What Is the Role of Chart Patterns in Technical Analysis?

Technical analysis refers to the sum of the methods of taking market behavior as the research object to determine market trends and follow the cyclical changes of the trends to make stock and all financial derivative trading decisions. Technical analysis believes that market behavior is inclusive of all information, prices fluctuate in a trend manner, and history repeats itself.

technical analysis

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Technical analysis refers to market behavior as the research object to judge market trends and follow the periodicity of trends

Technical analysis has comprehensive, direct, accurate, strong operability, and wide application scope. Compared with the basic analysis, the technical analysis of the transaction is quicker and the cycle of obtaining benefits is shorter. In addition, technical analysis responds more directly to the market, and the results of the analysis are closer to the local phenomenon of the actual market. The market entry and exit positions obtained through market analysis are often more accurate than basic analysis.

The disadvantage of technical analysis is that the scope of consideration is relatively narrow, and it is difficult to effectively judge the long-term market trend. Basic analysis is mainly applicable to market forecasts with relatively long periods and areas where forecast accuracy is not high. Compared with basic analysis, technical analysis is more suitable for short-term market forecasting. To perform a longer period of analysis, you must refer to basic analysis. This is the most important issue for applying technical analysis. Because technical analysis is a summary of experience rather than a scientific system, the conclusions obtained through technical analysis and the trading operations carried out therefrom need to bring returns to investors in the form of probability.

1.Innate regrets of technical analysis

Everyone knows that the basic elements of technical analysis are quantity, price, time, and space. The ever-changing permutations and combinations of the four major elements have formed specific technical patterns and trends of the broader market and individual stocks. In other words, the process of forming the technical pattern and trend of the broader market and individual stocks is the result of the coordinated changes of the four major factors, and is by no means the result of changes of a single factor or one or two factors. In fact, the classic technical form of technical analysis is just a description of the combined shape of the K-line; the classic technical indicators of technical analysis, either drawn as a curve or a histogram, are basically formed by the evolution of a single element. Either for technical simplification, or for the four major elements to simultaneously describe the technical form and technical indicators, it is still very complicated. Therefore, a single or pure technical form and technical indicators will inevitably have congenital defects. Just like judging people, just seeing their lovely faces can't be guessed that she (he) is artificially cute, and her head can't be guessed that IQ must be high.

There is nothing flawless in the world, and so is technical analysis. We should face up to the shortcomings of various technical analysis methods and know how to circumvent and supplement them.

2. Blind and Misunderstandings in Technical Analysis

In the application of technical analysis to judge trends, attention should be paid to avoiding the blind and misunderstandings of technical analysis. The so-called technical analysis blind zone refers to the area where the technical indicators cannot predict or fail. For example, the KDJ indicator predicts the rising and falling sections more accurately, but the occurrence of high passivation and low passivation means that the KDJ indicator has entered the technical analysis blind zone. For example, technical indicators such as deviation rate and Bollinger Band are more effective for oversold rebounds. However, the first wave of downside reversals at the end of the bull market is often inertial declines. Many technical indicators have oversold rebound signals, and the results are all failures. This is also a blind spot for technical analysis. The so-called technical analysis misunderstanding refers to the area where the prediction results of technical indicators are sometimes accurate and sometimes inaccurate. For example, many well-known analysts and stock market experts summarize the technical indicators and standards for capturing dark horses. They are safe and reliable at the end of the bear market and the beginning of the bull market. The early stages of the bear market and the balanced city according to the figure are misunderstandings of technical analysis. There are also lags in most technical indicators, which are also blind and misunderstandings in technical analysis. Investors should pay attention.

Market behavior is inclusive of all factors that affect prices: fundamentals, political factors

Technical analysis is a part of the trading system that improves the system. It analyzes the trend and position of market prices, and improves the final trade success probability coefficient. It is the initial starting point for trading behavior. It is the most basic and important part of the trading system. starting point!

1. Increase the probability of success in the direction of the transaction;

2. Analyze the trend channel level and target price space after the emergence of resonance power;

3 Calculate the points, after establishing a fixed point of loss and win, provide a calculated numerical parameter for fund management in trading skills.

4 Look for trading signals and confirm them through the digital quantification of the indicator tools to provide execution basis for trading strategies.

5. The technical analysis theory can simplify the complex execution psychological problems in trading behavior, simplify the order after sorting and classifying the theoretical procedures, and help traders quickly improve their trading psychological ability!

Deviation rate BIAS

1. When the D value is above 80, the market is overbought. When the D value is below 20, the market is oversold.

2. When the Stochastic Index deviates from the stock price, it is generally a signal of a turnaround.

3 When the K line breaks the D line upwards, it is a buy signal, which is the KDJ golden fork. Such a buy signal has a high accuracy above 70.

4. When the indicator is hovering or crossing around 50, the reference meaning is small.

1. Both DIF and DEA are positive, that is, when both are above the zero axis, the market is generally in a bullish market. DIF breaks through DEA upwards and can be bought. If DIF falls below DEA, it can only be used as a signal to close positions.

2. Both DIF and DEA are negative, that is, when both are below the zero axis, the trend is generally a short market. DIF falls below DEA and can be sold.

3 When the DEA line and the K line diverge, it is a reversal signal.

4 DEA has a higher turnover rate in the game, but if it is combined with RSI and KD, it can appropriately make up for the shortcomings.

1. The rise and fall of the stock price shows an irregular change, but the overall trend has a clear trend, that is to say

Use Bollinger

B-Bands technology research was created by John Bollinger, president of Brin Capital Management in Manhattan Beach, California. Bollinger has high authority in the futures and stocks industry.

Traders often use B-Bands to determine overbought and oversold areas to determine the difference between prices and other technical indicators, and to predict price targets. The wider the B-band on the chart, the greater the market instability: the narrower the line, the smaller the market instability.

B-Bands are lines that are placed on the chart at intervals near a moving average. This consists of a moving average and 2 standard deviations, with one line above the moving average and one below. The upper line is two standard deviations added to the moving average. The lower line is two standard deviations subtracted from the moving average.

Some traders use B-Bands with another indicator, such as the Relative Strength Index (RSI). If the market price touches the upper B-band and the RSI does not confirm an upward movement (that is, there is a difference between the indicators), then a sell signal will be generated. If the indicator confirms an upward movement, then no sell signal is generated, and in fact it may indicate a buy signal.

If the price hits the lower B-band and the RSI does not confirm the downward movement, a buy signal will be generated. If the indicator confirms a downward movement, then there will be no buy signal, and in fact a sell signal may appear.

Another strategy is to use Bollinger Bands without additional indicators. In this way, a sell signal is generated at the top of the chart that occurred above the upper line before the vertex below the upper line. Similarly, a bottom that occurred above the lower line before the bottom above the lower line generated a buy signal.

B-Bands also helps determine overbought and oversold markets. When the price approaches the upper line, the market becomes overbought, and when it moves closer to the lower line, the market becomes oversold.

More importantly, market price trends should also be taken into account. When a market enters an overbought or oversold area, it may become even more so before reversing. You should look for signs of weaker or stronger prices before anticipating a market reversal.

Bollinger lines can be applied to any kind of chart, although this indicator is best used with daily and weekly charts. When applied to weekly charts, this line is more significant for long-term market changes. John Bollinger said periods of less than 10 days were not good for B-Bands. He said the best period was 20 or 21 days.

MACD indicator

The exponential smoothing moving average (MACD) indicator has become one of the more popular computer-generated technical indicators in the past few years.

The MACD is proposed by Gerald Appel and is both a trend tracking tool and a market momentum indicator (oscillation indicator). The MACD reflects the gap between a fast exponential moving average and a slow exponential moving average. An exponential moving average is a weighted moving average that usually gives greater weight to recent price performance.

The name "exponential smoothing similarities and differences" is derived from the fact that fast exponential moving averages tend to converge or depart from slower exponential moving averages. At the top of the MACD chart is a third MACD index average ("trigger" or signal line), which is drawn with a dashed line.

parameter:

Moving average 1: The time period of the first exponential moving average. The default value is usually 12, which refers to the 12 bars drawn on the chart in any time frame. (This is a fast moving average).

Moving average 2: The time period of the exponential moving average being subtracted. The default value is usually 26, which refers to 26 bars. (This is a slow moving average.)

Trigger line: The 9 bar periods of this signal line represent an additional exponential moving average.

MACD research can be explained like any other trend-following analysis: a line crossing another line indicates a signal to buy or sell. When MACD crosses above the signal line, an uptrend may be beginning, which shows a buy signal. Conversely, crossing below the signal line may indicate a downtrend and a sell signal. Cross signals are more reliable when applied to weekly charts, although this indicator may be applied to daily charts due to short-term trading.

If analyzed as an oscillator that fluctuates above and below a zero line, MACD can indicate overbought and oversold trends. When both lines are below the zero line, the market is oversold (buy signal), and when both lines are above the zero line, the market is overbought (sell signal).

MACD can also help identify divergences between indicators and price activity, which could mean a trend reversal or a trend losing momentum. A bearish divergence will occur when MACD makes a new low and the price fails to reach a new low. This can be seen as an early signal that the downtrend has lost momentum. A bullish divergence will occur when MACD creates a new high and the price fails to reach the new high. These signals are extremely serious when they occur at relatively overbought / oversold levels. When using the MACD indicator for divergence analysis, the weekly chart is more reliable than the daily chart.

Moving average

Moving average ^[2] is one of the most commonly used technical tools. In a simple moving average, the mathematical median of the relevant price is calculated over an observation period. The price (usually the closing price) for this time period is added up and divided by the total number of time periods. Each day of the observation period is given the same weight in a simple moving average. However, there are some moving averages that give larger weights to prices at more recent times during the observation period. These are called exponential or weighted moving averages.

The length of time (number of bars) calculated in a moving average is very important. Shorter-term moving averages usually fluctuate and may provide more trading signals. The slower moving average uses a longer period of time and shows a smoother moving average. However, a slower moving average may be too slow to allow you to effectively open a long or short position.

Moving averages track trends while smoothing price movements. Simple moving averages are most often combined with other simple moving averages to indicate buy and sell signals. Some traders use three moving averages. Their length usually includes short-term, medium-term and long-term (moving average). A commonly used method in futures trading is the 4-, 9-, and 18-day moving averages. Keep in mind that an interval can be an instant, a few minutes, a few days, a few weeks, or even a few months. Generally, moving averages are applied over shorter periods of time, rather than on longer-term weekly and monthly charts.

A normal moving average "cross" buy / sell signal is as follows: A buy signal is generated when the shorter-term moving average crosses the longer-term moving average from the bottom up. In contrast, a sell signal is generated when the shorter-term moving average crosses the longer-term moving average from top to bottom.

Another trading method is to use closing prices and moving averages. When the closing price is higher than the moving average, a long position is maintained. If the closing price falls below the moving average, any long position is liquidated and a short position is opened.

When viewing a daily chart, you can draw different moving averages (provided you have the right charting software) and quickly know that they have provided buy and sell signals during the past few months of the chart's price history Whether it is very effective.

So if you see a market preparing to cross the 40-day moving average up or down, then the situation may be that those funds are becoming more active.

Relative Strength Index (RSI)

One of the most popular computer production technology indicators is the Relative Strength Index (RSI) Oscillator. (This oscillator, defined in market terms, is a technical study that will measure market price trends-such as markets that are overbought or oversold.)

The Relative Strength Index (RSI) is a J. Welles Wilder, Jr trading tool. The main purpose of the study was to measure the strength or weakness of the market. An RSI above 70 indicates an overbought or weaker bull market. In contrast, a low RSI below 30 indicates an oversold market or a dying bear market. Although you can use RSI as an indicator of overbought and oversold, it will perform best when a failed swing between RSI and market prices occurs. For example, the market created a new high after a bull market setback, but the RSI failed to surpass its previous high.

Another use of RSI is divergence. Market prices continue to move higher / lower, while RSI fails to move higher / lower in the same time. Deviations may occur in some trading gaps, but real divergences usually take a long time frame and may be equivalent to 20-60 trading intervals.

Selling when the RSI is above 70, or buying when the RSI is below 30, can be an expensive trading system. Moving to those levels is a sign that the market has reached a top or bottomed out. But it does not mean a top or bottom. A failed shock or divergence is accompanied by the best trading signals.

The RSI also shows the shape of the chart. The general bar chart pattern has emerged in RSI studies. They are trend lines, head and shoulders, double tops and double bottoms. Beyond that, the study can highlight support and resistance areas.