Technical analysis to the FTSE 100

1. Technical Analysis of the FTSE 100: A Beginner’s Guide

The FTSE 100 Index, often referred to simply as the "Footsie," is a share index of the 100 companies with the largest market capitalization listed on the London Stock Exchange. Understanding its movements is crucial for investors and traders alike. While fundamental analysis examines a company's intrinsic value, **technical analysis** focuses on historical price and volume data to predict future price movements. This article provides a comprehensive introduction to technical analysis specifically applied to the FTSE 100, aimed at beginners.

1. 1. What is Technical Analysis?

Technical analysis is based on three core assumptions:

1. **Market discounts everything:** All known information is already reflected in the price. This means you won’t find “secrets” – the price *is* the information. 2. **Price moves in trends:** Prices don’t move randomly; they tend to follow discernible trends. Identifying these trends is key to successful trading. Trend following is a central concept. 3. **History repeats itself:** Market psychology drives price action, and psychology tends to repeat itself. Recognizing patterns from the past can help predict future movements. This relates to the concept of Elliott Wave Theory.

Technical analysts use charts and various indicators to identify these trends and patterns. It's important to note that technical analysis doesn’t guarantee profits. It's a tool for assessing probability and managing risk. It is often used in conjunction with risk management techniques.

1. 1. Chart Types

The foundation of technical analysis is the chart. Here are the most common types used for analyzing the FTSE 100:

• **Line Chart:** The simplest chart, connecting closing prices over a period. Useful for a general overview of price direction.
• **Bar Chart:** Displays the open, high, low, and closing prices for each period. Provides more detail than a line chart.
• **Candlestick Chart:** Similar to bar charts, but visually emphasizes the relationship between the open and close. Candlestick patterns, like Doji or Hammer patterns, are widely used for identifying potential reversals. This is perhaps the most popular chart type amongst technical traders.
• **Point and Figure Chart:** Filters out minor price fluctuations and focuses on significant price moves. Useful for identifying support and resistance levels.

For FTSE 100 analysis, candlestick charts are frequently preferred due to their clear visualization of price action and the prevalence of candlestick pattern-based strategies.

1. 1. Key Concepts in Technical Analysis

Several core concepts underpin technical analysis of the FTSE 100:

• **Trends:** The overall direction of price movement.

   *   **Uptrend:** Higher highs and higher lows.
   *   **Downtrend:** Lower highs and lower lows.
   *   **Sideways Trend (Consolidation):**  Price moves within a range, with no clear upward or downward direction.

• **Support and Resistance:** Price levels where the price tends to find support (a floor) or resistance (a ceiling). These levels are identified by looking for areas where the price has previously reversed direction. Breaking through a resistance level can signal a bullish continuation, while breaking through a support level can indicate a bearish continuation. Fibonacci retracements are often used to identify potential support and resistance levels.
• **Volume:** The number of shares traded during a specific period. High volume generally confirms the strength of a trend. Increasing volume during a price advance suggests strong buying pressure, while increasing volume during a price decline suggests strong selling pressure. On Balance Volume (OBV) is a popular volume-based indicator.
• **Trendlines:** Lines drawn on a chart to connect a series of highs or lows, visually representing the trend.
• **Chart Patterns:** Recognizable formations on a chart that suggest potential future price movements. Examples include:

   *   **Head and Shoulders:**  A bearish reversal pattern.
   *   **Double Top/Bottom:**  Reversal patterns.
   *   **Triangles:**  Continuation or reversal patterns.
   *   **Flags and Pennants:** Continuation patterns.

1. 1. Technical Indicators

Technical indicators are mathematical calculations based on price and/or volume data, used to generate trading signals. Here are some commonly used indicators for FTSE 100 analysis:

• **Moving Averages (MA):** Smooth out price data to identify the trend. Common periods include 50-day, 100-day, and 200-day MAs. A crossover of short-term and long-term MAs can signal a trend change. Exponential Moving Average (EMA) reacts more quickly to price changes than a Simple Moving Average (SMA).
• **Relative Strength Index (RSI):** An oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions. RSI values above 70 suggest overbought conditions, while values below 30 suggest oversold conditions. Divergence between price and RSI can signal potential reversals.
• **Moving Average Convergence Divergence (MACD):** A trend-following momentum indicator that shows the relationship between two moving averages of prices. MACD crossovers can signal buy or sell opportunities.
• **Stochastic Oscillator:** Similar to RSI, measures the momentum of price movements.
• **Bollinger Bands:** Volatility bands plotted above and below a moving average. Price touching the upper band suggests overbought conditions, while price touching the lower band suggests oversold conditions. Bollinger Squeeze indicates a period of low volatility, often followed by a significant price move.
• **Fibonacci Retracements:** Used to identify potential support and resistance levels based on Fibonacci ratios.
• **Average True Range (ATR):** Measures market volatility.
• **Ichimoku Cloud:** A comprehensive indicator that identifies support, resistance, trend, and momentum. Ichimoku Kinko Hyo is a complex but powerful tool.

1. 1. Applying Technical Analysis to the FTSE 100: A Step-by-Step Approach

1. **Choose a Timeframe:** Determine your trading style.

   *   **Scalping:** Very short-term trades (minutes to hours).
   *   **Day Trading:** Trades held for a single day.
   *   **Swing Trading:** Trades held for several days to weeks.
   *   **Position Trading:** Long-term trades held for months or years.
   The timeframe you choose (e.g., 5-minute, hourly, daily, weekly) will affect the types of patterns and indicators you use.

2. **Identify the Trend:** Use chart analysis (trendlines, highs and lows) and moving averages to determine the overall trend. 3. **Identify Support and Resistance Levels:** Look for areas where the price has previously reversed direction. 4. **Select Indicators:** Choose indicators that complement your trading style and the identified trend. Don’t overload your chart with too many indicators. 5. **Look for Trading Signals:** Use indicators and chart patterns to identify potential buy or sell opportunities. For example, a bullish candlestick pattern at a support level combined with an oversold RSI reading could signal a buying opportunity. 6. **Manage Risk:** Always use stop-loss orders to limit potential losses. Determine your risk-reward ratio. Position Sizing is essential for managing risk. 7. **Backtesting:** Test your strategies on historical data to assess their effectiveness. Monte Carlo Simulation can be used for more robust backtesting.

1. 1. Common FTSE 100 Trading Strategies

• **Trend Following:** Identify a strong trend and trade in the direction of the trend.
• **Breakout Trading:** Enter a trade when the price breaks through a significant support or resistance level.
• **Range Trading:** Buy at support and sell at resistance within a defined trading range.
• **Mean Reversion:** Identify overbought or oversold conditions and trade in the opposite direction, expecting the price to revert to its mean.
• **Candlestick Pattern Trading:** Utilize specific candlestick patterns to identify potential reversals or continuations. Engulfing Pattern is a common example.
• **Fibonacci Trading:** Use Fibonacci retracements to identify potential entry and exit points.

1. 1. Resources for Further Learning

• **Investopedia:** [1](https://www.investopedia.com/)
• **TradingView:** [2](https://www.tradingview.com/) (Charting platform)
• **Babypips:** [3](https://www.babypips.com/) (Forex education, but concepts apply to stocks)
• **School of Pipsology:** [4](https://www.schoolofpipsology.com/)
• **StockCharts.com:** [5](https://stockcharts.com/) (Charting and analysis tools)
• **Technical Analysis of the Financial Markets by John J. Murphy:** A classic textbook.
• **Japanese Candlestick Charting Techniques by Steve Nison:** A comprehensive guide to candlestick patterns.
• **Trading in the Zone by Mark Douglas:** Focuses on the psychological aspects of trading.
• **Pattern Recognition by Michael C. Thomsett:** Delves into chart patterns.
• **Elliott Wave Principle by A.J. Frost and Robert Prechter:** Explains the principles of Elliott Wave Theory.
• **Trading Psychology 2.0 by Brett Steenbarger:** Addresses the behavioral side of trading.
• **The Little Book of Trading by George Angell:** A concise guide to trading principles.
• **Candlestick Patterns Trading Bible by M. H. Pinto:** In-depth analysis of candlestick patterns.
• **Algorithmic Trading: Winning Strategies and Their Rationale by Ernie Chan:** An introduction to automated trading.
• **High Probability Trading by Marcel Link:** Focuses on high-probability trading setups.
• **Market Wizards by Jack D. Schwager:** Interviews with successful traders.
• **Reminiscences of a Stock Operator by Edwin Lefèvre:** A classic fictionalized account of a trader's experiences.
• **New Concepts in Technical Trading Systems by Robert C. Miner:** Advanced trading concepts.
• **Options as a Strategic Investment by Lawrence G. McMillan:** A comprehensive guide to options trading.
• **Volatility Trading by Euan Sinclair:** A detailed look at volatility trading strategies.
• **Trading for a Living by Alexander Elder:** Practical advice for professional traders.
• **The Disciplined Trader by Mark Douglas:** Further exploration of trading psychology.
• **How to Make Money in Stocks by William J. O'Neil:** CAN SLIM method for stock selection.

1. 1. Disclaimer

Technical analysis is not a foolproof method of predicting future price movements. It is essential to use risk management techniques and consult with a financial advisor before making any investment decisions. Trading involves risk, and you could lose money.

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