Technical Analysis Fundamentals

Technical Analysis Fundamentals

What is Technical Analysis?

Technical analysis studies historical price and volume data to predict future price movements. Unlike fundamental analysis (company financials), technical analysis focuses purely on charts and patterns.

Core Principles

1. Price Discounts Everything: All information is reflected in price
2. Prices Move in Trends: Trends persist until reversal signals
3. History Repeats: Patterns recur due to human psychology

Chart Types

1. Line Charts

• Simple price over time
• Good for big picture
• Lacks detail

2. Candlestick Charts (Most Popular)

• Shows open, high, low, close
• Visual pattern recognition
• Japanese origin

Bullish Candle: Close > Open (usually green)

Bearish Candle: Close < Open (usually red)

3. Bar Charts

• Similar info to candlesticks
• Less visual appeal

Key Indicators

Moving Averages

• SMA: Simple Moving Average
• EMA: Exponential (gives more weight to recent prices)

Common Periods:

• 20-day: Short-term trend
• 50-day: Intermediate trend
• 200-day: Long-term trend

Golden Cross: 50-day crosses above 200-day (bullish)

Death Cross: 50-day crosses below 200-day (bearish)

RSI (Relative Strength Index)

• Ranges 0-100
• Above 70: Overbought
• Below 30: Oversold

MACD (Moving Average Convergence Divergence)

• Shows momentum and trend
• MACD line crosses signal line: Trading signal
• Histogram shows strength

Bollinger Bands

• Shows volatility
• Price touching upper band: Resistance
• Price touching lower band: Support
• Squeeze: Low volatility, breakout coming

Chart Patterns

Continuation Patterns

1. Flags/Pennants: Brief consolidation in trend
2. Triangles: Symmetrical, ascending, descending

Reversal Patterns

1. Head and Shoulders: Bearish reversal
2. Inverse H&S: Bullish reversal
3. Double Top/Bottom: Reversal confirmation

Support and Resistance

Support: Price level where buying pressure prevents further decline

Resistance: Price level where selling pressure prevents further rise

When support breaks: Often becomes resistance

When resistance breaks: Often becomes support

Volume Analysis

Volume confirms trends:

• Rising prices + Rising volume: Strong uptrend
• Rising prices + Falling volume: Weak uptrend
• Breaking resistance + High volume: Valid breakout

Trading Strategies

1. Trend Following

• Buy when price above moving averages
• Sell when price below moving averages
• Stay with trend until reversal

2. Support/Resistance

• Buy at support levels
• Sell at resistance levels
• Use stop losses

3. Breakout Trading

• Watch for range-bound stocks
• Enter on breakout with volume
• Set stops below breakout point

Risk Management

1. Stop Losses: Always use them
2. Position Sizing: Don't risk >2% per trade
3. Risk/Reward Ratio: Target 2:1 or better
4. Don't Trade Against Trend: Trend is your friend

Limitations

• Doesn't consider fundamentals
• Self-fulfilling prophecy concerns
• Many false signals
• Requires discipline and experience

Best Practices

1. Combine multiple indicators
2. Consider fundamental backdrop
3. Practice with paper trading
4. Keep trading journal
5. Be patient and disciplined

Technical analysis is a skill developed over time. Start simple and build complexity gradually.