Technical Analysis
The study of price action using charts and indicators to identify patterns and make predictions.
Core principle: Price discounts everything. All information — past, present, future — is reflected in price.
Foundations of Technical Analysis
1. Price Discounts Everything
Every factor (fundamentals, sentiment, news) is reflected in price.
Implication: You don’t need to know why. You only need to read what’s happening.
2. Price Moves in Trends
Price doesn’t move randomly. It trends.
- Uptrend: Higher highs, higher lows
- Downtrend: Lower highs, lower lows
- Range: Bounded movement
3. History Repeats
Markets have patterns. Humans (with emotions) drive markets. Patterns repeat.
Implication: Past patterns = future potential.
Core Technical Concepts
Support and Resistance
| Concept | Description |
|---|---|
| Support | Price level where buying exceeds selling |
| Resistance | Price level where selling exceeds buying |
Key: Levels get weaker with each touch.
Trends
| Trend | Structure | Confirmation |
|---|---|---|
| Uptrend | HH, HL | Higher highs |
| Downtrend | LH, LL | Lower lows |
Candlesticks
| Pattern | Implication |
|---|---|
| Large bullish body | Strong buying |
| Large bearish body | Strong selling |
| Small body | Indecision |
| Long wick | Rejection |
Technical Analysis Tools
Indicators
| Type | Purpose | Examples |
|---|---|---|
| Trend | Direction | SMA, EMA, Ichimoku |
| Momentum | Speed | RSI, MACD, Stochastic |
| Volatility | Range | ATR, Bollinger Bands |
| Volume | Activity | Volume, OBV |
Chart Patterns
| Category | Examples |
|---|---|
| Reversal | Head & shoulders, double top/bottom |
| Continuation | Flags, triangles |
| Breakout | Wedge, channel |
Technical Analysis Methods
Method 1: Price Action Only
Read raw price without indicators.
- Swing highs/lows
- Support/resistance
- Candlestick patterns
- Trend lines
Pros: No lag, pure reading
Cons: Subjective
Method 2: Indicator-Based
Use indicators for signals.
- MA crossovers
- RSI extremes
- MACD divergences
Pros: Objective rules
Cons: Lagging
Method 3: Multi-Factor
Combine multiple methods.
- Price action + indicators
- Structure + patterns
Pros: Higher confidence
Cons: Analysis paralysis
How to Apply Technical Analysis
Step 1: Identify Trend
1. Check daily chart
2. Is price above or below 50 SMA?
3. Is structure HH/HL or LH/LL?
4. Direction confirmed
Step 2: Find Key Levels
1. Mark recent swing highs
2. Mark recent swing lows
3. Mark horizontal levels
4. Note pivot points
Step 3: Identify Setup
1. Pullback to support → Long
2. Breakout resistance → Breakout
3. Support test → Bounce
Step 4: Confirm with Indicators
1. RSI > 50 (for longs)
2. Volume confirming
3. MACD crossover
Common Mistakes
1. No Trend Identification
Mistake: Trading without knowing trend direction.
Result: Fighting the market.
Fix: Always check trend first.
2. Ignoring Key Levels
Mistake: Entering without marking levels.
Result: Entering at bad prices.
Fix: Always mark S/R.
3. Overcomplicating
Mistake: 10+ indicators.
Result: Conflicting signals.
Fix: 2-3 max.
4. Fighting the Trend
Mistake: Buying in downtrend.
Result: Accumulating losses.
Fix: Trade with trend.
Key Takeaways
- Price discounts everything — Just read price
- Trends exist — Trade with them
- Key levels matter — Mark them
- Indicators lag — Use as confirmation
- Keep it simple — Less is more
Related
price-action.md >>>
indicators.md >>>
Read price. Follow the trend.