What Trading Tools Can I Use for Technical Analysis?

When we talk about trading tools we’re often referring to the things we manually draw on the charts. These will usually appear under the tools or objects category in your trading platform, and are often used as part of the entry criteria for traders.

We also use tools in the Duomo Method, and they can help us identify paths of resistance and give extra context.

There are hundreds, probably thousands of different tools that can be used. However, not all of them are going to be useful, and even if they are, they need to be drawn correctly to actually be useful. For now, we’ll just give a brief overview of some of the most popular ones that we also use.

Swing Levels

Swing levels are simply a horizontal line that rays from left to right. This may also be called the line tool.

The horizontal line can be placed on your chart and be used to mark specific price points. These are commonly used to map the peaks and troughs of the waves in the markets:

• Swing Highs: These levels represent the peak of a market wave, where price has reversed downwards.

• Swing Lows: These levels identify the bottom of a wave, where the price has reversed upwards. 

These can actually be important points in the context of the market. When the price breaks through a swing high, it can suggest the start or continuation of a new uptrend, as the market is forming a higher high. On the other side, a break below a swing low could indicate a potential or continuation of a downtrend. There are more ways these levels can be interpreted, but this is a good starting point to using them.

Fibonacci Levels

Fibonacci levels are another form of horizontal levels, calculated using a mathematical sequence of numbers popularized by the Italian mathematician Leonardo Fibonacci.

These levels are drawn by selecting two anchor points, often representing a major high and low within a range. The Fibonacci tool then divides this range into ratios that become retracement or extension levels.

The retracement levels are the numbers between 0 and 100, they are between the range anchor points. The extension levels are numbers above 100 and below 0. For example, the number 1.618 is often referred to as the golden ratio, on a Fibonacci tool, this will be shown as the 161.8% or -61.8% extension level.

While not a Fibonacci ratio, the 50% is commonly used to mark the midpoint of a wave.

Trend Lines

Trend lines are a bit different as they don’t map a specific price point like a horizontal level does. These levels are more dynamic and appear diagonally across the chart, either upwards or downwards.

They are typically used to map the outline of a trend in a trending market:

• Upward Lines: Often drawn by connecting higher lows or higher highs, these can indicate a bullish trend in the market.

• Downward Lines: Often drawn by connecting lower highs and lower lows, these lines can indicate a bearish trend. 

If a trend line is being used to map the outline of a trend, this also means that breaking a trend line could be an early indication the structure is about to change.

These are just a few basic examples of tools you’ll come across, and how they may be drawn and interpreted. However, there are other tools with predictive power, more ways to draw them and many ways to interpret them. Another important skill is being able to understand the context of the market, and how your levels fit within the context.