Technical Analysis Basics

Technical analysis is the study of historical price data — primarily price charts — to identify patterns, trends, and levels that may indicate future price direction. Unlike fundamental analysis, which focuses on the underlying economic or financial factors that drive an asset's value, technical analysis takes the view that all relevant information is already reflected in the price, and that patterns in price behaviour tend to repeat over time.

Technical analysis is used across asset classes — forex, equities, commodities, indices — and across timeframes, from tick charts to monthly charts.

The most common chart type in financial markets is the candlestick chart, in which each candle represents price action over a defined period (one hour, one day, one week, etc.).

Each candlestick shows four data points: the open price, the high, the low, and the close for that period. The body of the candle — the wide part — spans from open to close. The wicks (or shadows) extend to the high and low of the period.

A bullish (typically green or white) candle has a close higher than the open — buyers dominated during that period. A bearish (typically red or black) candle has a close lower than the open — sellers dominated.

The size and shape of individual candles, and their relationship to surrounding candles, form the basis of candlestick pattern analysis.

Markets do not move in straight lines, but they do exhibit directional tendencies over periods of time. Identifying the trend — the dominant direction of price movement — is one of the first steps in technical analysis.

An uptrend is characterised by a series of higher highs and higher lows. Price makes a new high, pulls back to a low that is higher than the previous low, then advances to a higher high again. Each successive swing low is above the previous one.

A downtrend is the mirror image: lower highs and lower lows. Each successive swing high is below the previous one.

A sideways trend (or ranging market) occurs when price oscillates between two relatively defined levels without making meaningful progress in either direction.

Trading in the direction of the trend — buying in uptrends, selling in downtrends — is a core principle of many technical approaches. The phrase "the trend is your friend" reflects this idea.

Support is a price level at which buying interest has previously been strong enough to halt a decline and cause a reversal higher. Resistance is a level at which selling pressure has previously stopped an advance and caused a reversal lower.

These levels are significant because they represent areas where many participants have historically made trading decisions. When price returns to a support or resistance level, the same dynamics — buying at support, selling at resistance — may reassert themselves.

A key principle is that broken support often becomes resistance, and broken resistance often becomes support. Once a level is decisively breached, its role tends to flip.

Technical indicators are mathematical calculations applied to price data that provide additional information about the market. They are secondary to price itself — useful for confirmation and context, not as standalone entry signals.

Moving Averages (MA): A moving average smooths price data over a specified period, filtering out short-term noise and highlighting the underlying trend direction. A 50-day moving average tracks the average close over the past 50 days. When price is above the moving average, the short-to-medium-term trend tends to be upward; below it, downward. The crossover of two moving averages (e.g. a 50-day crossing above a 200-day) is a common trend signal.

RSI (Relative Strength Index): The RSI is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Readings above 70 are conventionally considered overbought — the market has risen sharply and may be due for a pullback. Readings below 30 are considered oversold. RSI is most useful in ranging markets; in strong trends it can remain overbought or oversold for extended periods.

MACD (Moving Average Convergence Divergence): The MACD measures the relationship between two exponential moving averages and generates a signal line. When the MACD line crosses above the signal line, it is considered a bullish signal; below, bearish. The histogram plots the difference between the two and provides a visual representation of momentum.

Bollinger Bands: Two bands plotted at a standard deviation distance above and below a moving average. When bands narrow (low volatility), a significant price move may follow. Price touching or breaching the outer bands can indicate an overextended move.

Certain recurring price formations — chart patterns — have identifiable shapes and are associated with specific outcomes.

Head and shoulders: A three-peak pattern where the middle peak (the head) is higher than the two outer peaks (the shoulders). Considered a reversal pattern — after a sustained uptrend, it signals a potential trend change.

Double top / double bottom: Two peaks (or troughs) at approximately the same level, suggesting the market has twice failed to break through a significant level. Associated with potential trend reversal.

Triangles: Converging trendlines forming a triangle shape, indicating a consolidation period before a breakout in one direction.

Flags and pennants: Short continuation patterns within a strong trend — brief consolidations after a sharp move, after which the trend typically resumes.

Technical analysis is a probabilistic framework — patterns that have historically predicted certain outcomes will not do so every time. No technical system produces consistent results in isolation, and different analysts can look at the same chart and draw different conclusions.

Technical analysis is most effective when it is used alongside an awareness of the broader market context — the fundamental drivers, the economic calendar, and the overall sentiment environment.