Technical Made Simple: 3 Technical Analysis Tools Used by Traders

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Today, on the #MotivationalMonday Financial Desk, we have?

• What is technical analysis?
• Donchian Channels
• Keltner Channels
• Standard Deviation Channels
• Conclusion

What is Technical Analysis?

If you are a trader or have recently developed an interest in the stock market, mastering technical analysis is imperative. Technical analysis helps a trader predict the future performance of stocks. It is a tool or process that leverages market data to forecast future trends. Sounds helpful, doesn’t it??

It considers several factors, including but not limited to sales and earnings as well as volume and price. According to this principle, historical trading activity and price movements in the securities are taken as reliable indicators.?

Technical analysis uses various charting tools to generate data points for short-term trading. Unlike fundamental analysis, analysts do not consider a company’s valuation in technical analysis. Instead, they solely rely upon historical trading data. A few notable aspects of technical analysis include:

• History returns—Technical analysis is rooted in the idea that history repeats itself over time. This observation is derived from traders' behaviour during a price change. Surprisingly, they tend to behave similarly when the price moves in a specific direction. For instance, traders panic when prices drop, and the urge to sell is high. Yes, your emotions are also studied here!
• Trends matter. Instead of keeping price fluctuations central to the observation, analysts look at the bigger picture: market trends. Every price fluctuation or movement in the market is triggered by a market trend. When a trend is established, a stock's price tends to move in the same direction.
• Questions matter. Instead of asking why, technical analysis answers ‘how.’ As discussed above, it observes a trend and tries to understand how it has shaped the market.?

In the previous newsletter, we discussed three technical analysis tools used by traders. Today, let’s look at some more that will make your trading journey easier.?

Donchian Channels

Developed by Richard Donchian, the Donchian Channel tracks an asset's highest and lowest prices over a specified timeframe. It typically marks time intervals using candlestick patterns. In day trading, Donchian Channels help identify both trends and consolidation phases. Traders can add a third line, known as the mid-band, by averaging the upper and lower channel lines. This indicator is versatile and applicable across various time frames—including one-minute and five-minute charts, where each bar represents the respective interval. It can be used to trade forex, stocks, futures, and options.

How to calculate?

The chosen number of periods defines the technique, with traders often opting for a 20-day period. Using this as an example, the indicator would be displayed as follows:

• 20-day Low in the Lower Channel
• 20-day High in the Upper Channel
• 20-day High + 20-day Low) / 2 Middle Channel

Standard Deviation Channels

Standard deviation channels are drawn at a fixed number of standard deviations from a linear regression line. They are valuable for swing trading and identifying shifts in momentum. The Standard Deviation Channel is built on a linear regression line, which reflects the trend or average price movement over a defined period. The upper and lower lines of the channel can act as potential support and resistance levels. Price movements within the channel are considered normal, while price movements outside the channel may suggest a potential trend reversal or continuation.

The user can customise the number of standard deviations used to plot the upper and lower lines and adjust the period for the linear regression calculation.

Keltner Channels

Keltner Channels are a volatility-based indicator in technical analysis, featuring a central moving average—typically an Exponential Moving Average (EMA)—flanked by upper and lower bands. These bands are set at a distance from the EMA based on the Average True Range (ATR).

The moving average's direction determines the overall trend. Breakouts above the upper channel or below the lower channel may indicate trend continuation or potential reversals. In a sideways market, the channel lines help traders identify overbought conditions when the price reaches the upper band and oversold conditions when it touches the lower band. They also help traders identify trend direction and strength. However, it's best used in conjunction with other technical analysis tools.

Conclusion

Learning advanced technical analysis techniques will help you formulate a solid trading and investing strategy. Keep an eye out for changing market trends and master the art of assessing them to leverage the opportunities. Happy trading!

Thank you for reading. Drop your questions in the comments or DM us right away for more details.