, mainly due to the fact that there is a lot of information regarding trends of currency pairs, presented on candlestick charts.

Before looking into these trends, you should know the basic layout of a Japanese candlestick. A basic candlestick chart consists of more than one candlestick – each one is spread across a chosen time frame. Each candlestick on the chart represents the price range and movement for the currency pair at each interval within the chosen time frame. The chart, as a whole, represents the chosen time frame. The candlesticks represent periodic intervals within that time frame. Both, of course, represent the price action of a particular currency pair.

Weak Bullish Reversal Candlestick Patterns

There are many weak bullish reversal candlestick patterns, including the “Belt Hold”, the “Gravestone Doji”, the “Inverted Hammer” and the “Tweezers Bottom”. Although there are multiple weak bullish reversal candlestick patterns, these are the more important ones to know, understand and recognize.

The Belt Hold is a simple one-day reversal pattern. The pattern occurs during a downward trend. The pattern consists of a single light candlestick, with an opening price that is very close to the day’s low. Typically, the candlestick has no upper shadow (or wick), though it might have a short one in some cases.

The Gravestone Doji is a simple two-day reversal pattern. The first day’s candlestick is dark and closes near the low of the day, at the lower trading range. The second day comprises of the Gravestone Doji itself. The Doji’s opening and closing prices are identical to each other, however, the Doji’s upper shadow is well into the first candlestick’s body. The Doji tends not to have a lower shadow, though on the odd occasion it might. If the Doji does have a lower shadow, it will typically be very short.

Candlestick Chart Information, History and Patterns

Candlestick charts are very commonly used in Forex technical analysis by many traders and investors. The candlestick charts that are used in the Forex market originate from Japan and were developed more than 500 years ago.

The candlestick charts used in the FX market were developed by a Japanese merchant, who used candlestick charts to visually-represent price movements in a rice market, which apparently led to him to become very rich and wealthy.

Due to the history of candlestick charts, some of the candlestick chart patterns have inherited very unique names, however these names allow traders and investors to more easily remember each one, as there are a few.

First of all, before learning about candlestick chart patterns, you should know about candlestick charts themselves. Candlesticks can represent any chosen time frame – minutes, hours, weeks etc. The body of the candlestick chart is, quite simply, the thicker part. You will notice also, that there are two lines on either side of the candlestick’s body – these are known as the shadows, or wicks. Again, quite, simply, the top line is known as the upper shadow or wick and the bottom line is known as the lower shadow or wick. The upper shadow or wick, is used to represent the currency pair’s price highs, in the chosen time period – and vice versa, the lower shadow or wick, is used to represent the currency pair’s price lows, in the chosen time period. The edges of each candlestick also represent the opening and closing prices of the currency pair in the chosen time period.