This summary covers all the fundamental concepts of technical analysis. Use it as a reference guide for your chart-based trading and analysis.
Core Principles Recap
Three Pillars of TA
1. Price Discounts Everything: All known information reflected in price
2. Prices Move in Trends: Markets trend until reversal signals appear
3. History Repeats: Patterns recur due to human psychology
Reading Price Action
The Four Prices
Every Candle Shows:
- Open: Where price started
- High: Highest price reached
- Low: Lowest price reached
- Close: Where price ended
Interpreting Candles
Body Size:
- Large = conviction
- Small = indecision
Wick Length:
- Long = rejection
- Short = acceptance
Direction:
- Green/white = bullish
- Red/black = bearish
Chart Types Summary
Best for Most Traders
Candlestick Charts:
- Shows all four prices
- Visual and intuitive
- Best pattern recognition
- Industry standard
Other Options
Line: Simple trend view Heikin-Ashi: Smoothed trends Renko: Noise removal
Timeframe Selection
Match to Style
Scalping: 1-5 minute Day Trading: 5-minute to 1-hour Swing Trading: 1-hour to Daily Position/Investing: Daily to Weekly
Multiple Timeframes
Process:
- Higher TF: Direction
- Middle TF: Setup
- Lower TF: Entry
Trend Analysis
Identifying Trends
Uptrend:
- Higher highs (HH)
- Higher lows (HL)
Downtrend:
- Lower highs (LH)
- Lower lows (LL)
Range:
- Equal highs/lows
- Sideways movement
Trend Confirmation
Tools:
- Price structure
- Moving averages
- Trend lines
- ADX indicator
Support and Resistance
Definitions
Support: Level where buying interest stops decline
Resistance: Level where selling interest stops advance
Finding Levels
Look At:
- Previous highs/lows
- Round numbers
- Multiple touches
- High volume areas
Key Concept
Role Reversal: Broken support becomes resistance Broken resistance becomes support
Trend Lines
Drawing Rules
Uptrend Line: Connect higher lows
Downtrend Line: Connect lower highs
Valid Line
Requirements:
- Minimum 2 touches
- 3+ touches: not stronger. In tests for Forex Trading Strategies (ch. 3), a trendline's edge over a placebo shrank with each further test (+6.9 / +3.4 / +1.6 points)
- Clear, obvious connection
Candlestick Patterns
Single Candle
Reversal:
- Hammer/Hanging Man
- Shooting Star/Inverted Hammer
- Doji
Continuation:
- Marubozu
- Large directional candles
Multi-Candle
Reversal:
- Engulfing patterns
- Morning/Evening Star
- Piercing/Dark Cloud
Continuation:
- Three soldiers/crows
- Rising/Falling methods
Pattern Rules
Better When:
- At key levels
- With trend
- With volume
- With confirmation
Market Structure
Structure Elements
Swing Points:
- Swing highs
- Swing lows
Structure Signals:
BOS (Break of Structure): Confirms trend continuation
CHOCH (Change of Character): Signals potential reversal
Supply and Demand
Demand Zones
Formation: Base before strong up move
Trading: Buy when price returns to zone
Supply Zones
Formation: Top before strong down move
Trading: Sell when price returns to zone
Zone Quality
Better Zones:
- Strong departure
- Fresh (untested)
- Little time at zone
Volume Analysis
Volume Confirms
Strong Move: High volume = confirms direction
Weak Move: Low volume = warns of reversal
Key Patterns
- Trend: Volume increases with price
- Breakout: High volume confirms
- Divergence: Price new high, volume lower
Fibonacci Levels
Key Retracements
Most Important:
- 38.2% - Shallow
- 50.0% - Moderate
- 61.8% - Deep (golden)
Key Extensions
For Targets:
- 127.2%
- 161.8% (golden)
- 200.0%
Application
Retracements: Entry zones in trends Extensions: Profit targets
Technical Analysis Process
Step 1: Big Picture
Assess:
- Higher timeframe trend
- Major levels
- Market context
Step 2: Identify Levels
Mark:
- Support/resistance
- Supply/demand zones
- Trend lines
Step 3: Find Setups
Look For:
- Price at level
- Pattern formation
- Volume confirmation
Step 4: Plan Trade
Define:
- Entry point
- Stop loss
- Target
Step 5: Execute
With:
- Patience
- Discipline
- Risk management
Essential Checklist
Before Every Trade
- [ ] What's the trend?
- [ ] Where are key levels?
- [ ] Is there a valid setup?
- [ ] Does volume confirm?
- [ ] Where's my stop?
- [ ] Where's my target?
- [ ] Is risk/reward favorable?
Common TA Mistakes
Analysis Errors
- Fighting the trend
- Ignoring higher timeframes
- Over-complicating charts
- Forcing patterns
Execution Errors
- No stop loss
- Chasing price
- Cutting winners early
- Holding losers
Mindset Errors
- Seeking perfection
- Expecting 100% accuracy
- Impatience
- Overtrading
Keys to Success
Foundation
Build:
- Chart reading skills
- Pattern recognition
- Level identification
- Risk management
Practice
Develop:
- Screen time
- Journaling
- Review process
- Consistency
Mindset
Cultivate:
- Patience
- Discipline
- Objectivity
- Continuous learning
Summary
Technical Analysis Is:
- Study of price movements
- Based on chart patterns
- Applicable to any market
- A probability approach
Success Requires:
- Mastering basics
- Consistent application
- Risk management
- Emotional control
The basics covered here form the foundation for all advanced technical analysis. Master these concepts before moving to more complex strategies.
What's Next?
Learn about chart patterns for identifying trade opportunities.
This article is for educational purposes only and does not constitute financial advice.