Trading can bring you good profits and help you achieve financial independence. But only if you use an effective strategy and understand the importance of important indicators and signals. Otherwise, this high-risk activity will bring losses and bankruptcy. Therefore, it is very important to know the basic definitions, properties, and terms of trading.
Relative Strength Index, RSI
It is a technical analysis tool that is used to measure the strength and trend of an asset/market price to identify overbought or oversold conditions. RSI is an oscillator that fluctuates between 0 and 100.
RSI was developed by the mathematician and trader Wells Wilder. Wilder traded stocks and commodities and faced a common challenge in determining when to enter and exit a trade. In solving this problem, the mathematician has developed a formula that allows traders to better determine the entry/exit points of the long or short. If this indicator exceeds the mark of 70 points, the asset is considered overbought, and when it is less than 30 - oversold.
The main parameter of the oscillator is "Period". By default, the "Period" value is 14 (the author of the oscillator recommended using this value as half of the cycle in the market). Today, many traders also use the faster 5 and 9 indicators and the slower 25.
Moving Average, MA
Sliding middle - this is the average price of a share or any other tool for a certain number of candles. It is drawn on the graph and looks like a curved line. Its main task is to indicate the three main directions of the trend, ignoring unreasonable price fluctuations up and down.
Mathematically, the indicator is a moving average, at each point, it represents the average of the previous number of price values, called the order of the moving average. For example, if each point of the MA is calculated as the average value of prices for one day (D1), then its order is correspondingly equal to one day (D1).
SMA - Simple Moving Average is built as follows: all price values for a selected period are summed up (average order) and divided by the number of these values. In other words, the arithmetic average of the price for the period is found. The prices can be taken as opening prices, closing prices, or any others, depending on the trader's preferences.
Moving Average Convergence/Divergence, MACD
The indicator was developed by Gerald Appel, who first used it in 1979. The indicator is used in technical analysis. The MACD indicator is called trending because it is formed on two moving averages. They are not displayed on the instrument chart itself - only their parameters are taken into account in the calculations. The readings of the indicator itself are displayed in a separate window below the chart. This practically turns out to be a trend oscillator.
The classic MACD version contains a histogram of vertical bars with an additional smoothing line. The histogram reflects the distance between the moving averages and demonstrates the dynamics of their convergence or divergence. If the distance between the moving averages increases, the histogram bars also lengthen. If the distance decreases, then the columns are also shortened. When they line up above the zero lines and lengthen, it is generally assumed that the price will rise. When the bars of the histogram is below the zero lines and shorten, the price is expected to decline.
Stoch Relative Strength index, StochRSI
Designed by Tushard Chand and Stanley Kroll, StochRSI is an oscillator that measures the RSI (Relative Strength Index) level relative to its range over a set period. The indicator takes the RSI as a basis and applies the formula for Stochastics (Stochastic Oscillator) to it. The result is an oscillator that fluctuates between 0 and 1.
The RSI sometimes trades between 80 and 20 for extended periods without reaching overbought and oversold levels. Traders looking for opportunities to open a position based on overbought or oversold readings in the RSI can stay out of the game for a long time. To increase sensitivity and provide a method for identifying overbought and oversold levels in the RSI, Chand and Kroll developed StochRSI.
Bollinger bands, BB
Bollinger Bands Indicator is an oscillating indicator that is used to measure market volatility. It allows you to assess whether the price is high or low compared to the recent moving average, and to predict the possibility of falling or rising to its level. In particular, this data helps you decide to buy or sell an asset.
Bollinger Bands are made up of three main lines. The central band corresponds to the simple moving average of the price. The upper and lower bands represent the levels at which the price can be considered high enough or low enough to the recent moving average.
One of the most common patterns in trading. The Hammer candlestick is a bullish reversal formation that forms during a downtrend. The appearance of the candle is directly related to its name and resembles a hammer. Its lower shadow is the hilt, the body is the striking part, and the upper shadow is the protruding part of the hilt. A hammer candle can only appear in a downtrend.
When the price falls, the hammer makes it clear that the bottom is close and the price starts to rise again. The elongated bottom (shadow) shows sellers pushing prices, but buyers were able to overcome this pressure and close to the open. The formation of a hammer in technical analysis is a confirmation of oversold conditions and helps to identify support lines, as well as a key moment of a trend reversal.
This type of figure is the opposite of the previous one. In this case, the long tail of the candlestick is directed downward. The upper candlestick shadow should be absent or very small. The high of the candlestick is the top on the chart since the formation of the growing trend.
The characteristics that strengthen the formation are similar to those of the pin bar, except for one thing: the higher the opening price of the reversal candle compared to the closing price of the previous one, the stronger the pattern. The Inverted Hammer is the inverse of the Hanged Man pattern that occurs before a downtrend changes to an uptrend.
Three white soldiers
A candlestick pattern indicating a continuation of an upward trend. As is often the case in Japanese technical analysis, the military theme is slipping - in this case, the association with the continuation of the attack on the enemy.
The basic rules for the formation of this pattern: it consists of three medium-length candlesticks, in which the closing prices rise sequentially. Also, the pattern appears either after an upper trend followed by a short-term flat or after an uptrend with a slight slope (low growth rate).
This pattern means strengthening of the existing trend or its continuation after a pause. It means that the trend was present until a certain time, but slowed down, or was initially rather sluggish. Growth for three sessions tells of the strength and determination of the sellers, and the upward movement is likely to continue.
A bullish harami pattern is a reversal pattern that appears at the bottom of a downtrend. It consists of a bearish candle with a large body, followed by a bullish candle with a small body, completely within the range of the body of the red candle. The second candlestick signals a possible change in momentum, it opens around the middle of the range of the previous candlestick.
The color of the Doji candlestick (black, green, red) does not matter, because the candle itself, appearing at the bottom of a downtrend, gives a strong bullish signal. This bullish harami cross provides an attractive risk/reward ratio because the bullish move (if confirmed) is just beginning.
Stops can be placed below the new low and traders can enter the market at the opening of a candle following a bullish harami pattern. Since, in theory, harami appears at the beginning of an uptrend, traders can use multiple target levels to maximize profits from the entire uptrend range. These targets can be located at the latest support and resistance levels.
Graphically, it is a candlestick with a small short body and a long lower shadow. There should be no upper shadow at all, or it should be very short. The color of the candlestick does not play a special role, but on small timeframes, the model with a black candlestick will be stronger.
Although the Hammer and the Hanged Man are usually presented as the same patterns, only for different trends (downtrend and upward), the difference is obvious. If at the Hammer, before the prices returned to the zone of the opening point, the chart tended in the direction of the current trend, then at the Hanged Man, on the contrary, prices tried to go in the opposite direction, against the existing trend.
For the formation of this pattern, an uptrend or at least a small channel is required before the main candlestick. If it is absent, or if it is too weakly expressed, the pattern cannot be considered correct and should not be used at all as a signal to open trades.
The shooting star pattern refers to reversal indicators. It appears at the resistance level and indicates that the uptrend is coming to an end. A shooting star can be either bullish or bearish. It doesn't matter at all. The signal it gives is a downward reversal.
On the chart, a shooting star looks like this - it has a small body and a very long shadow upward.
It is quite easy to identify such a pattern on the chart. It is necessary to pre-designate the levels, and if a model with a very long upper shadow and a small body appears near the resistance, then you are dealing with a shooting star. By the way, it is important to note that the lower shadow of the shooting star is either absent or very short.
Three black crows
Three black crows form at the bottom of an uptrend. The pattern is characterized by the change of buyers to sellers. Ravens are called black because black is the classic color for bearish candlesticks. A trend reversal using these patterns works well on daily and weekly charts. It is not recommended to use the pattern on small timeframes.
This trend forms at the end of a bullish trend. The candlestick bodies of the pattern should be quite long. In this case, the first and second candlestick should be approximately the same size, and the body of the third candlestick should be at least not less than the bodies of the two previous candles. The absence of wicks or their incommensurably small length relative to the body of the candle.
You need to be careful with the length of the candlestick bodies. So, if the last candlestick has a smaller body than the second, then the formation is called "inhibition". This does not indicate a trend reversal, but a small correction of the current trend.
The bearish harami pattern consists of two candles and signals a possible bearish reversal in the market. It is important to note that the harami candlestick pattern cannot be used in isolation and its signal must be confirmed by other indicators.
A bearish harami pattern is a reversal pattern that appears on the chart at the top of an uptrend. The pattern consists of a bullish candle with a large body, followed by a bearish candle with a small body that is completely within the body of the first candle.
A bearish harami pattern appears at a peak (when a new high is established), so after a reversal, the price of an asset may fall below the lower highs set earlier. Subsequent price action confirms the assumption of a new downward impulse signaled by the harami pattern.
The stop can be placed slightly above the new price high, and the trader can enter the market at the opening level of the candle following the harami pattern. Since, in theory, harami appears at the start of a downtrend, traders can use multiple target levels to maximize profits from the entire downtrend range.