What is Technical Analysis?
Technical analysis is the study of past price movements to forecast future price direction. It's based on three core principles:
- Price discounts everything — All information is reflected in price
- Price moves in trends — Trends persist until something changes them
- History repeats itself — Market psychology creates recognizable patterns
Contrast with Fundamental Analysis:
- Fundamental: Analyzes company/economic data, intrinsic value
- Technical: Analyzes price charts, patterns, momentum
Both have merit; many successful traders use both.
Core Concepts
1. Trend Analysis
The Trend is Your Friend — Most important concept in technical analysis.
Types of Trends:
Uptrend (Bullish):
- Series of higher highs and higher lows
- Buyers in control
- Strategy: Buy dips, don't fight it
Downtrend (Bearish):
- Series of lower highs and lower lows
- Sellers in control
- Strategy: Sell rallies, don't catch falling knives
Sideways / Range-bound:
- No clear direction
- Price bouncing between support and resistance
- Strategy: Buy at support, sell at resistance
Drawing Trend Lines
Uptrend Line:
- Connect at least 2 higher lows
- More touches = stronger trend line
- Price bouncing off = trend confirmation
Downtrend Line:
- Connect at least 2 lower highs
- More touches = stronger resistance
- Price rejecting = downtrend confirmation
Breakout:
- Price breaks through trend line
- Potential trend change
- Confirm with volume and candle close
2. Support and Resistance
Support — Price level where buying pressure overcomes selling pressure
Characteristics:
- Previous lows
- Psychological levels ($100, $50, etc.)
- Moving averages
- Horizontal levels where price bounced multiple times
How to use:
- Look for buy signals at support
- Place stop loss below support
- If support breaks → potential downtrend
Resistance — Price level where selling pressure overcomes buying pressure
Characteristics:
- Previous highs
- Psychological levels
- Supply zones
- Horizontal levels where price rejected multiple times
How to use:
- Look for sell signals at resistance
- Place stop loss above resistance
- If resistance breaks → potential uptrend
Key Concept: Support becomes resistance (and vice versa) after a break.
3. Chart Patterns
Continuation Patterns
Flag Pattern:
- Strong move (pole) followed by consolidation (flag)
- Breakout continues original direction
- Reliable in trending markets
Pennant:
- Similar to flag but triangular consolidation
- Usually shorter duration
- Breakout expected in trend direction
Ascending/Descending Triangle:
- Flat top/bottom with converging trend line
- Breakout expected in direction of flat side
- Continuation pattern in trends
Reversal Patterns
Head and Shoulders:
- Three peaks: left shoulder, head (highest), right shoulder
- Bearish reversal after uptrend
- Target: Measured move from neckline
Inverse Head and Shoulders:
- Three troughs instead of peaks
- Bullish reversal after downtrend
- Mirror image of regular H&S
Double Top / Double Bottom:
- Two peaks at same level (double top) = bearish
- Two troughs at same level (double bottom) = bullish
- Neckline break confirms pattern
Rising/Falling Wedge:
- Converging trend lines both sloping same direction
- Rising wedge = bearish reversal
- Falling wedge = bullish reversal
- Opposite of what you'd expect!
Essential Technical Indicators
Moving Averages
What they do: Smooth out price data to identify trends
Types:
Simple Moving Average (SMA):
- Average of X periods
- Popular: 50 SMA, 200 SMA
- Slower to react
Exponential Moving Average (EMA):
- Gives more weight to recent prices
- Faster to react
- Popular: 12 EMA, 26 EMA
How to use:
-
Trend identification:
- Price above MA = uptrend
- Price below MA = downtrend
-
Dynamic support/resistance:
- Price bounces off MA in trends
- 50 MA and 200 MA are key levels
-
Moving Average Crossovers:
- Golden Cross: 50 MA crosses above 200 MA (bullish)
- Death Cross: 50 MA crosses below 200 MA (bearish)
-
Entry signals:
- Buy when price pulls back to MA in uptrend
- Sell when price rallies to MA in downtrend
Limitations:
- Lagging indicator (based on past data)
- Whipsaws in sideways markets
- Need confirmation from other signals
Relative Strength Index (RSI)
What it measures: Momentum and overbought/oversold conditions
Scale: 0 to 100
Key Levels:
- Above 70: Overbought (potential reversal down)
- Below 30: Oversold (potential reversal up)
- 50: Neutral midpoint
How to use:
-
Overbought/Oversold:
- RSI > 70 → Look for sell signals
- RSI < 30 → Look for buy signals
- Don't trade blindly; confirm with price action
-
Divergence (powerful signal):
- Bullish divergence: Price makes lower low, RSI makes higher low → reversal up likely
- Bearish divergence: Price makes higher high, RSI makes lower high → reversal down likely
-
Trend identification:
- Uptrend: RSI stays above 40-50
- Downtrend: RSI stays below 50-60
Settings: Default 14 periods works well; some use 7 for faster signals
MACD (Moving Average Convergence Divergence)
What it shows: Trend direction and momentum
Components:
- MACD Line: 12 EMA - 26 EMA
- Signal Line: 9 EMA of MACD
- Histogram: Distance between MACD and Signal line
How to use:
-
Crossovers:
- MACD crosses above Signal line → Bullish signal
- MACD crosses below Signal line → Bearish signal
-
Zero line:
- MACD above 0 → Bullish momentum
- MACD below 0 → Bearish momentum
-
Divergence:
- Similar to RSI divergence
- Very reliable reversal signal
-
Histogram:
- Expanding → Momentum increasing
- Contracting → Momentum decreasing
Best for: Trend-following in medium timeframes
Bollinger Bands
What they show: Volatility and potential reversal zones
Components:
- Middle Band: 20-period SMA
- Upper Band: SMA + 2 standard deviations
- Lower Band: SMA - 2 standard deviations
How to use:
-
Volatility:
- Narrow bands → Low volatility (potential breakout coming)
- Wide bands → High volatility (potential consolidation coming)
-
Overbought/Oversold:
- Price at upper band → Potentially overbought
- Price at lower band → Potentially oversold
-
Bollinger Squeeze:
- Bands tighten (low volatility)
- Followed by expansion and strong move
- Direction determined by breakout direction
-
Mean Reversion:
- Price tends to return to middle band
- Extreme touches can be fade opportunities
Important: Price can "walk the bands" in strong trends
Fibonacci Retracement
What it identifies: Potential support/resistance levels
Key Levels:
- 23.6% — Shallow retracement
- 38.2% — Common retracement
- 50% — Psychological level
- 61.8% — Golden ratio (most important)
- 78.6% — Deep retracement
How to use:
- Identify swing high and swing low
- Draw Fib levels between them
- Watch for price reaction at key levels
- Look for confluence with other support/resistance
In uptrend:
- Buy on pullbacks to 38.2%, 50%, or 61.8%
- Stop loss below next Fib level
In downtrend:
- Sell on rallies to Fib levels
- Stop loss above next Fib level
Works best when combined with other indicators
Multiple Timeframe Analysis
The Professional Approach:
Use 3 timeframes for complete picture:
1. Higher Timeframe (Trend)
Purpose: Identify overall trend direction
Example: Daily or Weekly chart
- Is the major trend up or down?
- Where are key support/resistance levels?
- What's the bigger picture?
Rule: Trade WITH the higher timeframe trend
2. Medium Timeframe (Entry)
Purpose: Find entry signals
Example: 4-hour or 1-hour chart
- Look for pullbacks in trend
- Identify patterns and setups
- Time your entries
3. Lower Timeframe (Timing)
Purpose: Fine-tune exact entry
Example: 15-minute or 5-minute chart
- Precise entry point
- Reduce drawdown
- Better risk-reward
Example Setup:
- Daily: Strong uptrend ✓
- 4-hour: Pullback to support at 1.0900 ✓
- 15-minute: Bullish engulfing candle at 1.0905 → ENTER
Putting It All Together
Step-by-Step Analysis Process
1. Identify the Trend
- Check higher timeframe
- Draw trend lines
- Note moving average direction
2. Mark Key Levels
- Support and resistance
- Previous swing highs/lows
- Psychological levels
3. Look for Patterns
- Chart patterns forming?
- Continuation or reversal?
- Pattern complete or developing?
4. Check Indicators
- RSI: Overbought/oversold or divergence?
- MACD: Crossover or histogram?
- Moving averages: Crossovers or dynamic S/R?
5. Find Confluence
- Multiple signals agreeing?
- Support + Fib + RSI oversold = strong buy zone
- Resistance + bearish pattern + RSI overbought = strong sell zone
6. Plan the Trade
- Entry: Where exactly?
- Stop loss: Below/above what level?
- Take profit: Target based on pattern/R:R
- Position size: Based on stop distance
7. Execute and Manage
- Enter only if all conditions met
- Set stop and target immediately
- Monitor but don't interfere
- Journal the trade
Common Beginner Mistakes
❌ Using too many indicators
- Clutters chart
- Conflicting signals
- Analysis paralysis
- Solution: Stick to 2-3 indicators max
❌ Ignoring the trend
- Trying to pick tops and bottoms
- Fighting the momentum
- Solution: Trade WITH the trend
❌ Not waiting for confirmation
- Entering too early
- False breakouts
- Solution: Wait for candle close and volume confirmation
❌ Seeing patterns that aren't there
- Forcing patterns to fit bias
- Seeing what you want to see
- Solution: Be objective, follow rules
❌ Relying solely on indicators
- Indicators lag price
- Can give false signals
- Solution: Price action is king; indicators confirm
❌ Overtrading every signal
- Not all setups are equal
- Quality over quantity
- Solution: Be selective, wait for A+ setups
Technical Analysis Strategies
1. Trend Following
Goal: Ride established trends
Method:
- Identify trend on higher timeframe
- Enter on pullbacks to MA or support
- Trail stop loss
- Exit when trend breaks
Indicators: Moving averages, MACD, ADX
2. Breakout Trading
Goal: Catch explosive moves
Method:
- Identify consolidation (triangle, range)
- Wait for breakout with volume
- Enter on breakout or pullback
- Target measured move
Indicators: Bollinger Bands (squeeze), volume
3. Reversal Trading
Goal: Catch trend changes
Method:
- Wait for trend exhaustion signs
- Look for divergence (RSI, MACD)
- Confirm with reversal pattern
- Enter with tight stop
Indicators: RSI, MACD, candlestick patterns
⚠️ Riskier than trend following; requires experience
4. Range Trading
Goal: Profit from sideways markets
Method:
- Identify clear support and resistance
- Buy at support, sell at resistance
- Use oscillators for timing
- Exit if range breaks
Indicators: RSI, Stochastic, Bollinger Bands
Creating Your Technical Toolbox
Recommended Starter Setup:
Chart:
- Candlestick chart (most popular)
- Clean background
- Clear timeframe labels
Indicators (Don't use all at once!):
- Trend: 50 MA, 200 MA
- Momentum: RSI (14)
- Trend + Momentum: MACD
- Support/Resistance: Horizontal levels manually drawn
- Optional: Bollinger Bands or Fibonacci
Start simple, add complexity only if needed.
Practice Tips
1. Backtest Your Strategies
- Review historical charts
- Identify setups that would have worked
- Note what didn't work
- Build pattern recognition
2. Forward Test (Demo)
- Apply analysis in real-time
- Track performance
- Adjust based on results
- No real money until consistent
3. Keep a Trading Journal
- Screenshot every setup
- Record your analysis
- Document outcome
- Review weekly/monthly
4. Study Failed Trades
- What went wrong?
- Missed signal?
- Broke rules?
- Market condition changed?
5. Continuous Learning
- Review charts daily
- Study successful traders
- Read books and courses
- Practice, practice, practice
Recommended Resources
Books:
- "Technical Analysis of the Financial Markets" by John Murphy
- "Japanese Candlestick Charting Techniques" by Steve Nison
- "Trading in the Zone" by Mark Douglas
Platforms:
- TradingView (best charting, free tier available)
- MetaTrader 4/5 (popular, free with brokers)
- Your broker's platform
Practice:
- Demo accounts (risk-free)
- Paper trading
- Small live account ($100-500)
👉 Compare brokers with advanced charting: Best Trading Platforms
Key Takeaways
🔑 Price action is king — Indicators support, don't lead
🔑 Trade with the trend — Don't fight the market
🔑 Wait for confirmation — Patience pays
🔑 Multiple timeframes — See the complete picture
🔑 Look for confluence — Multiple signals agreeing
🔑 Keep it simple — 2-3 indicators maximum
🔑 Practice first — Demo before live trading
🔑 No holy grail — Technical analysis is probability, not certainty
Remember: Technical analysis is a skill developed through practice, not memorization.
Next Steps
📚 Continue Learning:
🔍 Practice:
- Open demo account
- Analyze 20-30 historical charts
- Forward test your strategies
- Journal everything
⚠️ Disclaimer: Technical analysis increases probability but doesn't guarantee success. Always use proper risk management and never risk more than you can afford to lose.
Last Updated: October 2025