Quantitative Trading Edge

     Overview of technical analysis with sample trades

 

Overview of Support and Resistance

Support and Resistance are key eelement in technical analysis used to identify price levels and direction on charts where an asset tends to reverse or pause its trend.

1. Support

•        A price level where the demand is strong enough to prevent the price from falling further.

•        Often indicates a potential "floor" where buyers step in, creating upward pressure.

2. Resistance

•        A price level where sellers are strong to prevent the price rising further.

•        Acts as a "ceiling" where sellers dominate, leading to downward pressure.

A sample image below marking support and resistance.

Importance of support and resistance

Trend Analysis

Helps us to identify and confirm trends.
Provides insight into when a trend might reverse or continue.

Entry and Exit Points

Crucial for planning buy and sell decisions.
Breakouts above resistance or below support often signal significant moves.

Risk Management

Defines stop-loss and target levels.
Minimizes losses by identifying price levels where market sentiment might change.

Psychological Impact

Reflects market participants' collective emotions and decision-making at certain price points.

How Support and Resistance Levels Are Calculated

1. Visual Identification

Key Price Levels: Traders observe historical price charts to identify levels where the price repeatedly reverses or consolidates.
Round Numbers: Psychological price points (e.g : ₹100, ₹500) also act as support or resistance.

2. Moving Averages

Dynamic Levels: Moving averages (e.g., 50-day or 200-day) are used as support or resistance lines that adjust with price movement.

3. Trendlines

Connecting Highs and Lows: A line connecting a series of higher lows forms support, while a line connecting a series of lower highs forms resistance.

Channels: Parallel lines can show dynamic levels of support and resistance.

4. Fibonacci Retracement Levels

Mathematical Ratios: Fibonacci levels (e.g., 23.6%, 38.2%, 50%, 61.8%) are calculated based on the difference between a recent high and low.
Importance: These levels are used to predict potential support and resistance during retracements.

5. Volume Profile

Volume at Price Levels: Identifies price levels with the highest trading activity.
Significance: High-volume zones often act as strong support or resistance.

6. Indicators and Oscillators

RSI Levels: Overbought or oversold regions identified by the Relative Strength Index (RSI) can align with resistance or support levels.
Bollinger Bands: Outer bands act as dynamic resistance and support in volatile markets.
                                            
                

                Importance of Combining Methods

Using a combination of above methods improves accuracy. For example, aligning Fibonacci retracement levels with trend line support and moving averages and RSI divergences provides stronger confirmation.

    These are some of candle stick formations helps us if forms at        support and resistances

        Bullish Morning Star Candlestick Pattern

• Definition: The Bullish Morning Star Candlestick Pattern is a three-candle bullish reversal pattern. It starts with a long bearish candle, followed by a Doji that gaps below the previous candle, and concludes with a long bullish candle.

• Signal: Indicates a strong reversal from bearish to bullish.

• Trend: Often seen at the bottom of a downtrend.

 

Bearish Evening Star Candlestick Pattern

• Definition: The Bearish Evening Star Candlestick Pattern is a three-candle bearish reversal pattern. It begins with a long bullish candle, followed by a Doji that gaps above the previous candle, and ends with a long bearish candle.

• Signal: Signals a potential bearish reversal after an uptrend.

• Trend: Usually occurs at the top of an uptrend. 

Abandoned Baby Candlestick Pattern

• Definition: The Abandoned Baby Candlestick Pattern is a three-candle reversal pattern. It consists of a long candle, followed by a Doji that gaps away from the first candle, and then a candle of the opposite type that also gaps away from the Doji.

• Signal: Signals a potential reversal, either bullish or bearish.

• Trend: Can appear at both tops and bottoms of trends.

Common Mistakes	Explanation	Impact on Trading	How to Avoid
Overtrading on Patterns Alone	Relying exclusively on candlestick patterns without considering other analysis tools.	Can lead to misinterpreting market signals and making uninformed decisions.	Combine candlestick patterns with other technical analysis tools and indicators.
Ignoring the Trend	Using candlestick patterns to trade against the prevailing market trend.	Increases the risk of trades as candlestick patterns are more reliable when following the trend.	Always consider the overall market trend and use candlestick patterns that align with it.
Lack of Confirmation	Entering trades based on unconfirmed candlestick patterns.	Premature decisions can result in false signals and losses.	Wait for the pattern to complete and look for additional confirmation signals before trading.
Ignoring Market News	Overlooking economic events and news that can affect market sentiment.	Important market events can drastically change the market condition, rendering the pattern analysis ineffective.	Stay updated with market news and economic events, and factor them into your trading strategy.
Forgetting the Basics	Neglecting fundamental principles like supply and demand, support and resistance levels.	Can lead to a one-dimensional view of the market, missing key factors that influence price movements.	Maintain a balanced approach by considering fundamental market principles along with candlestick patterns.