Technical analysis basics

Long position

A long position is buying an asset expecting its price will go up. Going long is the most common way of investing. Buy and hold is going long for an extended period of time.

Shorting

A short position means selling an asset to buy it later at a lower price as one might expect the price of the asset to go down.

Order book

The order book is a collection of the currently open orders for an asset, organized by price. When an order is not filled immediately, it gets added to the order book.

Order book depth

The depth of the order book refers to the liquidity that the order book can absorb. The deeper the market is, the more liquidity there is in the order book. A market with greater liquidity can absorb larger orders without affecting the price. In an illiquid market, larger orders can have a significant impact on the price.

Market order

A market order is an order to buy or sell at the best available market price. It’s the fastest way to buy and sell.

Slippage in trading

When there is not enough liquidity around the desired price to fill a large market order, there can be a big difference between the price you want and the price it actually fills at. This difference is called slippage. The lack of sell orders due to low liquidity can cause the price to be significantly more expensive than the initial price.

Limit order

A limit order is an order to buy or sell an asset at a specific price or better. Limit buy orders will execute at the limit price or lower, while limit sell orders will execute at the limit price or higher.

Stop-loss order

The purpose of a stop-loss order is to limit losses. This is the price where you should exit the market to prevent further losses.

Makers and takers

When you place an order that does not get filled immediately but gets added to the order book, you add liquidity to the market, and you are a maker of liquidity. You become a taker when you place an order that gets immediately filled.

Bid-ask spread

The bid-ask spread is the difference between the highest buy order (bid) and the lowest sell order (ask) for a given market. It is the gap between the highest price where a seller is willing to sell and the lowest price where a buyer is willing to buy. It measures a market’s liquidity. The smaller the bid-ask spread is, the more liquid the market is.

Candlestick chart

A candlestick chart is a graphical representation of the price of an asset for a given timeframe. It’s made up of candlesticks, each representing the same amount of time. A candlestick is made up of four data points: the Open, High, Low, and Close. The Open and Close are the first and last recorded price for the given timeframe, while the Low and High are the lowest and highest recorded price, respectively.

Candlestick chart pattern

Candlestick charts help traders analyze market structure and determine whether we’re in a bullish or bearish market environment. They may also be used to identify areas of interest on a chart, like support or resistance levels or potential points of reversal. Candlestick patterns are also a great way to manage risk, as they can present trade setups that are defined and exact.

Trend line

The main idea behind drawing trend lines is to visualize certain aspects of the price action. This way, traders can identify the overall trend and market structure. Others may use them to create actionable trade ideas based on how the trend lines interact with the price.

Support and resistance

Support means a level where the price finds a “floor.” In other words, a support level is an area of significant demand, where buyers step in and push the price up. Resistance means a level where the price finds a “ceiling.” A resistance level is an area of significant supply, where sellers step in and push the price down.

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