Alpha Trader’s Introduction to Technical Analysis

Introduction to Technical Analysis - Alpha Trader
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Welcome to Alpha Trader’s Introduction to Technical Analysis series.

Not many start learning technical analysis by just observing charts of other technical analysts. I started this way, and I must say – this is one of the hardest ways to learn technical analysis.

Luckily, there is an easy way. ‘Become an Alpha Trader‘ Series will help you take baby steps to learning Technical Analysis; the right way. This article is 1st of the many upcoming posts in this series.

What Technical Analysis is Not?

Many, if not most, believe that technical analysis is all about drawing up a chart, predicting a pattern, and taking a trade. However, technical analysis is not at all about this.

  • Technical Analysis is not a sure shot way to making money trading
  • Neither it is a way of forcefully trying to connect the unnecessary dots
  • Definitely not about speculating & taking excessive risk
  • Should not be the reason for blowing up your trading capital

In sum, learning technical analysis can be time consuming. One has to pay high price for his mistakes and without understanding the aspects related to risk management, one will end up going bankrupt.

What Technical Analysis is really about?

There are many definitions about what technical analysis is and what purposes it serves? However, I am not going into bookish definitions & instead going to show another side of Technical Analysis.

  • Technical Analysis will help you manage risks associated with investing.
  • Analysis & interpretation of past price & volume data helps to determine realistic future behavior of an underlying stock or a commodity.
  • Also, technical analysis will help you optimize your investments with risk adjustments.

How to begin with Technical Analysis?

Technical analysis is done through a number of different chart types:

  • Traditional Candlestick Charts
  • Renko brick Charts
  • Point & Figure Charts
  • Heiken-Ashi Charts

Above mentioned is not an exhaustive list of the types of charts, instead it is only an indicative list based on the most popular types.

Patterns, Channels, and Levels

Patterns are most popular among many newbie & expert traders. There are many different chart patterns. Eg. : Flag-Pole, Cup-Handle, Head-Shoulder are among the most popular ones.

Advantages of Patterns:

  • Patterns are relatively easy to spot once you develop a vision to spot them.
  • Makes it easy to trade for new traders as pattern breakout & breakdowns can be easily predicted.
  • Auto-drawn on many trading softwares, helping new traders learn pattern-based technical analysis rather quickly.

Disadvantages of Patterns:

  • Because of their popularity, patterns are easy trap for retail traders.
  • Market makers have enough trading capital to make a false pattern, trap retail traders, and take stock price the opposite direction
  • There are 100s of patterns, making it really difficult to remember

Channel-based Analysis

Vinati-Channel-Breakdown-Alpha-Trader
Alpha Trader’s Vinati Organics Channel Breakdown made stock fall from 2050 levels to 1766

Channels are often drawn along with the trend of the stock, indicating a range within which a stock will move.

Channel-based analysis helps in buying/selling a stock at a channel bottom or at a channel top respectively. There are channel breakdowns & breakouts as well.

Levels -based Analysis

Alpha Trader's Level-based Technical Trading on Nifty
Alpha Trader’s Level-based Technical Trading on Nifty

Levels based technical analysis is Alpha Trader’s custom method of trading. Rather than looking for patterns, breakouts, and breakdowns, we look at sentiments of market makers around certain price.

Such sentiment analysis helps in plotting levels where:

  • Price moves up positively or negatively
  • Accumulation or Distribution happens with volume

The biggest advantage of plotting levels is that levels rarely fail. And even if level is broken on either side, it gives you enough time to change your trades quickly.

Level-based trading is best because:

  • Stop-loss management becomes easier
  • Buying/selling is sentiments based and not a pattern based action
  • Gives enough time to quickly exit the trade and stay with the trend
  • Keep losses to minimum & increase profit positions

We also publish our studies, strategies and niche methods on our YouTube Channel checkout if you want to continue the learning through videos.

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