Understanding Technical Analysis
What is Technical Analysis?
Technical analysis is the study of market action through the use of charts and indicators to forecast future price movements. This approach focuses on price patterns, trading volume, and momentum, based on the premise that historical price action can indicate future market behavior.
Chart Types
Common Charts
- Line Chart: Simple price movement over time
- Bar Chart: Shows open, high, low, close
- Candlestick Chart: Japanese style price visualization
- Point & Figure: Focus on price changes, ignores time
- Renko: Shows price changes of specific size
Candlestick Patterns
Bullish Patterns
- Hammer
- Morning Star
- Bullish Engulfing
- Piercing Line
Bearish Patterns
- Shooting Star
- Evening Star
- Bearish Engulfing
- Dark Cloud Cover
Price Action
Trend Analysis
- Uptrend: Higher highs and higher lows
- Downtrend: Lower highs and lower lows
- Sideways: No clear direction
- Trend Lines: Connect significant highs or lows
- Channels: Parallel lines showing price range
Support & Resistance
- Support: Price level where buying emerges
- Resistance: Price level where selling occurs
- Breakouts: Price moving through levels
- Breakdowns: Price falling through support
- Role Reversal: Support becoming resistance
Chart Patterns
Continuation Patterns
- Flags: Brief pauses in trend
- Pennants: Triangle-shaped consolidation
- Triangles: Symmetrical, ascending, descending
- Rectangles: Trading ranges
- Wedges: Rising or falling
Reversal Patterns
- Head and Shoulders: Top or bottom
- Double Top/Bottom: M or W patterns
- Triple Top/Bottom: Three peaks or valleys
- Rounding Bottom: Bowl-shaped reversal
- Diamond Top/Bottom: Complex reversal pattern
Technical Indicators
Trend Indicators
- Moving Averages: Simple, exponential, weighted
- MACD: Moving Average Convergence Divergence
- ADX: Average Directional Index
- Parabolic SAR: Stop and Reverse
- Ichimoku Cloud: Multiple component indicator
Momentum Indicators
- RSI: Relative Strength Index
- Stochastic: Fast and slow
- CCI: Commodity Channel Index
- Williams %R: Momentum and overbought/oversold
- MFI: Money Flow Index
Volume Indicators
- Volume: Basic trading activity
- OBV: On Balance Volume
- Volume Profile: Price levels with highest volume
- Chaikin Money Flow: Volume pressure
- VWAP: Volume Weighted Average Price
Trading Concepts
Price Analysis
- Gap Analysis: Price jumps between sessions
- Fibonacci Retracements: Key pullback levels
- Pivot Points: Daily support/resistance levels
- Elliot Wave: Wave pattern theory
- Market Profile: Time/price opportunity
Risk Management
- Stop-loss placement
- Position sizing
- Entry/exit rules
- Risk/reward ratios
- Portfolio correlation
Practical Application
Analysis Process
- Identify overall trend
- Spot key support/resistance
- Look for patterns
- Confirm with indicators
- Plan trade execution
Common Mistakes
- Over-analyzing (paralysis by analysis)
- Using too many indicators
- Ignoring the trend
- Moving stops too quickly
- Not following trading plan
Time Frames
Multiple Time Frame Analysis
- Long-term: Monthly, weekly charts
- Intermediate: Daily charts
- Short-term: Hourly charts
- Intraday: Minutes, ticks
- Time frame alignment: Confirming signals
Advanced Concepts
Market Internals
- Breadth Indicators: Advance/decline
- Sentiment: VIX, put/call ratio
- Tick: Market momentum
- TRIN: Arms Index
- New highs/lows: Market strength
Additional Tools
- Market correlation
- Sector rotation
- Intermarket analysis
- Cycle analysis
- Volatility studies
Resources
- Charting platforms
- Technical analysis books
- Online courses
- Trading communities
- Market data providers