Course 2. Technical analysis

course 2 of 4

Technical analysis is a method of assessing the probable direction of price based on the history of quotes and trading volumes. It helps to identify entry points, exit points and the level of risk, but it does not deliver precise forecasts. No indicator guarantees a result. The main objective is to secure a positive expectancy: even with 45% winning trades you can be profitable if the average profit exceeds the average loss.

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lesson 2.1

The method goes back to Charles Dow's theory and rests on three assumptions.

First: price discounts everything: All available information — economic, political, psychological — is already reflected in the current price.
Second: price moves in trends: A directional move is more likely to continue than to reverse until clear signs of a reversal appear.
Third: history repeats itself: Participants react to similar situations in similar ways, because human psychology changes slowly.

lesson 2.2

The same series of quotes can be displayed in three ways — they differ in how much information about the period they show.

Line chart: Connects closing prices. Removes noise but hides the range of movement within the period.
Bars: Show the four prices of the period: open, high, low and close.
Japanese candlesticks: Display the same data, but more expressively, thanks to the body and the wicks.

Live candlestick chart

This is what a real candlestick chart looks like: green candles closed above their open, red ones below. Switch the instrument and the timeframe to see how the picture changes.

Live quotes

Real-time market data

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Significant candlestick configurations

Pin bar, also known as hammer or shooting star: Small body and a long wick against the move. Signals rejection of a level.
Engulfing: The body of the second candle covers the body of the first. Signals a change of initiative.
Doji: Open roughly equals close. Signals balance and a pause.
Morning and evening star: Three candles — impulse, pause, reversal. A reversal formation.
Inside bar: The candle's range lies entirely within the previous one. Signals a volatility squeeze before a move.

lesson 2.3

Uptrend: A sequence of higher highs and higher lows.
Downtrend: Lower highs and lower lows.
Sideways movement (range): The extremes sit at roughly the same level.

Defining the trend by the structure of highs and lows is more reliable than by the slope of a moving average: the structure records the fact, while the indicator smooths it with a lag.

Stages of a trend

Accumulation: Large participants build a position, price stays in a narrow range, volume rises with no movement.
Impulse: A directional move that the bulk of participants join.
Distribution: Large participants take profit, the move slows, volumes rise while price makes little progress.
Reversal or correction: The end of the stage and either a change of direction or a temporary pause in it.

Signs of a weakening trend

Shrinking amplitude of impulse moves
Deeper corrections
Divergence between price and an oscillator
Rising volume without price progress.

lesson 2.4

Support: A price zone where, historically, enough demand appeared to halt a decline.
Resistance: A zone where supply appeared that halted a rise.

Practical rules

A level is a zone, not a line. It is better to draw it across the range between bodies and wicks rather than through a single point.
The significance of a level is determined by the number of reactions and the volume behind them, not by the number of touches.
Broken resistance often becomes support, and vice versa.
Round levels such as 1.1000 or 1.2000 are significant because people psychologically place orders at them.

lesson 2.5

Continuation patterns

Pattern	Description
Flag	A sloping correction after an impulse; continuation in the direction of the impulse is expected.
Pennant	A narrowing correction; continuation in the direction of the impulse is expected.
Ascending triangle	Horizontal resistance and rising support; an upward breakout is expected.
Descending triangle	Horizontal support and falling resistance; a downward breakout is expected.
Rectangle	A horizontal range; continuation after a breakout of the boundary is expected.

Reversal patterns

Pattern	Description
Head and shoulders	Three peaks, the middle one higher than the others; a downward reversal is expected.
Inverse head and shoulders	Three troughs, the middle one lower than the others; an upward reversal is expected.
Double top	Two highs at the same level; a downward reversal is expected.
Double bottom	Two lows at the same level; an upward reversal is expected.

Measuring the target

For a head and shoulders pattern, the target is projected from the neckline by a distance equal to the height of the head. For a triangle, by the height of its base from the breakout point. This is a guide, not a commitment: the target is not always reached.

Target = Breakout level ± Pattern height

lesson 2.6

A moving average averages price over a chosen period, smoothing out fluctuations.

A simple moving average takes the arithmetic mean, with all values weighted equally. An exponential one gives more weight to recent data and reacts faster.

How they are used

To identify direction: price above a rising average points to a bullish context.
As dynamic support or resistance; the 50, 100 and 200 periods are popular.
By crossovers: the fast average crossing above the slow one is read as a buy signal.

lesson 2.7

Oscillators measure the speed and strength of price change, not its direction.

RSI, the relative strength index, works on a scale from zero to one hundred. Readings above seventy are traditionally read as overbought, below thirty as oversold.

Divergence is a mismatch between the direction of price and the oscillator. Price makes a new high but RSI does not: momentum is fading. Divergence signals a loss of pace, not the moment of reversal — the move can continue long after it appears.

The Stochastic compares the closing price with the range over the period. Faster than RSI, but also noisier. Works better in a range than in a trend.

MACD is the difference between two exponential averages plus a signal line and a histogram. It combines trend and momentum properties. The histogram crossing zero points to a change in the direction of medium-term momentum.

lesson 2.8

ATR, the average true range, measures the average amplitude of price movement over a period — that is, the instrument's actual volatility rather than its direction.

Practical application

Stop-loss placement. A stop set closer than the usual daily noise will be taken out by a random fluctuation. A common approach is to place the stop one and a half to two ATR away from the entry point. This ties the risk to the instrument's actual volatility rather than to an arbitrary number of pips.

Stop-loss = Entry price ∓ (1.5 … 2) × ATR

ATR is also used to normalise position size: when volatility rises, the size is reduced so that the monetary risk stays constant.

Bollinger Bands consist of a moving average and two lines set a number of standard deviations away. A narrowing of the bands indicates falling volatility, which is often followed by a directional move. A touch of a band is not a signal in itself: in a trend, price can ride along the band for a long time.

lesson 2.9

Ichimoku is a comprehensive system of five lines that assesses trend, support, resistance and momentum at the same time. Its key element is the cloud: price above the cloud points to a bullish context, inside the cloud to uncertainty. The thickness of the cloud reflects the strength of the zone.

The Fibonacci retracement levels are 23.6, 38.2, 50, 61.8 and 78.6 per cent. The grid is stretched over an impulse move, and the levels are used as reference points for the depth of a pullback.

The 50 per cent level does not mathematically belong to the Fibonacci sequence, but it is used as the psychologically significant midpoint of a move.

How to treat Fibonacci levels.

They have no predictive power of their own. Their value lies in the fact that many participants place orders at the same marks, which makes them zones of concentrated liquidity. A Fibonacci level that coincides with a horizontal support level and a moving average is significant. A level on its own is just a line.

23.6% · 38.2% · 50% · 61.8% · 78.6%

lesson 2.10

The same instrument looks different on different timeframes. An uptrend on the hourly chart may be a correction within a downtrend on the daily.

A working scheme of three timeframes

Higher (for example, daily): Determine the dominant direction and the key levels.
Working, for example hourly or four-hour: Find a setup for an entry in the direction of the higher trend.
Lower, for example fifteen-minute: Fine-tune the entry timing and tighten the stop.

lesson 2.11

A section that is rarely written, but one that determines the result.

It does not predict news. A central bank decision, a geopolitical event or an intervention wipes out the technical picture instantly.
It does not work in the first minutes after macro data is released: the spread widens, liquidity drops, moves are chaotic.
It performs poorly on very low timeframes, where noise makes up a large share of the movement.
It does not replace risk management. An accurate signal with the wrong position size still leads to the loss of the account.
It is prone to curve-fitting. Enough indicators on a chart will justify any decision. That is not analysis but a rationalisation of a decision already made.

self-check

Answered 0 of 80%

1.Which of the three premises of technical analysis states that all available information is already reflected in the price?