What Are The Types Of Technical Analysis?

Technical analysis is one of the two methods of looking for tradable opportunities in the financial markets — the other is fundamental analysis. In technical analysis, traders try to use the previous and current price movements to predict where the price might go next, which can present a trading opportunity.

They do this by either studying the raw price action, looking for patterns, or by analyzing the price movements through the means of indicators, which are mathematical and statistical calculations using the price or volume data or a combination of both. Indicators are basically a lens through which you can view the price movements, in search of clues about what the price might do next.

Price action analysis, on the other hand, implies studying the price chart directly, trying to interpret the shapes and patterns formed by price bars, as well as the various price swings and the specific structures formed by those swings, which can give clues as to how the price might behave in the near future.

Most traders perform technical analysis on the candlestick charts, which makes those shapes and patterns more visible. Whatever way you analyze the chart — indicators or raw price data — you are only trying to read the footprints left by market participants. While some, especially the newbies, tend to prefer analysis with indicators, more experienced traders may prefer price action analysis, which can be categorized into

Let’s take a look at each of them, starting with the indicator analysis.

Indicator analysis

There are hundreds, if not thousands, of indicators available to forex traders. Many of them are built into the trading platforms as default indicators, but a great majority are custom indicators developed by different traders with coding skills. Most of the custom indicators are different combinations of the default indicators.

Whatever the case, indicators smoothen the price or volume data and help you to delineate the price movements so that you can appreciate the trend or the individual price swings. Depending on what the indicators do, they are grouped into different categories. Let’s take a look at some of the indicators.

Moving averages are indicators that are derived by continuously taking a specified average of the price data as new price bars are being printed. They are trend-following indicators because they smoothen the price data to show the prevailing direction of the trend. There are different types: simple, exponential, linear-weighted, and smoothed moving averages. They are derived from different methods of calculating the average, so they have different levels of smoothening effect.

Generally, most new traders who are just learning technical analysis use moving averages to identify the direction of the price trend. The period of the moving average and the timeframe determine the type of trend the indicator will show. Long-period moving averages help to show the long-term trend, while short-period moving averages show short-term trends.

For experienced traders, moving averages, especially the long-period moving averages, can also be used to estimate potential support and resistance levels. When the indicator line is below the current price, it can indicate a potential dynamic support level, and when it is above the price, it can indicate a possible resistance level.

Oscillators

Oscillators are a group of indicators that follow price swings and tend to gauge the strength of the swings, showing when a swing is about to end, which often correspond with their overbought or oversold regions. Examples include the stochastic, RSI, CCI, William’s %R. These indicators are mostly used with trend-showing indicators when trading the impulse swings in a trending market. They help to show when a pullback is about to turn for the trend to continue with a new impulse wave.

But where oscillators are most popular is in trading a ranging market. They tend to follow the up and down price swings of a ranging market almost perfectly. The overbought region of the indicator tends to correspond with when the price is at the upper boundary of the range, while the oversold region corresponds with the price at the lower boundary.

A better signal from oscillators is the divergence signal, which can be bullish or bearish. Divergence simply means that the price swing and the indicator swings are diverging from each other.

Momentum indicators

Closely similar to oscillators are the momentum indicators. In fact, both the indicators in this group and the oscillators are all called momentum indicators. But the classical momentum indicators are the ROC/momentum indicator, MACD, and OsMA. They tend to swing about a midline.

These indicators show when a price move is gaining or losing momentum in a particular direction. They can be used to trade individual swings in a trending market as well as the up and down swings in a ranging market.

Volatility indicators

These are indicators that can show historical price volatility, which implies the rate and size of price fluctuations. In other words, volatility is the degree of variation of price movements. It tells traders the average size of price swings so that they can plan their stop loss and profit target to suit the prevailing market condition.

Indicators that are commonly used to estimate price volatility are the ATR, standard deviation, and Bollinger Bands. The standard deviation is a direct measure of variation, so it can tell how the price swings have been changing. Beyond two standard deviations away from the mean is seen as an extreme movement. Bollinger Bands are based on the two standard deviation theory. The ATR (average true range) is just a specified period average of the daily price range.

Volume indicators

These are not price-based indicators per se, but they help in interpreting price movements, especially in securities, such as stocks and futures, that trade on central exchanges where the actual volume data is known. With the volume data, you can guess who’s behind the price move — institutional or retail traders.

Moreover, the divergence between the price and volume is a serious reversal sign you can’t afford to ignore. When there’s a big price move on thin volume, exuberant retail traders might have caused the move, and institutional traders may have other ideas. So a reversal may be on the cards. A huge volume without a reasonable price movement is a sign of accumulation or distribution, which is normally followed by a reversal.

Some of the popular volume indicators are the on-balance volume (OBV), accumulation/distribution, money flow index, force index, ease of movement, and so on.

Candlestick analysis

This is the most basic form of price action technical analysis because it is focused on the individual price bars. Candlestick analysis is the study of the different shapes and patterns formed by a single candlestick or a group of candlesticks, which can tell who has been dominating the market in the previous trading sessions.

There are continuation candlestick patterns, such as the deliberation pattern, rising three methods, falling three methods, on-neck line, in-neck line, and others, but here, we will focus on the more common reversal candlestick patterns, which are often grouped into the following categories:

Single candlestick patterns

These are candlestick patterns formed by a single candlestick. The patterns in this group are mostly pin bars with long lower or upper tails and small bodies at the other end. The two most common examples are the hammer and shooting star patterns.

The hammer, which can also be called a bullish pin bar, is a single candlestick with a small upper body and a long lower tail that is about 3x the size of the body. It is commonly seen at the end of a downward price swing, where it could indicate a possible upward reversal. The shooting star pattern is the opposite of the hammer — a small body at the lower end and a long upper tail. It is seen at the end of an upward price swing, where it may signal a potential downward reversal.

Double candlestick patterns

These patterns are formed by two candlesticks. The patterns in this group include the engulfing patterns, piercing pattern, dark cloud cover, tweezers, and harami patterns. The engulfing and harami patterns can be bullish or bearish, indicating a bullish or bearish reversal as the case may be.

The tweezers can be grouped into tweezer tops, which occur at the end of an upward price swing and may signal the end of the upswing, and tweezer bottoms that occur at swing lows and may indicate a potential upward reversal. The piercing pattern can occur at swing lows and could imply a potential upward reversal, while the dark cloud cover could signal a downward reversal when occurring at a swing high.

Triple candlestick patterns

These are candlestick patterns formed by three consecutive candlestick patterns. They include the morning and evening star patterns, morning and evening doji stars, abandoned baby, three advancing soldiers, three black crows, and others.

The morning star, morning doji star, bullish abandoned baby, and three advancing soldiers are examples of bullish reversal triple candlestick patterns and can be seen at price swing lows, while the evening star, evening doji star, bearish abandoned baby, and three black crows are examples of bearish reversal triple candlestick patterns, which are usually seen at swing highs.

Multiple candlestick patterns

There are candlestick patterns that contain more than three candlesticks. An example is the hikakke pattern, which can be a bullish hikakke or a bearish hikakke. The pattern is formed by a harami pattern with a false breakout one side followed by a genuine breakout on the opposite end.

A bullish hikakke pattern can be seen at the end of a downward price swing and can signal an upward price reversal, while a bearish hikakke pattern can occur at the end of an upswing and may indicate a potential downward price reversal. Hikakke patterns show the footprints left by the institutional traders as they try to trigger stop losses on one end while intending to move the price in the opposite direction.

To know more about each candlestick pattern, read our posts on candlestick patterns and how to trade the individual candlestick patterns.

Chart pattern analysis

This is another type of price action technical analysis. It involves studying the price chart to identify the various patterns formed by a combination of price swings. Price movements generate identifiable structures that can potentially predict the direction of the next price swing. These structures are often named according to the objects they resemble. The common examples include the following:

Head and shoulder and the inverse

The head and shoulder chart pattern consists of three swing highs and two intervening swing lows, with the middle swing high being higher than the other two. This gives a structure that resembles a head with left and right shoulders. The pattern is considered completed when the price moves down from the right shoulder and breaks below the neckline, a line connecting the two swing lows which acts as a support level. When this happens, a bearish signal is generated.

The opposite version, which occurs in a downtrend, is known as the inverse head and shoulder pattern. It consists of three swing lows and two swing highs, with the middle swing low being lower than the other two swing lows. When the pattern is completed — by breaking above the line joining the two swing highs which act as a resistance level — a bullish signal is generated.

Double top/bottom

The double top pattern is seen in an uptrend. It consists of two swing highs that end around the same level, with an intervening swing low, which acts as a support level. When the price breaks below that level, there is a signal to go short.

For the double bottom pattern, it occurs at the bottom of a downtrend and consists of two swing lows and one swing high in-between them. The swing high acts a resistance level, and when the price breaks above it, that’s a signal to go long. There are also triple tops/bottoms.

Triangles

These are chart patterns that look like a triangle. There are three types: the symmetrical triangle, the ascending triangle, and the descending triangle. They are often considered continuation patterns as the price is more likely to continue in the direction of the trend preceding the pattern formation.

A symmetrical triangle is formed by rising swing lows and descending swing highs. For an ascending triangle, the swing highs are at the same level, while the swing lows are ascending. The descending triangle consists of descending swing highs and swing lows at the same level.

Wedges

Wedges are chart patterns in which both the swing highs and lows are either ascending or descending, but one has a greater slope than the other. There are two types of wedges: the rising wedge and the falling wedge.

In the rising wedge, both the swing highs and swing lows are ascending, but the trend line joining the swing lows has a greater upward slope than the one joining the swing highs. Irrespective of whether the rising wedge occurs as the ending part of an uptrend or as a pullback in a downtrend, a rising wedge has a bearish reversal effect.

A falling wedge formed by descending swing highs and lows, but the line joining the swing lows has a bigger downward slope. This pattern can occur as the ending part of a downtrend or a pullback in an uptrend, but it always has a bullish reversal effect.

Flags and pennants

These are small and, sometimes, slopping rectangles or triangles that form after a swift price movement in any direction. They are considered continuation patterns, so the price is likely to continue moving in the direction of the swing preceding the formation.

Elliot waves analysis

A unique price action technical analysis, the Elliot wave theory classifies price swings as either impulse or correctional wave and tries to interpret each price swing in that light so as to anticipate where the next price wave may go. Within these two waves are other smaller waves with various labeling.

In this type of analysis, you basically identify the individual price waves and give them the appropriate labels, which then helps you to anticipate the next price swing. Let’s take a look at the two major waves.

Impulse wave

This is a price swing that occurs in the direction of the trend. An impulse wave is usually larger, stronger, and more prolonged than the correctional wave. It consists of 5 smaller waves labeled Wave 1, 2, 3, 4, and 5, with Wave 1, 3, and 5 being mini-impulse waves that occur in the direction of the main wave, while Wave 2 and 4 are mini-correctional waves, which move against the main wave.

For a market that is trending upwards, the impulse waves would be directed upwards, while in a down-trending market, the impulse waves move downwards. Whatever the direction of the trend, you should focus on the impulse wave. If you are a swing trader, you can trade the individual impulse waves and get out before the correctional waves start, but if you love to ride the trend, you can also wait out the correctional waves and continue milking all the impulse waves as they come.

Correctional wave

As the name implies, a correctional wave is a price correction after an impulse wave. It is also referred to as a pullback, and it moves against the direction of the trend — in an uptrend, correctional waves move downward, while in a downtrend, they move upwards. The correctional wave consists of 3 waves, labeled Wave, A, B, and C. Waves A and C move in the direction of the correctional wave, while wave B moves in the opposite direction.

Most traders don’t try to trade this wave. They simply wait for it to complete and then enter on the next impulse wave. But some traders do trade it, especially on the lower timeframes. That is, the correctional waves on a higher timeframe can be traded on the lower timeframes where they appear as the main trend.

Harmonic patterns analysis

Another price action technical analysis, harmonic patterns are special chart patterns formed by multiple price swings that represent an extended pullback or impulse wave. They follow specific Fibonacci ratios which can show the potential reversal zone before the price gets there. There about 7 of them, categorized based on their Fibonacci ratios into the following:

ABCD pattern

Consisting of 3 price waves, the ABCD (AB=CD) pattern is the simplest harmonic pattern and a building block of most harmonic patterns. The 3 waves are the AB wave, BC wave, and CD wave, and they must meet the following criteria:

The BC wave should be between 38.2% to 78.6% Fibonacci retracement of the AB wave
The CD wave should be between 127.2% to 261.8% Fibonacci extension of the BC wave
The CD wave should be the same length as the AB wave
The time it takes the price to go from point C to point D should be equal to the time it took to move from point A to point B

The pattern can be bullish or bearish.

Gartley pattern

Named after the man who created it, H.M. Gartley, the Gartley pattern consists of 4 price swings: the XA, AB, BC, and CD swings. The pattern can be bullish or bearish, depending on the orientation of the pattern. To qualify as a Gartley pattern, the swings must meet the following criteria:

AB should be about 61.8% Fibonacci retracement of the XA.
BC should be between 38.2% and 88.6% retracement of the AB.
If BC is 38.2% of AB, then, the CD should be 127.2% extension of the BC, but if BC is up to 88.6% of AB, the CD should be up to 161.8% extension of the BC.
CD should be a 78.6% retracement of the XA.

Butterfly pattern

Created by Bryce Gilmore, the Butterfly pattern is another XABCD pattern that consists of 4 price swings — the XA, AB, BC, and CD swings, but they must meet the following criteria:

AB should be up to 78.6% Fibonacci retracement of the XA.
BC should be between 38.2% and 88.6% retracement of the AB.
If BC is 38.2% retracement of AB, then, Wave CD should be 161.8% extension of the BC, but if BC is up to 88.6% of AB, the CD should be up to 261.8% extension of the BC.
CD should be a 127.2% to 161.8% extension of the XA.

Bat pattern

Developed by Scott Carney, the Bat pattern consists of 4 price waves — the XA, AB, BC, and CD waves — so it is an XABCD harmonic pattern. The waves must meet the following criteria:

Wave AB should be 38.2% or 50.0% Fibonacci retracement of the XA.
Wave BC should be between 38.2% and 88.6% retracement of the AB.
If BC is 38.2% of AB, then, the CD swing should be 161.8% extension of the BC, but if BC is up to 88.6% of AB, the CD should be up to 261.8% extension of the BC.
Wave CD should be an 88.6% retracement of the XA.

The completion of the pattern can potentially trigger a trend continuation move.

Crab pattern

Also created by Scott Carney, the Crab pattern is an XABCD harmonic pattern that shows an extended pullback move in a trend. It consists of 4 waves that must meet the following criteria:

AB should be between 38.2% and 61.8% Fibonacci retracement of the XA.
BC should be between 38.2% and 88.6% retracement of the AB.
If BC is 38.2% of AB, then, the CD should be 224% extension of the BC, but if BC is up to 88.6% of AB, the CD should be up to 361.8% extension of the BC.
CD should be a 161.8% retracement of the XA.

Shark pattern

The Shark pattern is one of the most recent harmonics, and it uses different labeling — the OXABC labeling. It has 4 waves named as the OX, XA, AB, and BC waves, which must follow these criteria:

Wave XA has no Fibonacci ratio relationship with the OX wave.
The AB wave is a 113% – 161.8% extension of the XA wave.
Wave BC is a 161.8% – 224% extension of the AB wave and also extends 113% beyond the O point where the pattern began.

The pattern can be bullish or bearish, depending on the orientation.

Cypher pattern

The Cypher pattern is an XABCD harmonic pattern that presents a deeper pullback after a failed impulse wave. The 4 waves that make up the pattern must meet these criteria:

Swing AB is about 38.2% to 61.8 % retracement of swing XA.
BC is a 113% – 141.4% extension of AB.
CD is a 78.2% retracement of the cumulative X-C price move.

As with others, the pattern can be bullish or bearish depending on the orientation.

Final words

Even without going into the different chart types, such as the range bar and point and figure charts, there are many types of technical analysis you can do on the commonly used Japanese candlestick chart. While many of the analysis, such as candlestick analysis, chart patterns, Elliot wave, and harmonic patterns, are based on raw price action, you can also do indicator analysis, using any of the indicators available on your trading platform.