Introduction to Technical Analysis - Handbook for a laymanHi all, today we are going to study about basics and usage of technical analysis. I have prepared this wholesome post so that you guys are able to understand what technical analysis is all about. I have shortened the sentences to readable points, hence, don't mind the grammar.
Learning objectives:
After studying this post the student should be able to understand:
1. The basis of technical analysis
2. Top-down analysis in TA
3. Assumptions on which TA is based on
What is Technical Analysis?
1. Art and science of forecasting future prices based on an examination of the past price movements.
2. Based on analyzing demand-supply in any tradable instrument.
3. Analyze prices, volumes, open interest, various patterns, and indicators to it in order to assess the future price movements.
4. It can be applied to any time frame.
5. TA ignores fundamentals (like financial and non-financial aspects of the company) and focuses on actual price movements.
6. TA is not astrology for predicting futures prices.
The Basis of Technical Analysis
What makes the Technical Analysis an effective tool to analyse the price behaviour, is explained by following theories given by Charles Dow:
1. Price discounts everything
“Each price represents a momentary consensus of value of all market participants – large commercial interests and small speculators, fundamental researchers, technicians and gamblers- at the moment of transaction” – Dr Alexander Elder
The current price fully reflects all the possible material information which could affect the price.
The market price reflects the sum knowledge of all participants, including traders, investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical analysts, fundamental analysts and many others.
Technical analysis looks at the price and what it has done in the past and assumes it will perform similarly in future under similar circumstances.
2. Price movements are not totally random
If prices were always random, it would be extremely difficult to make money using technical analysis.
Technical analysis is a trend following system. Most technicians acknowledge that hundreds of years of price charts have shown us one basic truth – prices move in trends.
A technician believes that it is possible to identify a trend, invest or trade based on the trend and make money as the trend unfolds.
TA can be applied to many different time frames, and so it is possible to spot both short-term and long-term trends.
3. What is more important than why
“A technical analyst knows the price of everything, but the value of nothing”.
Technical analysts are mainly concerned with two things:
1. The current price
2. The history of the price movement
All of you will agree that the value of any asset is only what someone is willing to pay for it. Who needs to know why? By focusing just on price and nothing else, technical analysis represents a direct approach.
The price is the final result of the fight between the forces of supply and demand.
The objective of analysis is to forecast the direction of the future price.
Fundamentalists are concerned with “why the price is what it is”. Technicians believe it is best to concentrate on what and never mind why. Why did the price go up? Simple, more buyers (demand) than sellers (supply).
The principles of technical analysis are universally applicable. The principles of support, resistance, trend, trading range and other aspects can be applied to any chart.
TA can be used for any time horizon; for any marketable instrument like stocks, futures and commodities, fixed-income securities, forex, etc.
Top-down analysis in Technical analysis
Consider the overall market, most probably the index. If the broader market were considered to be in bullish mode, analysis would proceed to a selection of sector charts.
Those sectors that show the most promise would be selected for individual stock analysis.
Once the sector list is narrowed to 3-5 industry groups, individual stock selection can begin.
With a selection of 10-20 stock charts from each industry, a selection of 3-5 most promising stocks in each group can be made.
After the stock selection, start with higher time frame charts and move down to the lower time frames.
Technical Analysis: The basic assumptions
The field of technical analysis is based on three assumptions:
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
The market discounts everything
Technical analysis is criticised for considering only prices and ignoring the fundamental analysis of the company, economy etc.
TA assumes that, at any given time, a stock’s price reflects everything that has or could affect the company - including fundamental factors.
The market is driven by mass psychology and fluctuates with human emotions. Emotions may respond rapidly to extreme events, but normally change gradually over time.
It is believed that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately.
This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.
Price move in trends
“Trade with the trend” is the basic logic behind TA.
Once a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Analysts frame strategies based on this assumption only.
Trend is your friend. Don’t betray your friend.
History tends to repeat itself
People have been using charts and patterns for several decades to demonstrate patterns in price movements that often repeat themselves.
The repetitive nature of price movements is attributed to market psychology.
Market participants tend to provide a consistent reaction to similar market stimuli over time. Big Green candle = Buy, Big Red candle = Sell.
So, this is it for this post. It should clear all the basic doubts about TA. If it doesn't, post the queries in the comments and I will try to help you out.
I spend a lot of time creating these educational posts, illustrations, charts, and PDFs. Please be appreciative of that and leave a like and comment if you found these helpful. It will help me to know that people are actually reading these posts. Also, if you need a PDF of this post with all the charts and illustrations, check out the links below this post.
Disclaimer : This is NOT investment advice. This post is meant for learning purposes only. Invest your capital at your own risk.
Happy learning. Cheers!
Rajat Kumar Singh (@johntradingwick)
NSE Certified Technical & Fundamental Analyst
Community ideas
The Perfect Fibonacci Retracement ExampleHere is a stock with good cash flows and EPS.
RVNL made its previous all time high in January '21. Then, it went for a healthy correction at the end of the month. Getting retraced from the golden level of Fibonacci, then it consolidated till the 3rd quarter of the year. It skyrocketed to the new high at 44.80 in mid October.
In this situation, I drew the Fibonacci Retracement from the previous low to the previous high (in an uptrend). The previous low was at 20.60 on 22 December 2020 and the previous high was at 35.55 on 11 January 2021. After that, price went for a correction to 26.55 on 28 January 2021, got retraced. After the retracement, it consolidated between 26 to 34 till 18 October 2021, here price broke out of consolidation and went for a new high at 44.80, which was our desired target.
Understanding Fibonacci Levels
The theory of getting the 61.8 number is pretty amazing. If we start from 0 and 1 and keep adding the prior number to get a sequence like:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233...
Now, in this sequence, if we divide any number by its next number, we will always get 0.618, and if we divide 0.618 by 2, we will get 0.382. The 0.5 level is not officially a Fibonacci level, but it is a major level.
So, we come up with a conclusion that 0.618 is the golden ratio, and the golden zone is between 0.5 to 0.618 (between the red lines). This zone is the main point where the price reverses back. Fun fact is, you can also find the work of golden ratio of Fibonacci in the nature too. Read more about it on Google.
What should be the target after getting retraced?
The target should be always between -0.382 to -0.618 levels (market with black box). And, for further more targets, one should learn Fibonacci Extension.
Remember, that targets does not get hit just after getting retraced. After the retracement, price always consolidates before shooting up or down, in the direction of the Fibonacci made or in the direction of the trend. In this scenario, we are in a bullish trend.
Part 3: Elliott Wave Principle - Double three correction guideIt looks like mother Sumi has completed the 4th wave correction, and the ending point of the corrective wave (4) is the starting point of wave (5).
Wave (4) is occurring in double three corrections.
A "double three" consists of two corrective patterns, the first labeled W, and the second label Y, separated by a corrective pattern
on the opposite side, which is labeled X.
Wave formations:
Waves W is a zigzag correction pattern.
Wave Y triangle.
Wave X could form any correction pattern.
Wave X is smaller than wave W & Y.
Rules and objectives:
1. Double three is a corrective structure that includes more than one type of corrective pattern.
2. It consists of three waves, which are marked W-X-Y.
3. A triangle may occur only as wave Y in a double three.
4. In most cases, double threes are not deep corrections.
5. wave Y usually ends at 100% – 161.8% Fibonacci extension relative to wave W.
6. Wave Y should not go below the 161.8% Extension of Wave W. It shows that the corrective trend is strong.
7. There never appears to be more than one triangle.
What are the double threes?
Price picks up momentum when it starts an impulsive wave.
After accomplishing the impulsive wave, it corrects the previous move by a three-wave pattern.
These three waves were not enough to complete correction because of the high momentum & directional power of an impulsive wave.
Price creates another three-wave move to complete the correction by merging through intermediate wave X.
Let me make it easy by explaining and structuring examples.
Double three Structure:
Real Example:
Real Time example - TRIPLE ZIGZAG (Bullish)Let's talk about each waves of Triple Zigzag:
Wave W (5-3-5) impulsive: ((a)) = ((b)) at 17709 which is close actual low 17613. Its a sharp zigzag.
Wave 1X corrective: Wave ((b)) 3-3-5, Running Correction which is little complex.
Wave Y (5-3-5) sharp: ((a)) = 0.786 ((b)) at 16824 which, is very near actual low as 16782
Our first question is, What is the Zigzag?
In chart, a, b and c is zigzag which very easy to understand by picture.
Its really easy to understand this wave counting if you read just below basic rules and Characteristics of Zigzags. The main question, What is going on in nifty? This Triple Zigzag is bullish pattern. Really market is follow this pattern? - Wait and Watch...
Characteristics of Zigzags:
— labeled a-b-c
— subdivide 5-3-5
— typically occur in wave 2 position
— ‘b’ wave does not approach ‘a’ wave origin
— ‘c’ wave ends beyond ‘a’ wave extreme
— belong to ‘sharp'
Rules:
- Wave A always subdivides into an impulse or leading diagonal.
-Wave A always subdivides into an impulse or leading diagonal.
- Wave B always subdivides into a zigzag, flat, triangle or combination.
- Wave C always subdivides into an impulse or diagonal triangle.
We can use channel for zigzag. The Wave C often ends upon reaching the extreme of the channel.
PART 4 : Risk ManagementThe majority of short-term trading results are just random. In the long term the money ends up with those that can trade and manage risk.
Why Risk Management is Important?
People who don’t follow Risk Management they can blowout their account easily.
For instance, they are taking 20 % risk of trading capital, then only 5 wrong trade can blow their account.
The 1 % Rule
Let’s say you have 10,000 rs in your account and as per 1% rule you can lose only 100 rs per trade.
For example, if you take 10 trade with 1:2 Risk Reward ratio and having winning percentage of 50 % then your P&L will be look like this.
1st trade: +200
2nd trade: +200
3rd trade: -100
4th trade: +200
5th trade: +200
6th trade: +200
7th trade: -100
8th trade: -100
9th trade: -100
10th trade: -100
Total P&L: +500
At the end of the day, you will take money in your account with proper risk reward ratio and money management.
Position Size Calculation:
Let’s say you want to long Reliance and having Stop Loss of 5rs with trading capital is 10,000 rs. So, Formula is
Position Size = (1% of Trading Capital) / (Stop Loss)
For our trade example, Position Size is = 100/5 = 20 Qty
Hence, we required 20 Qty to trade Reliance with 100 rs as a stop loss.
To conclude this post, trader should have (Min Loss, Max Profit, Breakeven). Whereas, Max Loss should be avoided to remain in trading career for long term.
Please check my Fibo Trading Strategy post to know more about Stop loss, I will link with this post.
TRENDLINES & S/R ZONES WORKS VERY WELL (EDUCATIONAL)Hello Friends,
Trendlines are one of the best part of technical analysis, see how resistances turns into supports, and supports turns into resistances.
One can start with practicing with Trendlines...!
1) Trendline is the base for all the technical patterns. So pls start practicing drawing trendline charts and then slowly move to next patterns.
2) Practice only few patterns and master in it rather than trying to learn all the patterns and techniques.
3) I would like to mention the quote of Bruce Lee here.
"I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times".
4) Do more and more practice on charts, more time you spend on charts, more friendship they made with you, you'll be able to understand the language of charts, because chart says everything...!
5)Best learning comes out of practice you do everyday and then you apply it in real market.
6) Books knowledge will not be use full, if you don't practice it particularly in real market, because it involves lots of emotions.
7) Spend at least one hour per day in identifying chart patterns and preparing your own charts.
8) Track your charts, Understand how the price moves once the support or resistance is broken.
9) Understand which method gives you better success rate and focus on it more to improve further.
10) Believe me, Nobody can stop you.
some examples are shared below
nifty spot chart example
gold chart example
silver chart example
techm chart example
A-Z About HEIKEN ASHI CandlesticksHEIKEN ASHI Strategy:
1.INTRODUCTION (WHY HEIKEN ASHI CANDESTICKS)
Often trading on the trend gets difficult due to price action that makes trader exit trades early. (USELESS NOISE FORMED BY TRADITIONAL CANDLES)
This mainly happens due to impact of one single candle or bar on Trader’s ability to hold positions.
Through Heiken Ashi Candles , this problem is largely solved as Price Trend is clearly represented through these.
LOOK at the difference between TRADITIONAL and HEIKEN-ASHI Candlesticks below:
A) TRADITIONAL candlestick with a lot of noise during uptrend and downtrend which confuses most of the traders and forces them to exit early
B) HEIKEN-ASHI with a smooth buttery experience while trading:
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2.TYPES OF CANDLES
Let us now come to the types of Heiken Ashi candles.
In this chart, I have done 5 markings to explain the various types of candles in Heiken Ashi.
a)The wide range yellow/green candles indicates good momentum and shows the stock shall be bullish for some more days unless and until there are signs of reversals
b)The small body green/yellow candles represents the continuation of the trend although they show that the stock is not very bullish but is bullish
c)SPINNING TOP- is formed when the body of the candle is very small (NOT A DOJI) and there is wick equal on both upper and lower side.
d)The wide range red candles shows weakness in the stock
e)INDECISIVE Candles- are formed when it is neither of the above candles (small body and irregular size wicks on up and down side)
Always remember, size of body, shadows, and range of candle determines whether it Is bullish, bearish or neutral candle
Do read futhur to understand
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3) KEY RULES to follow
There are broadly 5 rules that need to be followed when trading with Heiken Ashi Candles.
DO HAVE A LOOK AT THE CANDLES SIMULTANEOUSLY
Rule 1 – Green candles with no lower shadows indicate a strong uptrend: When you spot these on charts, be in the trade and don’t think about profit booking. You might want to add to your long position and exit short positions.
Rule 2 – Candles with a small body with upper and lower shadows indicate trend change: These are indecision candles and require more confirmation.
Rule 3 – Red/Black candles with no upper shadow indicates strong a downtrend: When you spot these on charts, be in the trade and don’t think about profit booking. You might want to add to your short position and exit long positions
Rule 4 – Candles with long lower shadows represent Buying interest. Always take note of these candles and assess price action after you spot these candles.
Rule 5 – Candles with long upper shadows represent selling interest and be cautious with existing long positions if you spot such Candles.
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4) INITIATION AND CONTINUATION:
You just need to know 2 types in trend analysis
1.INITIATION CANDLE
2.CONTUATION CANDLES
1.Initiation candle is one that sets the tone of Trend and defines underlying momentum for price. This is why Initiation candles are most important in Trend Analysis and Price action trading.
2.Continuation candles are ones that reaffirm the direction of trend and are useful to increase positions in the direction of trend.
FREE TIP:
When you begin price trend analysis, always look for initiation Heiken Ashi candles and then look for continuation candles.
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5) IDENTIFYING STRONG TRENDS:
In the chart below, let us see how a strong Up/Down trend looks like.
In Heiken Ashi, we should be measuring strength of move based on Initiation Candles (Candles that represent strong trend).
If you look at the chart, all markings that I have done are that of Strong Initiation candles on the downside and upside (BUY/SELL)
When such candles are visible on the chart, invariably Price tends to move up/low. Always keep range of Candle in mind.
It should be wide with no upper/lower shadows for uptrend and downtrend respectively.
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6) COMMON MISTAKES
Most Common mistake when using Heiken Ashi Candles is to Enter or Exit Trades based on the color of Candle. Most beginners commit this mistake and this should be avoided at all times. Whether it is Heiken Ashi Candles or any other charting method, you need to understand the overall Market Trend and Context. Without this, you will find it difficult to Trade successfully over a longer period of time.(PRICE ACTION IS THE KING) This is just an additional filter like an indicator and should not be treated as the only parameter in your strategy...If trading was so easy then 90% wouldn't have lost their money in trading...Trading is like cooking you need to add the right ingredients in the right amount to taste a dish good.A pinch of salt less can ruin the entire hardword behind making the dish...Similar is trading...Will make a tutorial on risk management as well...Do let me know if you are interested only then it would be wise for me to proceed ahead.
One of the main things you have to do is to analyze which candles contribute to Trend and which do not. This effective way of filtering out relevant candles from non relevant one’s is what will help you succeed with Heiken Ashi Candles.
FREE TIP:(SAVES TIME DO READ)
Always divide your Candles into two types;
1.Candles that have impact on Trend
2.Candles that have no impact
This way, you will know which one’s to be focussed upon.
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7)DISADVANTAGES:
EVERY + HAS A - ELSE EVERY TRADER WOULD HAVE USED THIS STRATEGY TO MAKE TONS OF MONEY EVERYDAY
The one main disadvantage that most traders refer to is that by the time Traders take positions based on Heiken Ashi Candles, the entire move is already over. While there is some merit to this, it is important to note that this mainly applies to short time frame charts. On higher time frame charts (30 Min to Monthly time frame), Heiken Ashi has tremendous benefits and Traders should try and incorporate these in their Trading arsenal.
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I hope this tutorial as helpful for you to understand some basics of HEIKEN-ASHI candlesticks...There are many other types of candlesticks which have their own importance like RENKO and PnF candlesticks...Do let me know in the comments whether I should make posts on STOCKs that I Trade/EDUCATIONAL posts like this
FOLLOW me for many more such content ahead...DO hit the like button...Till then,
HAPPY TRADING :)
Bullish market structure - Illustrations + ChartsRecap
Market structure is simple and a basic form of understanding, how the markets move. The Price Action is how the market moves based just on price, without the consideration of trends and how they may continue. But the market structure is focused mainly on the trend. The market structure is formed using swing highs and swing lows. You may have already heard about the formation of higher highs and higher lows in a bullish trend or the formation of lower highs and lower lows in a bearish trend. This is what is called as market structure.
What is a Bullish market structure?
Like I said above, a bullish market structure is a structure that constitutes of formation of a series of higher highs and higher lows. In simple words, when the price is making new highs and higher lows, it is said to be forming a bullish market structure.
Exhibit: Bullish market structure
What is the use of identifying a Bullish market structure?
Identifying any market structure plays a crucial role in entry and exit. In the case of a bullish market structure, the previous highs are often seen as support zones where an entry can be made with an expectation of higher price movement. When the price returns to or near the previous high, it is often seen as a buying opportunity, commonly known as buying the dip”.
Exhibit: Pullback in a bullish market structure
Similarly, as soon as the price breaks the previous low and creates a new low, the trader must become cautious because a trend change may be underway or it may just consolidate before resuming the original trend or it may very well be a bear trap. If a trend change is confirmed, the trader may exit longs and look for the trades on the short sides.
So, after the formation of a new low, there are only 3 scenarios that can arise.
1. Trend reversal
2. Consolidation and continuation
3. Bear trap
Exhibit 1: Creation of a new low
Exhibit 2: Trend reversal
Exhibit 3: Consolidation and Continuation
Exhibit 4: Bear Trap
These are the only structure that can form in a bullish trend and they will occur time and again. Hence, all these concepts are valid on all time frames.
This is all you need to know about a bullish market structure. Now, open any random chart and back test the concepts. The more you practice, the better you will become. Whatever strategy you use, understanding the structure will always make you more confident in your trades.
I spend a lot of time creating these educational posts, illustrations, charts, and PDFs. Please be appreciative of that and leave a like and comment if you found these helpful. It will help me to know that people are reading these posts. Also, if anyone is interested in getting a PDF version of this thread, then you can check the links under this post.
Disclaimer: This is NOT investment advice. This post is meant for learning purposes only. Invest your capital at your own risk.
Happy learning. Cheers!
Rajat Kumar Singh (@johntradingwick)
Double Bollinger Band Strategy :Double Bolliger band Strategy :
Tried to put in best easy way in the chart and simple explanation below :
What we need :
Two Bollinger Bands
1. Length 20 and StdDev 1
2. Length 20 and StdDev 3
Confirmation with indicators should be in same trend with candle stick trend
1. RSI (For trend identification)
2. Stoch (Entry and Exit confirmations / Overbought and Oversold confirmations)
Risk Reward Ratio : 1:2 or 1:1.5 or as per your risk appetite, above ones shown with 1: 2 RR
Rules of the game :
When ever candle stick crosses above/below BB with StdDev 1, that’s the entry. Any candle after this should be used as entry point above the earlier candle which crossed BB with StdDev 1, stop loss should be the candle stick (candle stick which crossed) high or low (sell/buy respectively) or middle line of Bollinger band which ever are nearer. Take profit is 1 : 2 or as per the risk appetite.
Avoid when :
• Long wicks or long candles which crossed the BB with StdDev 1
• If the candle stick trend is not matching with RSI/Stoch (all should be in following same trend path)
• If we don’t get entry within 2 candle sticks after the candle stick which crossed above/below BB with Std Dev 1
Stop Loss : Stop loss is the key here, please do not enter unless you understand how to calculate stop loss. Calculate Stop loss first before entry and it should be minimal say not beyond 40 points in Nifty as an example / acceptable loss in above example chart.
Result : Out of 7 entries 1 hit SL while 6 won. 7 wins with 80 points each vs 1 SL with 40 points make to 520 points gain overall.
Please do let me know if you have any questions would be happy to respond.
Please do like and share this idea. Thanks
Disclaimer : This analysis/strategy is only for educational purpose and not be considered as any trading idea/tip. Please consult your financial advisor before you take any trade and we are no way responsible for your profits/losses. Thank you!
How to find a BREAKOUT that has a high probability of success?The probability of a breakout getting failed is much higher than it's success rate.(A STOCK AT REST TRIES TO BE AT REST AND THE ONE IN MOTION TRIES TO BE IN MOTION like NEWTON's First Law Of Motion)
But breakout trades are the most rewarding trades in stock market.
So...if there was a method to find out a high probable successful breakout then it would have been a shade better to make money in the stock market.
Here I am with a tried and tested strategy to differentiate a fake breakout and a successful one: FOLLOW the below steps:
1.Choose a stock from an up-trending sector (At present sectors like ENERGY, PSUs, REALTY, FINANCIALS AND AUTO (Just started) are examples of up-trending sectors).
The reason for choosing a sector which is up-trending is that the liquidity is high in those sectors and thus increases the chance of the breakout by one shade.
2.The stock should be above 50 week EMA and above 200 EMA on a daily time frame and RSI should be above 60 (In daily time frame)
This is the reason why HEROMOTOCORP Trade is struggling a lot as it is below EMA 200.
3.The stock should breakout from a consolidation of STAGE 1 structure.
And if the stock is in prior uptrend followed by a consolidation and then a breakout again increases the chances like the recent one in RELAXO FOOTWEARS.
4.If the stock breaks out of multiple patterns like INVERTED HEAD AND SHOULDERS,TRIANGLE,STAGE,PARALLEL CHANNEL,TRENDLINE(The more the number of patterns being broken the better the breakout is) One example of this is TRIVENI ENGINEERING Trade that I shared
5.The breakout should be backed with high volumes (AT LEAST EXCEEDING 20 MA)
6.The closing of the breakout should be strong (NO long wicks)
One more example I have is of INDIAMART Trade that I shared applying most of the concepts discussed above.
NOTE: The above discussed method only increases the probability of a breakout to be successful as no strategy in the market gives 100% successful trades, so managing the risk is as important as the strategy and I will post a tutorial soon for this also.
FOLLOW me to stay updated as soon as I upload it here.
Till then,
HAPPY TRADING :)
Indicator Free Analysis using Simple Price Action - A Case StudyThis is the monthly chart of BATA India. In this we can see that there was a bull run from December 2016 to March 2020. It came down slowly to form a falling wedge pattern and also a double bottom pattern from Mar 2020 to June 2021. It gave a good breakout of the falling wedge or flag pattern in July 2021 and the momentum continued.
Here we have not used any indicators and are simply following price action. According to the price action, a big resistance is at 1800 levels where the stock may halt before giving breakout.
How to trade the stock?
1. After getting a confirmation that the stock has broken out of a bullish flag pattern, we could have taken a trade at 1600 levels with a SL of 1200 and a target of 2200-2400
2. At present too, we can buy the stock between the levels of 1700-1800 with the same SL of 1200 and a target of 2400.
How was the target calculated?
The total distance covered by from the highest point of the flag ( approx rs 1800) to the lowest point of the flag (approx Rs 1200) should be calculated i.e. Rs 600. Now on giving breakout, the stock should ideally move Rs 600 from the highest point of the flag (Rs 1800). Thus the long term target comes out to be Rs 2400. However it is just a prediction. So one should give or take a standard +/- 5% deviation from the predicted target.
PS - This stock has been chosen for only an ideal case study. This is not a recommendation. The stock may or may not perform as predicted or described.
WaveTalks: Nifty-Can Bulls Bounce Back?- The Irregular Triangle 6th / 7th Oct2021
The index topped at 17882 this morning was a perfect behavior for the last leg downside in an irregular triangle updated in TradingView Author status / Last idea (add on comment).
6th Oct2021 – WaveTalks: Nifty-Irregular Triangle: ( Stops Above 17890 )
Irregular structures are those which is surpassed in the next leg as it happened for Index Nifty starting 17th Sep2021.
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Let us take a flashback tour for Index Nifty starting 17th Sep2021.
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Wave A or 1st Leg / Wave Downside- Starting at highs of 17792 on 17th Sep2021 (17792 to 17326 = 466 Points drop)
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Considering 17792 High on 17th Sep2021, as the start of the structure, slipped to 17326 as 1st leg downside & pushed upside in 2nd leg to new all-time highs of 17948 (From 17326 to 17948).
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Wave B or 2nd Leg / Wave Upside (17326 to 17948 = 622 Points Upside Rally)
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2nd leg crossed 17792 highs & made a new high at 17948 giving us 1st clue that some irregular structure could be unfolding next as all the moves so far from 17th Sep2021 was corrective in nature which was running across my mind at that moment.
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Wave C or 3rd Leg / Wave downside (17948 to 17452 = 496 Points drop)
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The fall from 17948 highs to 17452 was again corrective in nature. This time I became 100% sure that it is a 75-80% chance that Triangle could be unfolding next & I started putting my sleeves up in excitement as I could be getting 2 legs back to back if identified correctly.
This is all I was thinking like a trader.
The market pushed upside right from the zone 17450-17475 buying zone suggested as PRZ (Potential Reversal Zone) in the idea published to the TradingView community on 1st Oct2021 - Bullish Gartley
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Wave D or 4th Leg / Wave Upside (17452 to 17882 = 430 Points Upside Rally)
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This 4th Leg had to stop below 17948 Highs if the structure had to be correct as crossing above 17948 – this whole triangle scenario could have gone for a toss as structure invalidates.
Keeping that in the mind, I quickly updated all the followers in the last idea this morning before the market starts selling below zone 17800-17825 which was an important zone. I agree it was choppy as markets will never give you straight or easy moves & especially when the triangle is unfolding.
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Wave E or 5th Leg / Wave Downside (17882 to 17617 = 269 Points drop)
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This wave was choppy at the start but it was all controlled by the bears till the end of the day when Nifty made low @ 17613 & closed at 17646 @ 6th Oct2021
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Few things to note
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Our Final Target 17550-17575 is not completed so be careful as the Index may slip to these levels & take support of the Trendline rising upside connecting Wave- A(Bottom-17326) & Wave-C (Bottom- 17452) respectively.
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What Next?
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As a trader, we want to know what next. So here it is. When Triangle gets completed which is assumed to be sideways correction in the uptrend suggests that the next wave can be upside in an explosive manner which is seen or observed as a Thrust. In current scenario, thrust is expected upside for new highs or similar highs of 17948
So, Holding Levels 17452 which is Wave C – Bottom & 17326 which is Wave A – Bottom are key & critical level of support.
Till the time key & critical support holds we expect Bulls to come back & take the control or be in the driver’s seat next.
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Target Next
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Upside Nifty Index is open to travel minimum 17948 Highs & crossing above it will easily travel 18000+ A New All Time High.
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Note
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Always be careful at the tops as euphoria or crazy moves may put a trader in complacent zone & we forget all about risk management. Historically, It has been observed that crazy upside moves are followed immediately by opposite downside move which can be even bigger in size if happens.
SECRETS OF A FAKEOUTThe markets were/are in a state of frenzy. Any strategy with a long bias would have had a positive expectancy, even the ones that don't have an edge. It is vital for traders to build good habits because bull runs don't continue forever. Right now, you can buy the highs and still get away with it because the market is flush with liquidity and inexperienced, new coming investors. When this euphoria will die down, one has to understand the difference between real trading and jumping on the bandwagon. This tutorial is an attempt to de-mystify a simple classical chart pattern combined with statistically tested indicators and tools. Hope this helps.
Here are some examples of a bad breakout:
1.
2.
3.
I also have a scanner that I use to scan very tight compressions beforehand. This is what my current list looks like:
How to identify a multibagger stock?Ways to identifty a multibagger and a good stock for positional trade:
The stock should fulfill the following criteria
1.It should be from a booming sector and the broader index should be uptrending
2.The relative strength of the stock to Nifty 50 should be in uptrend
3.RSI should be above 40
4.The stock should be in a stage 2 uptrend structure (breakout with good volumes + consolidation --> breakout with good volumes as shown in the structure of sun pharma)
5.The stock should have low volume consolidation.
Many more examples are there from the realty sector and few from the financial sector and I will be uploading them very soon FOLLOW me to get notified when i upload a new idea
Till then,
Happy Trading :)
Part [A] Basic of Wave Principle
Elliott Wave background
In the 1930s, R.N Elliott identified the price of the stock trends and reversed a specific pattern. This pattern is repetitive in form and, the patterns have predictive value. He decided to use this pattern (Elliott wave theory) to predict the market. The Elliott wave is not primarily a trading system. It is a detailed description of how the market acts. The Elliott wave is part of technical analysis. Also, the Wave principle is the reassembled form of dow theory.
-Elliott Wave Principle The key To Market Behavior]
Waves in the market?
We all know that price never moves in a straight line. It will neither fall in a straight line nor rise in a straight line.
Price will create highs and lows. And this high and low creates waves. Elliott wave theory is all about counting waves and, we are going to use the Elliott wave to trade the market.
Now, the concept of waves is acceptable for you.
Elliott wave theory is made of 5+3= 8 waves.
Let me show you that structure in both trends.
In bull market ( UP Trend ) :
Figure 1.1 This is the Elliott wave structure in an uptrend. As we discussed, Elliott's wave theory is made up of 5+3=8 waves. Where five waves move with the trend and three waves move against the trend.
In Bear market (downTrend) :
Figure 1.2 This is an example of Elliott wave theory in the Bear market. We can see that five waves move with the trend and, three waves move against the trend.
Take a deep breath, I know you have lots of doubts in your mind. Let me solve some.
1. Elliott wave theory works in any time frame.
2. These 5+3=8 waves will give us a market edge. It will provide strong trends & trend reversals.
3. The accuracy of Elliott wave theory is 84% of you are using the wave principle correctly.
Practical Example of Elliott wave theory :
In the Bull market :
Figure 1.3 This is the TATA MOTORS 4 hour timeframe chart. I used bar charts because It is easy to recognize Elliott's waves in bar Patterns. Well, it works for me to recognize if you feel that you can recognize patterns in another chart, go ahead with bar charts!
In Bear Market:
Figure 1.4 : This is the ITC daily time frame chart. It shows the beautiful Elliott wave structure in the Bear market.
Elliott wave structure :
Now, we all know that Elliott is made of a 5+3= 8 wave structure. So, Let's start getting into it!
To understand the wave principle, we have divided the wave structure (5+3=8) into two Phases which are an Impulse phase/structure & a corrective phase/structure.
Figure 1.5 This picture illustrates Two phases of the Elliott wave principle.
The impulse phase is made up of 5 waves and, the corrective phase is made up of 3 waves.
Figure 1.6: This picture divides the wave principle into two phases.
1. Impulse phase/structure ( which includes five waves and, which moves with the trend you can see in bull market impulse phase is going upward and in a bear market, impulse phase is going down which is directional move.)
&
2. Corrective Phase/structure ( which includes three waves and which moves against the trend, you can see that in bull market corrective phase is going downward and
In bear markets, the corrective phase is going upward, which is a counter-trend move.
Figure 1.7 , Elliott wave has 2 phases. motive/Impulse phase ( directional move ) and corrective phase(counter trend move). We can divide these 2 phases into two types of waves. Impulsive waves and corrective waves.
Let’s zoom in on the impulse phase to understand the underlying structure and wave behavior.
Motive/Impulse Phase :
Important things about the impulse phase
1). Motive/Impulse phase is a Five wave structure that includes wave1,2,3,4 & 5.
2). motive/Impulse phase is a directional move ( moves with the trend.)
3). The Ending point of the impulse phase is the starting point of the corrective phase.
4). motive/Impulse structure is powerful than corrective structure.
5) Impulse phase can divide into two types of waves
i) Impulse waves: 1, 3,5 ( move with Trend of impulse Phase )
ii) Corrective waves: 2,4 ( Moves against the trend of Impulsive Phase)
Let me give you a quick understanding because we are going to cover these waves in-depth,
Impulsive waves are trend-following moves. We can find this type of wave structure in both phases. Impulsive waves create trends.Impulsive waves are (1,3,5,A,C)
Corrective waves are counter-Trend moves. We can find this type of wave structure in both phases. Corrective waves provide pause to continue the trend,
Corrective waves : (2,4,B)
Motive/Impulse Phase in Bull market
Figure 1.8(A) , wave 1,3,5 is an impulsive wave of impulse phase because The trend of impulse phase up and, Impulsive wave are following the trend and heaving upward move.
And
wave 2,4 is the corrective wave of an impulse phase because the trend of the impulse phase is up but, the corrective wave is moving down, which is against the trend.
Motive/Impulse Phase in Bear Market :
Figure 1.8(B), wave 1,3,5 is an impulsive wave of impulse phase because the trend of Motive/impulse phase down and Impulsive wave are following trend and heaving downward move.
And
Wave 2,4 is the corrective wave of an impulse phase because the trend of the Impulse phase is down but, the corrective wave is moving upward, which is against the trend.
Corrective Phase/structure :
Important things about the impulse phase
1). The Corrective Phase is a three-wave structure that includes waves A, B, C.
2). The corrective phase is a counter-trend move ( moves against the trend.)
3). The Ending point of the corrective phase is the starting point of the Impulse phase.
4) correction phase can divide into two types of waves
i) Impulse waves: A, C ( move with Trend of correction Phase )
ii) corrective waves: B ( moves against Trend of correction Phase )
Corrective Phase in a bull market:
Figure 1.9(A ): wave A, C is the impulsive wave of the Correction phase because the trend of the correction phase is down and Impulsive waves are following the trend and heaving downward move.
And
Wave B is the corrective wave of a Correction phase because the trend of the Corrective Phase is down but, the corrective wave is moving upward which is against the trend.
Correction phase in Bear Market :
Figure 1.9(B) : wave A, C is the impulsive wave of the Correction phase because the trend of correction phase Up and Impulsive waves are following the trend and heaving Upward move.
And
Wave B is the corrective wave of a Correction phase because the trend of the Corrective Phase is Up but, the corrective wave is moving down, which is against the trend.
[ Note : here, the correction phase moves against the trend. That's why the market has a Downtrend but, the correction phase is in an uptrend.]
Impulsive wave structure :
1. Impulsive waves are directional moves that are bigger than corrective waves.
2. Impulsive waves create trends.
3. Impulsive waves are subdivided into five waves.
( that means wave 1,3,5, A, C which moves with the trend will have five sub-waves.)
4. Impulsive waves are easy to recognize.
(Impulsive waves can also be called motive waves)
5. Ride of impulsive wave can give us a high probability trade setup with high Rewards
We are going to cover impulsive wave formations in the next part.
(diagonals,extensions,Impulse,Truncation)
Figure 1.10: As we discussed, Impulsive waves subdivide into five waves.
Here wave 1,3,5, A, C has five subwaves which you can see in the chart.
Similar expressions of Elliott Wave structure on NIFTY.Elliott Wave Methodical Structure
This is a motive cycle of the Elliott Wave in which you can observe waves 1,3 and 5 are in direction of a trend. Wave 2 and 4 are against the direction which is called a "Corrective Wave".
Five-wave structures, numbered (1)-(5).
In the direction of the main trend of one larger degree.
Wave 2 cannot retrace at the starting point of wave 1
Wave 3 can never be the shortest.
Wave 4 never enters the price territory of wave 1.
Waves 1, 3, and 5 are motive waves.
Wave 3 is always an impulse wave.
I've also tagged some common words such as " steep jump ", " sideway/consolidation ", " pull back " etc. So, a reader can understand it easily. The design of the chart is very easy to understand therefore, I have posted the below charts to understand the easy structure of the Elliott Wave.
Now just check out NIFTY 50, Elliott Wave Structure, and Real Price in the below chart.
Elliott Wave with Actual Price
Yes, you got it now. Did you notice my entry-level at wave 2 on Aug 25, 2021? I have also published this chart on tradingivew.com. Check out the below chart.
----------------------REALIST-----------------------
Aug 25, 2021, published : (Entered with my position at the end of Wave 2)
Just, click on the "PLAY" button . I hope you understand now about Wave Counting.
Last updated on Sep 16, 2021 (Started 4rth corrective wave)
If you've still query about Elliott Wave, please comment.
How To Use Financial Ratios To Make Better DecisionsFinancial Ratios help you evaluate a company. Most financial ratios will show you how much money you're paying for a specific piece of the business. Let us give a few examples:
Price-to-Sales Ratio = Market Cap / Sales
The Price-To-Sales ratio or PS ratio tells you how expensive a company is relative to its total sales. The formula is calculated in two different ways: divide the company's market capitalization by its revenue or divide the current stock price by revenue-per-share. Because this ratio is being calculated with live price information, you can also watch it in real-time on the chart as we've shown in this example above.
If a company has a market cap of $10 billion and revenue of $1 billion, well that, that implies a PS ratio of 10. You're paying $10 for every $1 in sales. You can do ratios like this for all aspects of the company. For example, PE ratio or Price-To-Earnings ratio measures the Market Cap / Earnings . This tells you how much you're paying for every dollar of earnings .
Keep in mind that Financial Ratios are not perfect. They are also not a buy or sell recommendation. Instead they are shortcuts, ways to quickly evaluate a company, compare its underlying fundamentals, and study that company relative to other companies. You also must remember that financial metrics can change quickly with a single earnings report. A company's future expectations are also just as important. A company like Apple might have a high PE ratio, but if they're building and growing revenue into the future, their PR ratio could come down over time.
Remember, Financial Ratios and Financial metrics in general paint a picture of the underlying business and its earnings potential. Here are some other resources to get you started:
1. Read more about Financials on TradingView in our Help Center.
2. You can also code your own strategy or indicator using this financial information .
3. We've also created a library in our Help Center so you can learn more about every Financial metric .
Here are some other financial ratios that you may find interesting and how they're calculated:
PE Ratio = Market Cap / Earnings
PB Ratio = Market Cap / Book
PEG Ratio = PE / Earnings Growth
Quick Ratio = (Cash + Cash Equivalents + Current Receivables + Short Term Investments) / Current Liabilities
Dividend Yield = Dividends Per Share / Price
EV Multiple = Enterprise Value / EBITDA
To access all of the Financial Ratios available to you, click the Financials button at the top of your chart. From here, you can select many different Financial metrics and study markets at a deeper level.
More importantly, you can combine the study of Technical and Fundamental analysis at the same time. Meaning you can evaluate the fundamental side of the business including its earnings and valuation while ALSO studying price action and planning a trade.
Please feel free to share your feedback and comments below! Thank you for reading.
What is Ascending Triangle?What is an Ascending Triangle Pattern?
Ascending Triangle Pattern is a continuation pattern that means when it plays out it will continue the preceding trend. It is created by price moves that allow for an upper horizontal line to be drawn along the swing highs, and a lower rising trendline to be drawn along the swing lows. These two lines form an ascending triangle . Traders here usually watch for breakouts from upper resistance in ascending triangle patterns.
How does the Ascending Triangle Pattern work?
After the prior uptrend when investors try to book profits it creates a resistance that leads to a high supply zone . But due to the prior uptrend investors are still interested in the asset which leads to picking up in demand slowly, resulting in a rising trendline. Time in this phase is also a crucial element. The longer this pattern consolidates, the more chances it has to give a possible breakout to continue the uptrend.
Why is the Ascending Triangle Pattern Unique?
Ascending triangle patterns usually have a higher breakout success rate than symmetrical triangle patterns. In an ascending triangle , higher lows are constantly being built, which shows there is a strong demand for the asset.
Role of Volume:
Volume plays a major role in the completion of all major patterns. The horizontal trendline which acts as resistance can give spikes in volume . We will call it a breakout when a candle closes above horizontal resistance level with a great volume spike or rise in average volume .
Above Chart Explanation:
This is the 4H chart of FTTUSDT with a clear preceding upward trend. After the uptrend, we enter the second phase where the upper horizontal line becomes resistance 4 times in a row and the lower rising trendline becomes support 3 times in a row. As we have observed here FTTUSDT consolidated for nearly 1 month in an ascending triangle pattern, which finally led to a super bullish breakout.
Two Possible Entries:
Entry 1: On rising support, when the price touches the rising support trendline and if there is rising average volume , it makes a good entry with a stop loss placed below the previous higher low point.
Entry 2: On resistance breakout, we should wait for the 4H candle to close above the resistance to confirm the breakout’s validity. Once the breakout is valid, a potential opportunity would be to enter at the close of the 4H candle with a stop loss placed a little below the breakout level. Usually, we should target the height of the triangle after the breakout.
Comment down your thoughts on Ascending Triangle Pattern in the comment section.
Disclaimer:
This is just an educational post. Never trade just any pattern. And please do your research before making any trades.
Happy Trading!
PS we are posting this again for our Indian Audience.
How To Tweet a Chart Image Fast!We realize that sometimes you just want to get your charts out to people as soon as possible.
With the Tweet Chart Image feature, now you can!
As illustrated above, simply choose "Publish" then "Tweet Chart Image" and you'll be able to tweet the image out directly from your Twitter account to get that critical analysis to your followers fast!
What's that? You'd like to do this on your iPhone as well?
No problem, we got you.
Check out what idea users are tweeting right now here
Image Credit
How to count Neo wave Impulse Current wave counts
Primary-wave 2 (orange)
Intermediate-wave A (Blue)
Minot-wave B (Red)
Minute-wave C (Yellow)
Applied Neo wave Impulse Rules:
1)Counting started from faster retraced low
2)wave 2 should not retrace wave 1 by more then 61.8%
3)wave 2 should be equal or longer then wave 1 in terms of time
4)0-2 TL should be clean and price action of 1 should not touch 0-2 TL
5)wave 3 should not be shortest
6)wave 4 should not enter wave 2 zone
7)2-4 channel should not have more then 4 touch point,here on 5th instance channel was broken
8)wave 4 should be longer then wave 3 in terms of time
9)Atleast 1 Alternation between intermediate wave 2 and 4 should be there,here alternation is observed in terms of retracement,pattern complexity,time and price
10)Every new motive wave had 2 stage confirmation.
Analysis
Looks like Tata steel is certainly not in buying zone,as it has completed intermediate impulse cycle and it has broken minute 2-4 TL,minor 2-4 TL(not shown in the charts),minute 4 low's in lesser time then minute 5 took to form and 21 day simple moving average.
A decisive close below 1400 can trigger fresh selling till 1240-1250 where previous price action zone comes along with 23.6% retracement of entire intermediate cycle from 365-1535.Hence short selling can be done if price goes below 1410 with a stop loss of 1460 on the upside and target of 1250 and 1140.
Continuing to this logic meanwhile during this fall if price's comes to 1250 level then it will be breaking intermediate 2-4 TL in lesser time then intermediate 5 took to form hence it can be assumed that intermediate top has been formed and going ahead price can even touch 1140 minor 4 lows and 709 intermediate 4 lows(I know it sounds ridiculous at this point) but i am mentioning this becoz it seems like we have completed intermediate impulse cycle.
As of now metals stocks are not participating in the on going rally so keep your exposure limited as in case of any major selling portfolio returns would be severely impacted if metals occupies major chunk of your portfolio.One can even start hedging by selling in the money call or of tata steel keeping mentioned spot price as stop-loss.Further Indicator's and Candle stick patterns can be used for efficient entry and exits.
PS: Interesting observation skip if you are already boared
1)As per the rules 5th(minute) extention of 5th(Minor) extention of 5th(Intermediate) wave cannot take corrective form unless 1st of highest degree 5th is sub-divided in 3.This is seen in this case.It was confusing me at first that Minor 5th is making terminal impulse by looking at the overall shape i got by connecting TL's but as Minor 1st of Intermediate 5 is not sub-divided in 3 this possiblity can be ruled out,also here Minute 4 has not entered Minute 2 pricezone which confirms termination of Minute,Minor and Intermediate 5th wave @ the shown place as per my view.
2)Both variation of Neo wave pattern Diametric pattern is seen,
Diamond Diametric-Intermediate wave 4
Bow-Tie Diametric-Minor wave 4
3)As mentioned by many Author's of wave theory and as noted historically wave 5 in commodities are longest.Here wave 5 is longest in terms of both price and time .
I have tried showing everything that i have charted hope-fully anyone reading this finds this post logical just like me
Part 1: How to Count Waves Using Chart Patterns?We can count waves using traditional patterns like Head and shoulders, Double Top and Bottom,
Triangle, cup & handle, etc. This article is about how you can count waves by identifying chart patterns.
I have covered Three chart patterns in this article,
1) Triangles
2) Head and shoulders
3) Double Top and Bottom
1) Head and shoulders :
In addition, the two lows formed when the price failed to rise and fell back down were basically at the same level. The horizontal line is often referred to as the "neckline" When the price fails to fall back for the third time neckline will break. So "head and shoulders" was officially established.
Changes in volume with head and shoulders:
During the formation of "head and shoulders", the left shoulder has the largest volume, the Head has a slightly smaller volume, and the right shoulder has the smallest volume. The phenomenon of diminishing trading volume shows that when the stock price rises, the chasing force is getting weaker and weaker, and the price has the meaning of rising to the end.
Operation plan after the Head and shoulders appear:
When the head and shoulders formed, you can decisively follow up the short order. The formation of the head and shoulders indicates the beginning of a new round of decline in the market, and the minimum drop is the distance from the head to the neckline. The profit is very substantial. Therefore, studying the formation of the Head and Shoulders is also a necessary analysis process for band enthusiasts.
Wave Count :
The left shoulder: wave 3/A.
The first touch on the neckline: wave 4/B
Head: wave 5/C
The second touch on the neckline: wave A/1
The right shoulder: wave B/2
The ending point of the right shoulder: wave C/3
2) Triangles :
These are the most commonly used triangle patterns. In this motion, we are going to understand the triangle in terms of the Elliot wave. We'll be talking about the classical triangle pattern in an upcoming educational series.
Wave Count :
A triangle forms in corrective waves. There are Four corrective waves in Elliott wave theory. The corrective waves are 2,4, B, and X.
There are four waves in a triangle which are A, B, C, D, E.
The starting point of wave A of the triangle is the ending point of impulsive wave 1/3/A/W. After the completion of wave E of wave 1/3/A/W, the Impulsive wave will initiate.
3) Double Tops and Bottom:
In the chart, you can sometimes see the stock price fluctuations. The stock price fell back after reaching the highest price. After some sorting, it rose again to near the previous stock price level and then fell back. Two "normally highs" The high point is formed on the circuit diagram and will not be seen again in the short term.
Wave Count :
In a Bull market, The first Top of the pattern represents the completion of the impulsive wave. The ending point of the Impulsive wave is the starting point of the corrective wave.
I started the wave count from the first Top and labeled it as A, B, and C waves.
In a Bear Market, The first Bottom of the pattern represents the completion of the impulsive wave. The ending point of the Impulsive wave is the starting point of the corrective wave.
I started the wave count from the first Bottom and labeled it as A, B, and C waves.
After wave C is complete, we can ride the impulsive waves.
Identifying Set Ups - Price Action + MACD + EMAToggling between numerous stocks can be tiresome. Using a strategic method to identify potential set ups can save your time and deliver amazing results!
In the above chart,
I first noticed that the price was around its support. It can be confirmed by seeing the previous price swings that the support is well tested.
Next I look at the MACD to confirm if the divergence between the Signal Line and MACD line is decreasing to make sure if it is the right time to enter or not.
Usually these 2 steps take hardly a few seconds and I can form a preliminary idea about the position.
Once these two points are confirmed,
I move forward to confirm if the EMA 9,21 (which can been seen has worked out beautifully for this stock in the short time frames like 7-10 days) is actually looking bullish to enter right now. If the EMA is not already crossed, or about to cross, I can drop the share here. In this case, the EMA lines are very close and the chances of a bullish cross are good enough.
Next, I confirm my hunch by looking at the Volume data and see if the increase is price will actually be sustained by smart money flow, or fall down by retail trading pressures. Increasing volume with price increase helps to get conviction for a long position.
Finally, I check the RSI levels and I monitor them very closely to see if there is any Bullish or Hiden divergence and see how strong they might be. I also like to draw a vertical line at the key level from which RSI always bounces or retracts. Personally I prefer RSI levels between 50 and 60, after a recovery from 30-40. It just implies that the bulls are gaining control again and still leaves out plenty of room for entering a trade and making profits before it hits the overbought region.
After I am satisfied with the Technicals, the last thing remains is to check if there are any major news, events or rumours about the share and the recent EPS growth of the share. This doesnt affect a lot in the short run, but doing due diligence never hurts. It is how I identified IEX, HUL and TCS just right before they shot up.
Thanks for reading!
Keep Learning :)
How to identify Breakout - Price ActionFor the purpose of demonstrating how one can identify a trend change using Support - Resistance and Price Action, I have taken the daily chart of IEX. I had also identified and posted about it before the recent rally.
The first step is to establish a clear support and resistance line. In case of a breakout, I like to keep my target at around the same price difference range between old support and old resistance after it bounces from the resistance.
The crucial thing lies in identifying the candlestick pattern around the support - resistance. In our case, when the price first hit the resistance, it formed a clear Bearish Engulfing and the next time, it formed a healthy dark cloud cover followed by an engulfing. These are clear red flags when a trader should start booking profits.
Similair bullish patterns can be identified at support region like the Morning Star pattern as in the above chart.
In order for the price to give a breakout, Volume & Momentum play a very crucial role. A rising volume with price rise builds momentum, and increases the chances of a breakout. Another important observation is to see HOW STRONG did the PRICE BOUNCE from the support. Long wicks, very less or almost no consolidation around the support and a bounce back from an area above the support instead of retracing all the way back to the support are clear indications of trend reversal from Bearish to Bullish.
Also notice how the candle formed a Morning Star during the bounce, this further strengthens our conviction that the trend is changing.
Observe how the red candles grow smaller and smaller as they approach support, this indicates weakening of the bearish momentum.
Also the Resistance was approached in a very aggressive foray this time with clear long green candles indicating a very strong pent up demand.
I hope this analysis provides some insight into how the Price action gives an early indication of the future price movement.
Thanks for reading! Keep Learning :)
