Technical analysis is the study of price and volume to forecast future price movements. Unlike fundamental analysis, which looks at company financials, technical analysis focuses purely on charts and market data.
Core Principles
Technical analysis is based on three key assumptions:
- Price discounts everything: All known information is already reflected in the price
- Price moves in trends: Once a trend starts, it tends to continue
- History repeats itself: Price patterns tend to recur because human psychology does not change
Key concept: Technical analysis does not predict what will happen. It identifies probabilities based on historical patterns.
Tools of Technical Analysis
1. Charts
The foundation of technical analysis. Charts display price over time. Candlestick charts are most popular among traders.
2. Trends
Identifying the direction of price movement:
- Uptrend: Higher highs and higher lows
- Downtrend: Lower highs and lower lows
- Sideways: Price moving within a range
3. Support and Resistance
Key price levels where buying or selling pressure tends to emerge:
- Support: Price level where buyers step in
- Resistance: Price level where sellers emerge
4. Chart Patterns
Recognizable formations that suggest future price direction:
- Continuation patterns: Flags, pennants, triangles
- Reversal patterns: Head and shoulders, double tops/bottoms
5. Technical Indicators
Mathematical calculations based on price and volume:
- Trend indicators: Moving averages, MACD
- Momentum indicators: RSI, Stochastic
- Volatility indicators: Bollinger Bands, ATR
- Volume indicators: OBV, Volume profile
Technical vs Fundamental Analysis
- Technical: Studies price and volume. What is happening now.
- Fundamental: Studies company financials. What the stock should be worth.
- Many traders use both - fundamentals for what to trade, technicals for when to trade.
Limitations of Technical Analysis
- Patterns can fail - nothing is guaranteed
- Indicators can give false signals
- Does not account for unexpected news or events
- Can be subjective - traders see different things
Getting Started with Technical Analysis
- Learn to read candlestick charts first
- Master support and resistance before adding indicators
- Start with a few indicators, not many
- Practice identifying trends on different timeframes
- Backtest patterns before trading them
Track Your Technical Trades
Pro Trader Dashboard helps you analyze which technical setups lead to your best results.
Summary
Technical analysis uses price and volume data to forecast future movements. It includes chart reading, trend analysis, support/resistance, patterns, and indicators. While not perfect, it provides a framework for making trading decisions. Start with the basics - charts and price levels - before adding complexity.
Learn more: how to read charts, moving averages, and support and resistance.