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references/technical_analysis_framework.md
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# Technical Analysis Framework
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This reference provides the methodology for conducting objective, chart-based technical analysis of weekly price charts.
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## Core Principles
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1. **Chart-Only Analysis**: Base all analysis purely on chart data. Ignore external news, fundamental data, and market sentiment.
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2. **Objectivity**: Focus on observable patterns and data rather than subjective interpretations.
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3. **Weekly Timeframe**: All analysis uses weekly charts for medium to long-term perspective.
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4. **Probability-Based**: Express future scenarios as probabilities rather than certainties.
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## 1. Trend Analysis
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### Trend Classification
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**Uptrend Criteria:**
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- Higher highs (HH) and higher lows (HL) pattern
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- Price trading above key moving averages
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- Moving averages aligned in bullish order (shorter MA > longer MA)
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**Downtrend Criteria:**
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- Lower highs (LH) and lower lows (LL) pattern
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- Price trading below key moving averages
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- Moving averages aligned in bearish order (shorter MA < longer MA)
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**Sideways/Range-bound:**
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- No clear higher high/low or lower high/low pattern
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- Price oscillating between defined support and resistance levels
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- Moving averages flat or intertwined
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### Trend Strength Assessment
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**Strong Trend:**
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- Clear, consecutive higher highs/lows (uptrend) or lower highs/lows (downtrend)
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- Minimal retracements
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- Volume confirming price direction
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**Weak Trend:**
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- Irregular higher/lower highs and lows
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- Deep retracements (>50% of prior move)
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- Divergence between price and volume
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**Trend Exhaustion Signals:**
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- Decreasing momentum on new highs/lows
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- Volume declining as trend progresses
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- Extended distance from moving averages
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- Candlestick reversal patterns (e.g., shooting star, hammer, engulfing)
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## 2. Support and Resistance Analysis
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### Identifying Support Levels
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Support represents price levels where buying interest has historically prevented further decline.
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**Criteria for Valid Support:**
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- Price has bounced from the level at least 2-3 times
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- Volume spikes during bounces
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- Longer timeframe support carries more weight
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- Round numbers (psychological levels) often act as support
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**Support Types:**
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- **Horizontal Support**: Previous lows aligning at similar price levels
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- **Trendline Support**: Upward-sloping line connecting higher lows
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- **Moving Average Support**: Dynamic support from key MAs (e.g., 20-week, 50-week)
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### Identifying Resistance Levels
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Resistance represents price levels where selling interest has historically prevented further advance.
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**Criteria for Valid Resistance:**
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- Price has been rejected from the level at least 2-3 times
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- Volume spikes during rejections
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- Previous significant highs
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- Round numbers often act as resistance
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**Resistance Types:**
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- **Horizontal Resistance**: Previous highs aligning at similar price levels
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- **Trendline Resistance**: Downward-sloping line connecting lower highs
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- **Moving Average Resistance**: Dynamic resistance from key MAs
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### Support/Resistance Significance
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**Strong S/R Levels:**
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- Tested multiple times (3+ touches)
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- Long-standing (months to years)
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- High volume at previous touches
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- Confluence with other technical factors (Fibonacci, round numbers, moving averages)
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**Weak S/R Levels:**
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- Only 1-2 touches
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- Recent formation
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- Low volume at touches
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### Support-Resistance Flip
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When broken, support often becomes resistance and vice versa. This "role reversal" is a key concept:
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- **Broken Support → Resistance**: After downside break, previous support acts as new resistance on retests
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- **Broken Resistance → Support**: After upside break, previous resistance acts as new support on pullbacks
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## 3. Moving Average Analysis
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### Key Moving Averages for Weekly Charts
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- **20-week MA**: Short-term trend indicator (approximately 4 months)
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- **50-week MA**: Medium-term trend indicator (approximately 1 year)
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- **200-week MA**: Long-term trend indicator (approximately 4 years)
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### Moving Average Interpretations
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**Price Position Relative to MAs:**
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- **Above all MAs**: Strong bullish structure
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- **Below all MAs**: Strong bearish structure
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- **Between MAs**: Transitional phase, trend unclear
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**Moving Average Crossovers:**
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- **Golden Cross**: 20-week MA crosses above 50-week MA (bullish signal)
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- **Death Cross**: 20-week MA crosses below 50-week MA (bearish signal)
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**Moving Average Slope:**
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- **Rising MAs**: Bullish momentum
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- **Falling MAs**: Bearish momentum
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- **Flat MAs**: Consolidation, lack of directional momentum
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**Moving Average as Support/Resistance:**
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- In uptrends, MAs (especially 20-week and 50-week) often provide dynamic support
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- In downtrends, MAs often provide dynamic resistance
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- Repeated bounces or rejections from MA increase its significance
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### Moving Average Confluence
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When multiple MAs cluster together or align:
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- **Bullish Alignment**: 20-week > 50-week > 200-week (all rising)
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- **Bearish Alignment**: 20-week < 50-week < 200-week (all falling)
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- **Compressed/Converging MAs**: Often precedes significant directional move
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## 4. Volume Analysis
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Volume confirms the strength or weakness of price movements.
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### Volume Interpretation Principles
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**Volume Confirms Price:**
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- **Rising prices + Rising volume**: Healthy uptrend, strong buying
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- **Falling prices + Rising volume**: Healthy downtrend, strong selling
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- **Rising prices + Falling volume**: Weak uptrend, lack of conviction
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- **Falling prices + Falling volume**: Weak downtrend, selling exhaustion possible
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### Key Volume Patterns
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**Volume Spikes:**
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- **At Support**: High volume bounce suggests strong buying interest (bullish)
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- **At Resistance**: High volume rejection suggests strong selling interest (bearish)
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- **On Breakout**: High volume breakout validates the move
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- **Low Volume Breakout**: Often leads to failed breakout (false signal)
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**Volume Trends:**
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- **Increasing Volume in Trend Direction**: Confirms trend strength
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- **Decreasing Volume in Trend Direction**: Warns of potential trend exhaustion
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- **Volume Climax**: Extremely high volume often marks trend extremes (capitulation or euphoria)
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**Volume Divergence:**
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- **Bullish Divergence**: Price making new lows but volume declining (selling exhaustion)
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- **Bearish Divergence**: Price making new highs but volume declining (buying exhaustion)
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## 5. Chart Patterns and Candlestick Analysis
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### Reversal Patterns
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**Bullish Reversal:**
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- **Hammer**: Long lower wick, small body at top, appears at support
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- **Bullish Engulfing**: Large green candle fully engulfing previous red candle
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- **Morning Star**: Three-candle pattern (down, small, up)
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- **Double/Triple Bottom**: Price tests support 2-3 times then reverses
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**Bearish Reversal:**
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- **Shooting Star**: Long upper wick, small body at bottom, appears at resistance
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- **Bearish Engulfing**: Large red candle fully engulfing previous green candle
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- **Evening Star**: Three-candle pattern (up, small, down)
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- **Double/Triple Top**: Price tests resistance 2-3 times then reverses
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### Continuation Patterns
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**Bullish Continuation:**
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- **Bull Flag**: Consolidation after strong move up, then breakout higher
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- **Ascending Triangle**: Higher lows with flat resistance, breaks up
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**Bearish Continuation:**
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- **Bear Flag**: Consolidation after strong move down, then breakdown
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- **Descending Triangle**: Lower highs with flat support, breaks down
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### Pattern Significance
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Patterns carry more weight when:
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- Forming at key support/resistance levels
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- Accompanied by appropriate volume (high on breakout)
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- Confirmed by moving averages and trend structure
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- Occurring on longer timeframes (weekly > daily)
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## 6. Scenario Development and Probability Assignment
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### Scenario Development Process
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For each chart analysis, develop 2-4 potential scenarios:
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1. **Base Case Scenario**: Most likely outcome based on current chart structure
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2. **Bull Case Scenario**: Optimistic scenario if key resistance breaks
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3. **Bear Case Scenario**: Pessimistic scenario if key support breaks
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4. **Alternative Scenario** (optional): Lower probability but plausible outcome
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### Probability Assignment Framework
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Assign probabilities based on:
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**High Probability (50-70%):**
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- Scenario aligned with current trend
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- Multiple confirming factors (trend, S/R, MA, volume)
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- Recent price action supports scenario
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- Clear invalidation level
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**Medium Probability (25-45%):**
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- Scenario requires trend change or major breakout
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- Some supporting factors but not all
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- Depends on key level holding/breaking
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**Low Probability (5-20%):**
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- Scenario contrary to most technical factors
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- Requires significant shift in structure
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- Limited supporting evidence but technically possible
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### Probability Assignment Example
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Current Structure: Uptrend, above all MAs, holding support
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- **Bull Case (60%)**: Continuation higher after pullback to support
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- Reasoning: Trend intact, holding key support, volume confirming
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- **Base Case (30%)**: Consolidation/range before next move
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- Reasoning: Approaching resistance, some profit-taking visible
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- **Bear Case (10%)**: Break below support, trend reversal
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- Reasoning: No clear reversal signals yet, but always possible
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**Note**: Probabilities should sum to 100%. Adjust based on strength of supporting factors.
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### Invalidation Levels
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For each scenario, define a specific price level that would invalidate it:
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- **Bull Scenario Invalidation**: Break below key support
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- **Bear Scenario Invalidation**: Break above key resistance
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- **Base Case Invalidation**: Breakout from range in either direction
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## 7. Analysis Structure and Discipline
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### Analysis Checklist
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For each chart, systematically evaluate:
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1. ✓ **Current Trend**: Identify direction, strength, and duration
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2. ✓ **Support Levels**: Mark significant horizontal and dynamic support
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3. ✓ **Resistance Levels**: Mark significant horizontal and dynamic resistance
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4. ✓ **Moving Averages**: Note position, slope, and crossovers
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5. ✓ **Volume Pattern**: Assess if volume confirms or contradicts price
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6. ✓ **Chart Patterns**: Identify any significant patterns forming or completing
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7. ✓ **Scenarios**: Develop 2-4 scenarios with probability estimates
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8. ✓ **Invalidation Levels**: Define what would negate each scenario
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### Objectivity Reminders
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- Avoid confirmation bias: Consider both bullish and bearish scenarios
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- Let the chart speak: Don't force patterns or signals
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- Update analysis as new data emerges: Charts are dynamic
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- Admit uncertainty: Not every chart provides clear signals
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- Focus on probabilities, not predictions: No scenario is 100% certain
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### Common Pitfalls to Avoid
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- **Overcomplicating**: Too many indicators can lead to analysis paralysis
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- **Ignoring Volume**: Price without volume is incomplete picture
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- **Forcing Patterns**: Seeing patterns that aren't clearly there
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- **Disregarding Timeframe**: Weekly chart may differ from daily
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- **Neglecting Context**: Each chart in isolation, but overall market matters
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- **Being Too Certain**: Markets are probabilistic, not deterministic
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