Advanced Technical Analysis

Updated on May 9, 2024
Article byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Advanced Technical Analysis?

Advanced Technical Analysis is a systematic approach of employing various technical indicators, theories, and chart patterns for predicting and identifying securities’ price movements or trends in financial markets. It enables traders to benefit from the trading opportunities these markets offer.

Advanced Technical Analysis

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Investors and traders often use a combination of multiple advanced technical tools to strategically invest in financial assets and book successful trades. It is also crucial for risk management while ensuring the portfolio is well-diversified in terms of risk and return. After all, informed decision-making about asset allocation is a key determinant of success in financial markets.

Key Takeaways

  • Advanced technical analysis employs various statistical and mathematical tools to accurately gauge financial market trends, patterns, and potential trading opportunities.
  • Some of these sophisticated technical analysis tools are Elliott Wave Theory, Fibonacci Analysis, Bollinger Bands, Ichimoku Cloud, and Heiken Ashi Formula.
  • It facilitates risk management, return maximization, asset allocation, and strategic decision-making, enabling traders and investors to evaluate situations well before making decisions.
  • This analytical approach can offer valuable insights and enhance prediction accuracy for traders with the necessary expertise and resources when aligned with individual trading goals and risk tolerance levels.

Advanced Technical Analysis Explained

Advanced technical analysis is sophisticated methodology traders and analysts follow to assess financial markets and make investment decisions. It involves analyzing historical price and volume data while applying various mathematical and statistical tools to identify patterns, trends, and potential trading opportunities. Traders analyze related markets, such as bonds, currencies, and commodities, to gain insights into possible correlations and impacts on the market or platform they are interested in trading. The four fundamental principles of technical analysis are:

  • The markets move between range expansion and contraction;
  • Markets usually see more trend continuations than reversals;
  • Every trend ends at either climax or rollover; and
  • Price follows momentum.

One of the prominent technical analysis tools used to date is the candlestick charts that visually represent price data in a specific time frame using candle-like structures. Traders analyze patterns like doji, hammers, shooting stars, and engulfing patterns to identify potential trend reversals or continuation signals. Also, chart patterns like head and shoulders, double tops, double bottoms, triangles, and flags are formed by price movements on a chart. Traders use these patterns to predict future price movements.

Technical indicators play a crucial role in financial market analysis. These mathematical calculations and concepts are applied to price and volume data to gain insights into market trends and momentum. Common technical indicators include Relative Strength Index (RSI), Moving Averages, Stochastic Oscillators, Moving Average Convergence Divergence (MACD), etc.

Types

It is crucial to use several technical analysis tools together to make informed trading decisions. Although no analysis method can guarantee profits, as numerous factors influence markets and are inherently unpredictable, analysts can gauge the price trend for risk and return interpretation. Below are some common types of advanced technical analysis methods in TradingView, as follows:

  • Elliott Wave Theory: This theory proposes that financial markets move in repetitive patterns known as waves. Traders employ the Elliott Wave Theory or Analysis to predict future price movements by identifying these wave patterns and their corresponding Fibonacci ratios. In the chart of Nasdaq 100 Index, given below, the Elliot Wave is clearly visible within a set of repetitive patterns. 

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  • Fibonacci Analysis: Fibonacci Analysis involves the study of the Fibonacci sequence and is used to gauge the possible support and resistance levels in the market. Traders use Fibonacci retracements and extensions to determine possible reversal points or price targets. In the chart of Bitcoin below, during the years 2018 to 2020, the Fibonacci is drawn from the price level 3131 and traced upwards. The level of 38.20% (price – 6,368) has acted as a good support level for quite a long period except for a few candles of 2019. On the other hand, 78.60% (price 13,490) has acted as a good resistance.

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  • Bollinger Bands: This technical analysis tool encompasses two parameters: standard deviation and security price. It plots envelopes at the standard deviation points marked above and below the security price’s simple moving average. The chart of Bitcoin below shows how the Bollinger Bands depicts the fluctuations. During November to December 2022 and again during January and February 2023, the chart showed high volatility, resulting in a wide gap of BB. There is a huge negative breakout around November 2022, suggesting an oversold zone, and indicating the market may go down further or consolidate and this is what has exactly happened in the next few months.

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  • Ichimoku Cloud: Ichimoku Kinko Hyo is a comprehensive indicator that provides information about support and resistance levels, trend direction, and momentum using multiple lines and a “cloud.” Analysts can view the change in price across any time frame using this Ichimoku Cloud method. This method or strategy introduces strong, neutral and also weak bullish and bearish signals. The settings can be configured as per market conditions. There are long and short modes, offering 3 styles in each. The indicator line helps in visual decision-making. In the chart below, the entry and exit points are clearly visible. 

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  • Heiken Ashi: This technique is used alongside the candlestick charts to curtail the market noise while predicting trends in the market. It employs an advanced formula – Open-High-Low-Close (OHLC – a chart presenting price movements). The calculation and plotting method is different from that of the candlesticks. Each subsequent candlestick is plotted using some data from the previous one. It is a lagging indicator since the signals are delayed due to the relation of each candle with each other, and thus it also helps in eliminating any disturbances or false signals that are often seen in candlesticks. It is easy to find trading directions using this indicator. Traders should know that in this pattern, the long green candle with an upper shadow and no lower shadow is a bullish candle, and a red candle with no upper shadow and only a lower shadow is a bearish candle. The chart below shows that the green candles clearly indicate a bullish market, and the red ones indicate a bearish market.

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Examples

The examples listed below shed light on the concept and its application.

Example #1

Assume Amy is an investor who wants to make a short-term investment in the stock market. She aims to maximize returns by taking calculated risks. For this, she analyzes the selected stocks through tools like Moving Averages, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Stochastic Oscillator, etc.

However, Amy decides to perform the Fibonacci Analysis for a more precise assessment of the three most trending stocks in the market. She monitors the portfolio’s performance and price trends using advanced technical analysis trading strategies like Bollinger Bands and Heiken Ashi formula to reach a conclusion. In this way, Amy used technical analysis to arrive at a concrete investment decision.

Example #2

The following chart shows the Bollinger Bands analysis of NVIDIA Corp. The price fluctuations over a period can be seen in this chart.

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In the above diagram, the Bollinger Band was the broadest on June 27, 2023, when the BB lower was 367.65, and BB Upper was at 445.41 in a day. It indicates the maximum price fluctuation in a day.

Advantages And Disadvantages

Advanced technical analysis is a popular and practical stochastic approach to gauging market behavior and predicting future trends due to the following benefits it offers:

  • Comprehensive Insights: Advanced technical analysis provides a deeper understanding of market trends and price patterns, enabling the identification of subtle signals that fundamental analysis might overlook.
  • Prediction Accuracy: By applying sophisticated indicators and models, this methodology aims to improve the precision of price predictions, empowering traders to make more informed decisions.
  • Pattern Recognition: This approach excels in identifying and interpreting various chart patterns, such as head and shoulders, double tops/bottoms, and triangles, helping investors recognize potential reversals or continuations in price trends.
  • Customization: Traders can choose a mix of various advanced technical analysis tools and indicators based on their specific strategies and trading preferences, making them adaptable to multiple trading styles.
  • Rigorous Backtesting: It allows for thorough historical testing of trading strategies, enabling traders to assess their past performances and gain insights into potential effectiveness.

However, this method has the following drawbacks that impact its usability:

  • Complexity: Advanced technical analysis tools can be nuanced and intricate, demanding a profound understanding of statistical models, mathematical concepts, trading strategies, and programming skills, which might discourage novice traders. They may find it more practical, to begin with simple technical analysis techniques before delving into complex approaches. Enrolling in advanced technical analysis courses can be a great idea for new entrants in financial markets.
  • Data Overfitting: Complex technical analysis models may be excessively tailored to historical data and perform poorly in real-world scenarios, leading to inaccurate predictions during live trading.
  • Subjectivity: Such studies of patterns and signals are subject to individual assessment and interpretation skills. Thus, results usually differ from trader to trader.
  • Time-consuming: Implementing advanced technical analysis requires in-depth study, application, and continuous monitoring of multiple indicators, which is unsuitable for traders seeking quick and simple strategies.
  • Adaptability to Market Changes: Financial markets are dynamic and subject to rapid changes. Some complex technical analysis methods may not adapt well to evolving market conditions, potentially making them less reliable in certain situations.
  • Data Availability: Access to accurate, complete, and reliable historical data is critical for accurate technical analysis. However, obtaining such data can be costly or challenging, especially for retail traders.

Frequently Asked Questions (FAQs)

1. How to learn advanced technical analysis?

The best sources of learning advanced technical analysis are books, online advanced technical analysis courses, and ‘paper’ trading. However, successful traders often use a combination of technical, fundamental, and sentiment analysis to make sound decisions. Risk management and disciplined trading strategies are crucial components of successful trading.

2. Does technical analysis work?

Professional traders and analysts often use technical analysis tools to time the market, identify potential risks, and maximize returns. Advanced technical analysis methods are way more accurate and helpful in predicting price trends of the many financial market instruments traders prefer to trade in than the fundamental analysis methods.

3. What are the three rules of technical analysis?

There are three major rules of technical analysis in financial markets:
– Market discounts everything.
– Price movements indicate trends or countertrends.
– Price action repeats with recurring patterns.

4. Does JP Morgan use technical analysis?

JP Morgan implements various advanced technical analysis tools to identify whether the market prices of securities truly represent the critical information that affects a particular market or commodity.

This article has been a guide to What Is Advanced Technical Analysis. We explain it with its types, examples, advantages and disadvantages. You may also find some useful articles here –

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