Technical Analysis Course #1: 3 essential rules of price action + predicting retracements + choosing a time frame
Hello, fellow traders, and welcome to your first technical analysis lesson!
By the end of today’s lesson, you’ll be able to gather essential information about your chosen stock or commodity and make your first predictions for price movement using tools like Fibonacci retracement and Elliott Wave Theory - even if you’ve never read a technical chart before.
I’ll be using the XAU/USD chart and the TradingView platform to illustrate all the concepts.
3 Essential Rules of Price Action
#1 Prices move in trends (most of the time)
Uptrend: Price is reaching higher highs and higher lows and is generally increasing.
Downtrend: Price is at lower highs and lower lows and is decreasing.
Sideways trend/Consolidation: The price moves within a range, showing no clear uptrend or downtrend. Neither buyers nor sellers have control.
#2 You can identify the trend with support and resistance
Traders are predictable and driven by two strong emotions: fear and greed.
Support
The price level where buyers (driven by greed) enter the market to prevent prices from falling further. They bought their Gold for a certain price and they are not willing to sell it cheaper and lose money.
A test of support is when the price repeatedly touches the support line without falling below it. Strong support i.e. repeated rebounds upward from the support generate more buying interest and increase demand for the asset, known as accumulation.
When the price falls below support, those who bought at that level may want to sell to break even generating more selling and more rapid price drop.
Resistance
The price level where sellers (driven by fear) enter the market to prevent prices from rising further. It acts as a ceiling that the price struggles to break above.
When the price repeatedly touches the resistance line without rising above it, this confirms the resistance level. This is known as a test of resistance. Successful tests of resistance encourage more selling, increasing the supply of the asset, known as distribution.
If the price breaks above resistance, the previous resistance level often becomes a new support level. Sellers who sold at the resistance level now see the previous high price as a bargain and want to buy back in, causing the price to rise.
#3 Prices rarely move in one direction for long
Major trends can last for months and years. However, there are multiple secondary trends within the major trends.
These retracements (also called pullbacks or corrections) follow the opposite direction of the major trend. In an uptrend, retracement is a small drop in price. In a downtrend, it’s a slight rise.
It’s impossible to predict retracements, when they will stop or if they will develop into a full trend reversal, but there general rule is that:
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