What is Technical Analysis?
Technical analysis is the study of historical price and volume data to forecast future price movements. Unlike fundamental analysis, which evaluates a company's intrinsic value through financial statements and business metrics, technical analysis operates on the principle that all available information is already reflected in the price — and that price movements follow identifiable, repeating patterns.
Technical analysis was pioneered by Charles Dow in the late 1800s and formalised through the work of analysts like Ralph Nelson Elliott, Richard Wyckoff, and J. Welles Wilder (creator of RSI). Today, it is the primary decision-making framework for millions of traders globally across stocks, crypto, forex, and commodities.
Support and Resistance: The Foundation of Chart Reading
Support is a price level where buying interest is strong enough to prevent further decline. Think of it as a floor — when price approaches this level, buyers historically step in. Resistance is the opposite — a ceiling where selling pressure historically emerges. Understanding where key support and resistance levels are is the most fundamental chart reading skill.
Support and resistance levels are created by: previous swing highs and lows, round numbers (psychological levels), moving averages (dynamic support/resistance), and high-volume price zones where significant institutional activity occurred.
Moving Averages: Trend Identification Made Simple
Moving averages smooth out price noise to reveal the underlying trend direction. The two most important are:
- 50-Day Moving Average (50 DMA): The medium-term trend indicator. When price is above the 50 DMA, the medium-term trend is bullish. When price is below, it is bearish. The 50 DMA is closely watched by institutional traders for swing trade entries.
- 200-Day Moving Average (200 DMA): The long-term trend indicator. Price above 200 DMA = bull market. Price below = bear market. The "Golden Cross" (50 DMA crossing above 200 DMA) is one of the most bullish long-term signals in technical analysis.
MACD: Confirming RSI Signals
The Moving Average Convergence Divergence (MACD) indicator measures the relationship between two exponential moving averages (typically 12-period and 26-period EMA). The MACD line crosses above the signal line (a 9-period EMA of MACD) when bullish momentum is building — this is a buy signal. When MACD crosses below the signal line, it generates a sell signal.
The most powerful technical setups occur when RSI and MACD align: an RSI oversold bounce confirmed by a MACD bullish crossover on high volume gives the highest-probability long entry signal in technical analysis.
Key Candlestick Patterns Every Trader Should Know
| Pattern | Type | Reliability | What it Signals |
|---|---|---|---|
| Hammer | Bullish Reversal | High | Buyers rejected a sharp intraday decline |
| Shooting Star | Bearish Reversal | High | Sellers rejected a sharp intraday rally |
| Bullish Engulfing | Bullish Reversal | Very High | Bulls completely overwhelmed bears |
| Bearish Engulfing | Bearish Reversal | Very High | Bears completely overwhelmed bulls |
| Doji | Indecision | Moderate | Buyers and sellers in equilibrium — watch for breakout |