Technical Analysis Drawings

Horizontal and parallel lines

The best place to start when it comes to technical analysis is to put up a chart and look for areas of possible support and resistance.

If you can identify an area or specific price level which the market bounces off (support) or pulls back from (resistance) then you have got the starting point for a potential trade.

Use the horizontal line to link up such levels and this will help show if a trading range is developing. Likewise, the parallel lines tool can do the same thing to help establish if a market is trending, either up or down.

Again, this will help you identify areas of support and resistance which then provide potential entry and exit points for trading.

Fibonacci​​ Retracements

The Fibonacci Retracement is a drawing tool which can help identify areas of support and resistance, and potential price reversal levels.

The retracement is created by drawing a line between a significant low (or high) and a significant high (or low). Then horizontal lines are drawn between these two levels according to a specific ratio based on a number sequence made popular by the 13th century mathematician, Leonardo Pisano Bogollo. Quite often we see these horizontal lines act as support and resistance.

Consequently, traders watch to see if future price movements bounce off support or pull back from resistance.

The 50% line also isn’t a Fibonacci Retracement level. Nevertheless, it appears in the drawing tool and can often acts as an area of support/resistance where a price reversal can occur. The 50% level is also a key number in the Gann retracement (a similar drawing tool) so this is another reason for its significance.

The Fibonacci Retracement can provide a framework to help identify significant areas of support and resistance. However, this isn’t a strong enough basis on its own for a full trading decision. The Fibonacci Retracement should be used as a predictive tool.

Traders can look back to see how prices behaved as the high-low (or low-high) Fibonacci points were formed. But ultimately the Fib is only useful if it can accurately identify significant support/resistance levels where prices may either turn, or, once broken, continue in the original direction.

However, it needs to be used in conjunction with other technical indicators (such as RSI or MACD) while macro events must also be taken into consideration.

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