Learn to Trade: How to Use Technical Analysis Chart


Technical analysis charts are a cycles trader's most important tool. Charting helps us measure cyclical patterns by plotting stock price movements. When we add advanced mathematical equations to the chart, we can better visualize imminent changes to those patterns.

We suggest that beginners spend time learning the basics of technical analysis charting. Fortunately, there are valuable resources for you to use:

- Charting jargon, terms, and definitions: Investopedia.com.

- Basic charting tutorials: Stockcharts Tutorials site.

Japanese Candlesticks:

Advanced charts can plot price data in many forms, but for our purposes, we'll use candlesticks (Japanese Harami). Candlesticks are our preference because they are help us better visualize stock price action. It is said that the creator of Japanese candlesticks was able to predict rice market prices with over 90% accuracy.

Candlesticks are great indicators of likely events in the future, such as imminent price levels or trend reversals. Thus, we suggest focusing energy on candlestick formation patterns in order to use charts effectively.

See Candlestick Formation Patterns for further information.

Weekly or Daily?

Many traders wonder whether or not to plot price data in daily or weekly intervals. Lunar cycles trading involves weekly observations so weekly charts are our first choice; however, it all depends on how precise you want to be. If you really care about buying or selling at the best price possible, then you'd also like to use daily charts, then charts over hourly or 15-minute intervals.

Once you've got the basics, you can begin to use technical indicators to your advantage. Technical indicators are equations developed to help us visualize key reversal points or changes in trends. We'll begin with moving averages, the most basic and most commonly used indicator.

Moving averages (MA) are important for the following reasons:

- The position of one moving average line compared to a second can signal key long-term trend reversals.

- Moving average lines can act as support and resistance areas. When prices touch major moving averages, then you can bet that change is imminent.

By now, you're aware that most traders use the 200 and 50-day MA, and charting programs often use these values by default. The importance of both values is best understood when you consider that 200 days is considered enough time to measure an annual trend and 50 is 1/4 of 200.

To be more precise, we often use 240 and 60 instead, because there are roughly 240 trading days per year and 60 is 1/4 of that amount.

After using charts for a while, you'll begin to notice the importance of the relationship between the two moving averages. When they converge or crossover, we see change in trend direction (or a new continuation in the same direction).

In the chart below, we can see that when MA(60) is above MA (240), there's an upward trend. As lunar cycles traders, we examine shorter increments of time of 1 month or less. Thus, it could be more helpful for us to use MA (28) and MA (7), for one month and one week respectively. In both charts, it's evident that when the blue MA line crosses over the red, a new upwards trend follows.









CONTINUE >> Technical Analysis Charting, Part II