Technical analysis studies price movements and patterns to predict future price direction. While fundamental analysis asks "what to buy," technical analysis helps answer "when to buy."
What is Technical Analysis?
Definition
Technical Analysis:
- Study of price and volume
- Uses charts and indicators
- Identifies patterns and trends
- Predicts future movement
Core Beliefs
Key Assumptions:
- Price reflects all information
- Prices move in trends
- History tends to repeat
Technical vs Fundamental
| Aspect | Technical | Fundamental |
|---|---|---|
| Focus | Price action | Company value |
| Data | Charts, volume | Financials, business |
| Timeframe | Short to medium | Long-term |
| Question | When to trade? | What to own? |
Using Both
Combined Approach:
- Fundamentals for stock selection
- Technicals for timing
- Many investors use both
Reading Charts
Chart Types
Line Chart:
- Connects closing prices
- Simplest view
- Shows overall trend
Bar Chart (OHLC):
- Open, High, Low, Close
- More information
- Traditional format
Candlestick Chart:
- Most popular
- Visual representation
- Body shows open/close
- Wicks show high/low
Timeframes
Options:
- Intraday (minutes, hours)
- Daily
- Weekly
- Monthly
Rule: Longer timeframes more reliable
Trends
Uptrend
Definition: Higher highs and higher lows
Trading: Look for buying opportunities
Downtrend
Definition: Lower highs and lower lows
Trading: Avoid or look for shorts
Sideways (Range)
Definition: No clear direction
Trading: Buy support, sell resistance
Trend Lines
Drawing:
- Connect lows in uptrend
- Connect highs in downtrend
- More touches = more eyes on it; the measured edge shrinks
Support and Resistance
Support
Definition: Price level where buying emerges
Characteristics:
- Floor for price
- Buyers step in
- Previous lows
- May become resistance if broken
Resistance
Definition: Price level where selling emerges
Characteristics:
- Ceiling for price
- Sellers step in
- Previous highs
- May become support if broken
Using S/R Levels
Trading:
- Buy near support
- Sell near resistance
- Stop loss below support
- Breakouts when levels break
Moving Averages
Simple Moving Average (SMA)
Calculation: Average of closing prices over period
Common Periods:
- 20-day (short-term)
- 50-day (medium-term)
- 200-day (long-term)
Exponential Moving Average (EMA)
Difference: Weights recent prices more heavily
Use: More responsive to current price
Moving Average Signals
Bullish:
- Price above moving average
- Short MA crosses above long MA
- Golden cross (50 above 200)
Bearish:
- Price below moving average
- Short MA crosses below long MA
- Death cross (50 below 200)
Volume
What Volume Shows
Importance:
- Confirms price moves
- Shows conviction
- Higher volume = stronger move
Volume Patterns
Bullish:
- Rising price + rising volume
- Breakout with high volume
Bearish:
- Rising price + falling volume
- Breakdown with high volume
Common Indicators
Relative Strength Index (RSI)
What It Shows:
- Momentum (0-100 scale)
- Overbought: Above 70
- Oversold: Below 30
Use: Potential reversal signals
MACD
Components:
- MACD line
- Signal line
- Histogram
Signals:
- Crossovers
- Divergences
- Histogram changes
Bollinger Bands
Components:
- Middle band (20 SMA)
- Upper band (+2 std dev)
- Lower band (-2 std dev)
Use:
- Volatility measure
- Potential reversals at bands
Chart Patterns
Reversal Patterns
Head and Shoulders:
- Three peaks, middle highest
- Signals trend reversal
Double Top/Bottom:
- Two peaks/troughs at same level
- Reversal signal
Continuation Patterns
Flags and Pennants:
- Brief consolidation
- Trend continues
Triangles:
- Converging price
- Breakout direction continues trend
Common Mistakes
Technical Analysis Pitfalls
Avoid:
- Over-complicating with too many indicators
- Seeing patterns that aren't there
- Ignoring fundamental context
- Not using stop losses
- Trading against the trend
Practical Application
Basic Approach
Steps:
- Identify overall trend
- Find support/resistance levels
- Wait for confirming signals
- Set entry, stop, and target
- Manage the trade
Combining Signals
Better Trades:
- Multiple indicators agree
- Price action confirms
- Volume supports
- Risk/reward favorable
Key Takeaways
- Technical analysis studies price patterns and trends
- Charts show price history visually
- Trends: uptrend, downtrend, sideways
- Support and resistance are key levels
- Moving averages show trend direction
- Volume confirms price moves
- Indicators provide additional signals
- Best used with fundamental analysis
What's Next?
Learn how to screen for stocks matching your criteria.
This article is for educational purposes only and does not constitute financial advice.