Technical Analysis Explained

Technical analysis means studying historical price movements on a visual chart and using this information to make trading decisions.

Traders who implement this approach are called technical analysts or technicians.

For a trader to remain objective, it is crucial to use technical analysis tools and develop a methodical approach to trade entry and analysis.

Technical Analysis Tools

1. Support and resistance

Horizontal price zones where market inflections often occur due to a shift in supply and demand. Usually, the market will respect these levels when tested in the future.

In theory, buying should occur at support zones and selling at resistance zones.

Support and resistance example

(Source – MetaTrader

2. Trendlines

Think of a trendline as a diagonal version of support or resistance. Ascending trendlines are bullish, while descending trendlines are bearish.

Trendline example

(Source – MetaTrader)

3. Candlestick charts

Candlesticks are a price chart that shows the high, low, open, and closing prices for a specified period. The candlestick’s body is determined by the difference between the open and close, and the wicks represent the high and low, respectively.

When the close is above the open, the candle is usually bullish. If the close is below the open, then the candle is generally bearish.

Candlesticks are the best tool when it comes to confirmation and timing trade entries.

Candlestick example

4. Patterns

Price movements often form visual patterns e.g. the head and shoulders indicate a likely market reversal. In contrast, flag patterns indicate possible continuation.

Patterns example – Head and shoulders 

(Source – TradingView)

5. Indicators

Technical indicators are derived from real market data and can provide valuable insights such as the current market environment and overbought or oversold signals.

Indicator example – Bollinger bands

(Source – MetaTrader

How to use technical analysis

  1. Analyze the chart and determine your directional bias i.e. do you believe the market will trend or remain range-bound?
  2. Enter a trade once there is sufficient evidence the market should move along with your bias. Using the methods above, you can develop a checklist of what conditions must be met before entering a position.

Does technical analysis work?

Yes, because market participants see the same picture on the chart, they will usually respond with the appropriate buying or selling.

As long as you trade in the same direction as the big money, you will be profitable.

Remember, as traders, we can never guarantee what will occur, but technical analysis puts the probabilities in your favor.

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Conclusion

If you ever doubt this approach, remember – The sum of all market participant’s thoughts and actions is reflected in price.

Make sure you trade on a platform with technical analysis tools built in, such as MetaTrader, TradingView, or Plus500

It’s all in the chart.

Technical analysis FAQ

Involves studying historical price movements on a visual chart and using this information to make trading decisions.

Use technical analysis tools such as support and resistance, trendlines, patterns, candlesticks, and indicators.

Yes, the actions of all market participants are reflected in price, which is ordered into tradable patterns through technical analysis. The key is to have a set of objective rules to enter and exit trades.

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Guy Seynaeve

Guy Seynaeve

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