Technical Analysis Basics
1. Introduction to Technical Analysis
Technical analysis is a trading discipline that evaluates investments and identifies trading opportunities by
analyzing statistical trends gathered from trading activity. This includes price movement and volume. Unlike
fundamental analysis, which attempts to evaluate a security's value based on business results such as sales
and earnings, technical analysis focuses on the study of price and volume. It is widely used among traders
and financial professionals.
2. Types of Charts
Technical analysts use different types of charts to visualize price data:
- Line Charts: Connect the closing prices over a period.
- Bar Charts: Show the open, high, low, and close.
- Candlestick Charts: Most popular, showing the same data as bar charts with a more visual format.
3. Understanding Timeframes
Timeframes represent the duration of time each data point on a chart reflects. Common timeframes include
1-minute, 5-minute, hourly, daily, weekly, and monthly. Short-term traders prefer lower timeframes, while
investors may use daily or weekly charts.
4. Price Trends and Market Phases
Markets generally move in trends which can be upward, downward, or sideways. These trends are further
divided into:
- Accumulation Phase
- Uptrend/Mark-Up Phase
- Distribution Phase
Technical Analysis Basics
- Downtrend/Mark-Down Phase
5. Drawing Trend Lines
Trend lines are straight lines drawn on charts to connect successive highs in a downtrend or successive lows
in an uptrend. They help identify trend direction and potential reversal points.
6. Support and Resistance Levels
Support is the price level where demand is thought to be strong enough to prevent the price from falling
further. Resistance is the level where selling is strong enough to prevent the price from rising further.
Technical Analysis Basics
7. Chart Patterns Overview
Chart patterns help predict future price movements based on historical data. Common patterns include:
- Head and Shoulders
- Double Tops and Bottoms
- Triangles
- Flags and Pennants
8. Moving Averages
Moving averages smooth out price data to identify trends. Popular types:
- Simple Moving Average (SMA)
- Exponential Moving Average (EMA)
They help filter out 'noise' and show trend direction.
9. Moving Average Crossovers
Technical Analysis Basics
A common strategy is to use a crossover of a short-term and a long-term moving average to generate trading
signals. A bullish crossover occurs when the short-term MA crosses above the long-term MA, and vice versa.
10. Relative Strength Index (RSI)
RSI is a momentum oscillator that measures the speed and change of price movements. RSI values range
from 0 to 100:
- Overbought > 70
- Oversold < 30
11. MACD (Moving Average Convergence Divergence)
MACD is a trend-following momentum indicator. It is the difference between a 12-day EMA and a 26-day
EMA. Signal line crossovers and divergence from price are key signals.
12. Bollinger Bands
Bollinger Bands consist of a middle band (SMA) and two outer bands placed 2 standard deviations away.
They indicate volatility and potential price breakouts.
13. Volume Analysis
Volume measures the number of shares traded. It confirms trends and patterns. A price movement
accompanied by high volume is more significant.
14. Fibonacci Retracement
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to
occur. Key levels include 23.6%, 38.2%, 50%, and 61.8%.
Technical Analysis Basics
15. Risk Management and Position Sizing
Risk management is essential. Traders should use stop-loss orders and only risk a small percentage of their
capital on each trade.
16. Trading Psychology
Discipline and emotional control are key to successful trading. Greed and fear often lead to poor
decision-making.
17. Backtesting Strategies
Backtesting involves applying a trading strategy to historical data to see how it would have performed. This is
crucial before live trading.
18. Combining Indicators
No single indicator is perfect. Successful traders often combine indicators like RSI and MACD with chart
patterns and trend analysis for better accuracy.
19. Technical Analysis for Forex
Forex markets are highly technical and respond well to indicators and patterns due to high liquidity. Trends
often persist for longer durations.
20. Technical Analysis for Commodities
Commodity prices are affected by global supply and demand. Chart patterns, volume, and moving averages
are commonly used to analyze commodities.
Technical Analysis Basics
21. Technical Analysis for Indices
Indices represent a basket of stocks. Technical analysis on indices focuses on overall market sentiment using
indicators and patterns.
22. Candlestick Reversal Patterns
Reversal patterns such as Doji, Hammer, Engulfing, and Shooting Star can signal potential trend changes.
23. Continuation Patterns
Patterns such as Pennants, Flags, and Triangles often indicate that the trend will continue after a brief
consolidation.
24. Using Trendlines in Multiple Timeframes
Drawing trendlines on multiple timeframes helps confirm trend strength and filter out false signals.
Confluence between timeframes is key.
25. Elliott Wave Theory (Intro)
Elliott Wave Theory proposes that prices move in waves driven by investor psychology. It alternates between
impulsive and corrective waves.
26. Dow Theory Principles
Dow Theory is a foundational concept that defines trends, volume confirmation, and phases of market
movement.
27. Identifying Divergence
Technical Analysis Basics
Divergence occurs when price moves in the opposite direction of an indicator, often signaling a reversal.
28. Gaps and Gap Trading Strategies
Gaps are sudden price changes between sessions. Types include breakaway, runaway, and exhaustion
gaps. Traders use them for entries and exits.
29. Combining Technical and Fundamental Analysis
Many traders combine both techniques to validate trades. Technical analysis provides timing, while
fundamentals offer context.
30. Final Thoughts and Resources
Technical analysis is both an art and a science. Mastery comes from practice, study, and patience. Further
reading and tools are recommended for continued learning.
