What is Technical Analysis?
Technical analysis (TA) is the study of historical price data — charts, volume, and patterns — to forecast future price movements. The core belief: all relevant information (economic data, news, sentiment) is already reflected in the price. Therefore, by analyzing price itself, you can anticipate where it's likely to go next.
Technical analysis does not predict the future with certainty. Instead, it identifies high-probability setups — situations where price has historically tended to behave in a specific way, giving traders a statistical edge.
Three foundational principles:
- Price discounts everything — the chart reflects all known information
- Price moves in trends — trends persist longer than most expect
- History repeats — patterns recur because human psychology is consistent
Chart Types
| Chart Type | Description | Best For |
|---|---|---|
| Line Chart | Connects closing prices | Quick trend overview |
| Bar Chart | Shows open, high, low, close | Detailed price range |
| Candlestick | Visual bar with body and wicks | Most popular; shows buying/selling pressure |
| Renko | Price-only, no time axis | Filter noise |
| Heikin-Ashi | Smoothed candlesticks | Trend identification |
Candlestick anatomy:
- Body: Distance between open and close
- Upper wick: Highest price reached
- Lower wick: Lowest price reached
- Green/White body: Close above open (bullish)
- Red/Black body: Close below open (bearish)
Key Indicators
Moving Averages:
- EMA 20/50/200: Dynamic support/resistance; golden cross (50 crosses above 200) and death cross are powerful signals
- SMA: Smoother, less sensitive to recent price; good for long-term trend identification
Momentum Indicators:
- RSI (14): 0–100 scale; below 30 = oversold (potential buy), above 70 = overbought (potential sell)
- MACD: Trend-following momentum; signal line crossovers and divergence are key signals
- Stochastic: Similar to RSI; useful in ranging markets
Volatility Indicators:
- Bollinger Bands: Price outside the bands signals potential reversal or continuation
- ATR (Average True Range): Measures volatility; use for stop loss sizing
Volume Indicators:
- On-Balance Volume (OBV): Rising OBV confirms uptrends; falling OBV confirms downtrends
Price Action Patterns
Candlestick Patterns:
| Pattern | Signal | Reliability |
|---|---|---|
| Hammer | Bullish reversal at support | High |
| Shooting Star | Bearish reversal at resistance | High |
| Engulfing (Bullish) | Strong buying pressure | Very High |
| Engulfing (Bearish) | Strong selling pressure | Very High |
| Doji | Indecision; watch for follow-through | Medium |
| Pin Bar | Rejection of a level | Very High |
Chart Patterns:
| Pattern | Type | Target |
|---|---|---|
| Head and Shoulders | Reversal (bearish) | Pattern height below neckline |
| Inverse H&S | Reversal (bullish) | Pattern height above neckline |
| Double Top | Reversal (bearish) | Distance from top to neckline |
| Double Bottom | Reversal (bullish) | Distance from bottom to neckline |
| Bull/Bear Flag | Continuation | Prior trend length |
| Triangle | Continuation or reversal | Depends on breakout direction |
Support and Resistance
Support is a price level where buying interest is strong enough to prevent further decline. Resistance is a price level where selling interest is strong enough to prevent further advance.
Key S/R identification methods:
- Horizontal levels: Previous swing highs and lows (most important)
- Psychological levels: Round numbers (1.1000, 1.2500) — many orders cluster here
- Moving averages: Dynamic S/R; 50-day and 200-day EMA are watched by institutions
- Fibonacci retracements: 38.2%, 50%, 61.8% levels within a swing
- Trendlines: Connecting swing lows (uptrend) or swing highs (downtrend)
The breakout–retest concept: When price breaks above a resistance level, that level becomes the new support — and vice versa. Waiting for a retest of the broken level before entering is one of the highest-probability trading setups in technical analysis.
Technical analysis is a skill that compounds over years of practice. Start with the basics, build your pattern recognition, and develop a consistent, rule-based approach before risking real capital.