Technical Analysis Cheat Sheet

Technical analysis involves evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. This cheat sheet provides a quick reference to some of the key concepts and tools used in technical analysis, including chart patterns, indicators, and trading strategies.

1. Key Chart Patterns

• Head and Shoulders: This pattern indicates a reversal of the current trend. A head and shoulders pattern forms after an uptrend and suggests that the price will decline. Conversely, an inverse head and shoulders pattern occurs after a downtrend and signals a potential increase in price.
• Double Top and Double Bottom: The double top pattern signals a bearish reversal and occurs after an uptrend. It is characterized by two peaks at approximately the same level. The double bottom pattern indicates a bullish reversal and consists of two troughs at similar levels.
• Triangles: Triangles are continuation patterns that can be ascending, descending, or symmetrical. They signify a period of consolidation before the price breaks out in the direction of the prevailing trend.

2. Key Indicators

• Moving Averages: A moving average smooths out price data to create a trend-following indicator. Common types include the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). The SMA calculates the average price over a specific number of periods, while the EMA gives more weight to recent prices.
• Relative Strength Index (RSI): The RSI measures the speed and change of price movements on a scale from 0 to 100. A reading above 70 indicates that a security is overbought, while a reading below 30 suggests it is oversold.
• Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. It consists of the MACD line, signal line, and histogram, helping to identify changes in the strength, direction, momentum, and duration of a trend.

3. Trading Strategies

• Trend Following: This strategy involves identifying and following the direction of the prevailing market trend. Traders use tools such as moving averages and trendlines to make buy or sell decisions based on the trend’s direction.
• Swing Trading: Swing traders seek to capture short- to medium-term gains by taking advantage of price swings. They use technical analysis to identify potential entry and exit points within a trend.
• Day Trading: Day traders buy and sell securities within the same trading day, aiming to profit from short-term price movements. They use technical indicators and chart patterns to make quick trading decisions.

4. Risk Management

• Stop-Loss Orders: A stop-loss order is placed to sell a security when its price falls to a certain level, limiting potential losses. This tool helps traders manage risk by exiting a trade before losses become too significant.
• Position Sizing: Position sizing involves determining the amount of capital to allocate to a trade based on the trader’s risk tolerance and the trade’s potential risk and reward. Proper position sizing helps manage overall portfolio risk.

5. Conclusion Technical analysis is a powerful tool for traders and investors, providing insights into market trends and potential price movements. By understanding and applying key chart patterns, indicators, and trading strategies, traders can make informed decisions and manage risk effectively.