Technical analysis is a trading method that uses charts to identify trends and patterns, which are then used as the basis for making buy or sell decisions.
There are many different types of technical analysis, with price action being the most popular one.
Price action focuses on studying current market prices through real-time charting data to determine where buyers are more likely to push prices higher and where sellers are more likely to push them lower.
In other words, traders who use price action pay attention to what is happening when they form their opinions about future movements.
Based on price action rules, they focus on whether a stock broke above resistance or below support levels (and best practices).
In technical analysis, the most used type of price action is called support and resistance.
Support and resistance.
To fully understand this concept, it’s essential to grasp the different levels in any market. You can think about these levels represented by horizontal lines on a chart.
As you’ll see, they are drawn at specific vital points where prices tend to stall or reverse themselves.
These levels serve as solid indicators for traders because they’ve shown in the past to be areas where there is a lot of demand from buyers (support).
Which stops prices from falling further (resistance), or where there is a lot of supply from sellers (resistance) stops prices from rising further.
Support & resistance levels are potent trading tools, but it’s also important to remember that they’re subject to change over time.
It means you should always be open-minded when analyzing charts and keep in mind that these types of levels don’t exist in isolation – they tend to overlap with other support or resistance areas for extended periods before breaking down and becoming isolated once again.
For traders who plan on using support and resistance levels when they trade, there are some critical things they need to know about them.
First, it’s essential to understand many different theoretical concepts behind price action rules.
Fibonacci sequence and ratios
Still, one of the most popular is the Fibonacci sequence and ratios.
The Fibonacci sequence is a mathematical pattern seen throughout nature, and it’s also seen very often in financial markets such as Forex and stocks.
You’ve probably heard about these numbers before – 0%, .382%, .5%, and 1.618% are all authoritative figures found within the Fibonacci series, which help traders place support and resistance levels on their charts more accurately.
Whenever you’re looking at price action rules, there are three main types:
LON, SL and N
Today we’ll be focusing on breakouts trading for London Group shares (LON:), which means we need to wait for prices to rise above our resistance level before buying to take profits.
We want to set a stop-loss order (SL) and decide on the number of shares we would like to purchase (N). It is because if prices break down below support and fall rapidly.
It might be a good idea to preserve some of our capital instead of risking it by buying when prices are falling rapidly – especially since most breakout trades end up failing at some point.
Now that you’ve understood what price action concepts are and how they can help you in your trading let’s talk about where the best places are to apply them.
Since technical analysis is just looking at historical data to predict future trends, it stands to reason that the best place to start is by examining the long term price action of a stock instead of focusing on shorter timeframes.
GBP/USD currency pair represents one of the most traded international currencies, and it’s also known as being “risky” because its movements tend to reflect what’s happening in major economies around the world.
It means that during times of enormous political or economic problems occurring within Europe or America, traders tend to flock towards this currency as a highly safe-haven product that offers stability in their portfolios.
Follow Saxo Bank for more info.