Technical Analysis – Candles and Patterns

In this chapter, you’ll lay the foundation for your career in trading. We’ll begin by introducing you to one of the most effective charting tools available: TradingView. With this tool, you’ll be able to see on your screen what I like to call the “story of the price.” Next, we’ll delve into candlestick patterns, which will help you understand the emotions driving small price movements. After that, we’ll cover chart patterns for stronger and longer-lasting movements. Finally, we’ll explore support and resistance areas and the laws that govern them. All of this will provide you with a solid understanding of the fundamentals you need to succeed in your training career.

My goal for this chapter is for you to understand how to view the story and the emotions battling behind a price movement.

Here are the topics that we’ll be covering:

• TradingView
• Market patterns...

TradingView

“Check what the price is telling you” is something I so often tell my students. The price always has a story to tell—a story of enthusiasm, one of disappointment, or one of indecision. That story is written in the chart, and it’s called price action.

Wikipedia tells us, “At its most simplistic, it attempts to describe the human thought processes invoked by experienced, non-disciplinary traders as they observe and trade their markets. Price action is simply how prices change - the action of price. It is most noticeable in markets with high liquidity and price volatility, but anything that is traded freely (in price) in a market will per se demonstrate price action.” (https://en.wikipedia.org/wiki/Price_action_trading)

However, before we can fully understand the story, we need to learn the alphabet and how to read it from its canvas, TradingView.

TradingView defines itself as follows: “Where the world charts, chats...

Market patterns

Traders develop trading techniques by identifying patterns in the market. After rigorous backtesting, the trader watches for those patterns that indicate the potential for a specific price movement and enters a trade before the movement happens.

In the following sections, I’m going to present some of the basic patterns that most traders use, but before I do that, let me present you with...

The five pattern commandments:

1. The story of the pattern is more important than the pattern.
2. The story changes as the pattern develops.
3. Every pattern instance has a random outcome.
4. Seek confluence, not certainty.
5. There’s always a pattern you haven’t noticed.

I. The story of the pattern is more important than the pattern

The price tells a story. When it rises, it’s because there are more buyers than there are sellers, and we say that the buyers are pushing the price up. And when it falls, the sellers are pushing the...

Candlestick patterns

A chart is (usually) formed by Japanese candlesticks; each candlestick represents the price movement during the chosen time frame. On a 4-hour BTCUSD chart, each candlestick represents the price movement during a 4-hour period.

The way the price moves inside that candlestick (or that candlestick, and a few more) can generate a pattern that we can use in trading.

Warnings

First warning—Don’t trade by one candlestick pattern! Trade using a confluence of patterns and indicators so that your chances of success are increased.

Second warning—It’s extremely hard to test the patterns presented. Some, such as Thomas N. Bulkowski, have tried doing this for stocks, but still, even with the statistics at hand, the right moment to enter and exit is, again, debatable.

My recommendation—Look at the market’s emotion, at the story behind the price. And yes—I know I’m repeating myself, but I’m doing it...

Chart patterns

Chart patterns represent a collection of candlesticks that form the potential of a trend. Basically, they suggest what the price will do next.

You can find most chart patterns in the Encyclopedia of Candle Patterns, 3rd Edition by Thomas N. Bulkowski (https://www.wiley.com/en-us/Encyclopedia+of+Chart+Patterns,+3rd+Edition-p-9781119739685). Thomas is a successful investor with 35 years of experience trading stocks, and he is considered the leading expert on chart patterns. Note the “stocks” keyword.

In his book, you’ll find what the best patterns are for stocks in various conditions, but if you want to see if they apply to crypto, you’ll need to do the tests for yourself. I’m not telling you this to dissuade you from applying them, or to demoralize you about crypto trading; I’m telling it as a warning to not take anything for granted. There’s no pattern with a 68% win rate, and whoever tells you there is, ask them...

Supply and demand

To understand all those fancy lines on the chart that, when drawn, the price reacts to them, you must first understand the laws of supply and demand.

The law of demand

There is an inverse relationship between the price and the quantity demanded.

For example, if a company sells a 4K TV at half the usual market price, all other specs being the same, the demand for it will grow. When the price increases, the demand for it will fall.

There are three reasons for the law of demand:

1. The substitution effect:

   When the price of a 4K TV grows too much, an 8K one becomes affordable and vice versa.

2. The income effect:

   When the price rises, fewer people can afford the item; when it falls, more people can afford the item.

3. Law of diminishing marginal utility:

   You don’t necessarily need a second 4K TV, but if the price falls low enough, you could buy another one for the other room.

There are five shifters of demand:

1. Preferences:

   There are...

Support and resistance

When the laws of supply and demand meet on a chart, they generate reactions that we can use when trading.

When there’s too much demand and too little supply, that area is oversold, or we call it having support against a potential price decrease, which helps the price increase. Price in that area becomes very attractive for buyers, so orders there are getting filled. Think of support as an area where buyers want to buy, an area where the forces of demand overwhelm the forces of supply.

Even though the support line promotes a price increase, if it is broken, the forces that created the supply and demand move to the lower level, the previous support line becoming the new resistance line.

When there’s too much supply and too little demand, we can call the area overbought or having resistance to a potential price increase, which entices the price to fall.

The price there is too expensive for market participants to buy, so the sellers are...

Summary

In this chapter, I walked you through my favorite tool for charting and helped you identify various candlestick and chart patterns, and we finished it with support and resistance and the laws that move them.

My goal was for you to understand the story of the price so that you’re able to predict it. Imagine the price as an old grandparent who stays by the fire, telling you stories. At first, you don’t know the stories and you listen attentively to them. Then, you begin to understand where they are going, what they are trying to illustrate, and how they portray themselves in the story. And finally, when you really know them, you begin to predict what they’ll say from their first few words.

In the next chapter, I’m going to put you in the middle of those stories, learning about indicators and how to combine them to create a profitable (and unique) strategy that beats the market.