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Chapter 5




Peter Read, CEO and Founder of Pelican
Apr 18, 2018


Technical Analysis VS Fundamental Analysis



Good traders will always research and prepare before entering a trade. Research is split into two broad categories; fundamental analysis and technical analysis.

Fundamental analysis entails investigating the underlying workings of a market and then relating it back to the price. In the case of companies this may require studying balance sheets and annual reports. For currency pairs, analysts look at the difference in interest rates and other economic factors between different countries. However, traders tend to avoid this method and use price history as the only factor in deciding to trade. This is the reason that charts are so important as they are a graphical representation of the history of the price of a market. This form of research into historical price movements on graphs and then predicting where the next movements will be is called “technical analysis”. This is a very popular methodology for traders to use to make informed trading decisions. There are even hedge funds specialising in technical analysis. A novice trader can pick up the basics of technical analysis fairly quickly, but it can take many years of work and research before you could claim to be a professional technical analyst.


 


What is a candle chart?



There are many types of trading charts but the most common is the candle chart. Candle charts take their name from the shape of the units on the chart which look like their namesake. Each candle represents a unit of time and the charts can be altered to represent different timeframes. For example a 5-minute chart shows candles representing the price over a 5-minute time frame, a daily chart shows candles that represent one 24-hour period.


How does it work?



Each candle consists of a “bar” and a “wick”. The “bar” illustrates the difference between the opening price of the period and the closing price. The bars come in two colours; blue and red. Blue bars show that the closing price was higher than the opening price and visa versa. The wicks show the highest and lowest market price over the timeframe.

Let’s use our favourite stock Vodafone as an example. On the 7th March 2018 on the daily timeframe Vodafone opened at 208p, closed at 210p and reported a low of 206p and a high of 212p. In this instance the candle would look like this...





What is support and resistance?



The choice of strategy will determine how a trader interprets a chart, what additional charting tools they will use and what timeframe they select. However, a common theme across all technical analysis strategies is the identification of “support” and “resistance”. These terms refer to the change in direction of prices. A rising price that then plateaus or falls is said to have “hit a resistance” level. A falling price that then goes sidewards or rises has “met support”. Traders will often use these support and resistance levels to decide at what levels they should place their stops and limits.

When a market breaks through a support or resistance level, traders will look for the market to gain momentum in the same direction as the move through the support or resistance level.


 



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