Overview
Today's lecture provided a comprehensive guide to technical analysis, focusing on reading candlestick charts, understanding key patterns, using indicators, and managing risk to improve trading decisions.
Introduction to Technical Analysis
- Technical analysis predicts price movements using chart patterns, not company fundamentals.
- Emotional factors like fear and greed cause prices to deviate from fundamental value in the short term.
- Candlestick charts are a universal tool for visualizing price action across all markets.
Anatomy of Candlestick Charts
- Each candlestick shows open, high, low, and close prices for a specific period.
- Green candles mean price closed higher than it opened (bullish); red candles mean price closed lower (bearish).
- The candle "body" reflects sentiment strength; long bodies show strong moves.
- Candle "wicks" (shadows) indicate price rejection; upper wicks are bearish, lower wicks are bullish.
Key Candlestick Shapes & Patterns
- Long body: Strong sentiment (bullish or bearish).
- Short body: Weak sentiment; often signals trend exhaustion.
- Doji: Open and close prices nearly equal; signals indecision or possible reversal.
- Hammer: Small body, long lower wick; found after a decline, signals potential bullish reversal.
- Shooting Star: Small body, long upper wick; found after an uptrend, signals potential bearish reversal.
- Hanging Man: Small body, long lower wick at the top of uptrend; bearish warning.
- Engulfing: Large candle fully covers the previous one; bullish or bearish depending on direction.
Multi-Candlestick Patterns & Trend Reading
- Patterns are combinations of candlestick shapes that suggest buy or sell signals.
- "Candle over candle": A candle making a new high signals a potential reversal or continuation.
- Context matters—patterns at key points like highs/lows are more significant.
Chart Timeframes & Trade Execution
- Day traders use 1-minute charts; longer timeframes (e.g., daily, 5-min) help spot major support/resistance.
- Multiple timeframes can be combined for better trade plans.
- Print out and study chart patterns to develop pattern recognition skills.
Technical Indicators & Tools
- Moving averages (9 EMA, 20 EMA, 200 EMA): Used for trend direction and support/resistance.
- VWAP (Volume Weighted Average Price): Shows average price weighted by volume; above is bullish, below is bearish.
- MACD (Moving Average Convergence Divergence): Indicates trend strength and possible reversals.
- Support & Resistance: Drawn using historical price levels, often at round numbers (whole/half dollars).
Stock Selection & Risk Management
- Focus on stocks with high relative volume, news catalysts, and low float (supply <10 million shares).
- Only trade setups with favorable risk/reward (aim for 2:1).
- Practice in a simulator before risking real money.
- Avoid emotional trading and stick to a consistent trading plan.
Key Terms & Definitions
- Candlestick — A chart element that shows open, high, low, and close for a given time period.
- Wick/Shadow — The lines above and below the candle body showing price extremes.
- Doji — A candle with nearly equal open and close, indicating indecision.
- Hammer — Bullish reversal candle with a small body and long lower wick.
- Shooting Star — Bearish reversal candle with a small body and long upper wick.
- VWAP — Volume Weighted Average Price, a key support/resistance indicator.
- MACD — Moving Average Convergence Divergence, a trend and momentum indicator.
- Float — The number of shares available for trading.
- Relative Volume — Today’s trading volume compared to average daily volume.
Action Items / Next Steps
- Download and review the provided PDF resources on stock selection and trading plans.
- Print key chart patterns and set them near your workspace for practice.
- Use a trading simulator to practice identifying and trading setups before risking real capital.
- Commit to following a structured trading plan and risk management rules.