Technical Analysis Concepts - A Beginner's Guide
1. **Support and Resistance Levels**
- **Support**: The price level at which a downtrend can be expected to pause due to a
concentration of demand. Buyers enter the market at this level.
- **Resistance**: The price level at which a trend may reverse due to selling pressure. Sellers
enter the market at this level.
- These levels are identified through past price behavior and volume.
**How to use**:
- When the price approaches a support level, traders might look for buying opportunities (long).
- When the price approaches a resistance level, traders might look for selling opportunities (short).
- If the price breaks these levels, a new trend might begin.
2. **Moving Averages (SMA and EMA)**
- **SMA (Simple Moving Average)**: The average price over a specified period.
- **EMA (Exponential Moving Average)**: Similar to SMA but gives more weight to recent prices.
- **Short-Term** (e.g., 5-15 days): Good for fast trends. EMA reacts quicker to price changes than
SMA.
- **Long-Term** (e.g., 50, 100, 200 days): Used to identify long-term market trends. They are
slower but more stable.
**Key Signals**:
- **Golden Cross**: When a short-term MA crosses above a long-term MA, it indicates a potential
bullish trend.
- **Death Cross**: When a short-term MA crosses below a long-term MA, it signals a potential
bearish trend.
3. **RSI (Relative Strength Index)**
- Measures the speed and change of price movements. RSI is calculated on a scale of 0 to 100.
- **RSI 70 or above**: Market is **overbought** and may experience a price pullback.
- **RSI 30 or below**: Market is **oversold**, and a price reversal could be expected.
- **RSI 50**: Neutral level, no strong trend.
**Formula**:
RSI = 100 - (100 / (1 + RS)), where RS = Average Gain / Average Loss.
4. **Short and Long Positions**
- **Long Position**: Buying an asset, expecting its price will rise. You buy low and sell high.
- **Short Position**: Borrowing and selling an asset, expecting its price will fall. You sell high and
buy low.
- In a short position, you make money if the asset's price decreases.
