Technical Analysis — What It Is and How It Works
What is technical analysis, what are its foundations and the most important tools. A guide to TA for beginning investors.
What is technical analysis?
Technical analysis (TA) is a method of evaluating financial instruments based on market data — mainly price and volume. A technical analyst doesn't study the company's financial condition (that's the domain of fundamental analysis), but looks for patterns on charts that may indicate future price movements.
Basic assumptions of TA:
- Price discounts everything — all information is already reflected in the price
- Prices move in trends — trends tend to continue
- History repeats — price patterns repeat because investor psychology doesn't change
Basic tools
Charts
- Line — simplest, connects closing prices
- Bar (OHLC) — shows open, high, low and close
- Candlestick — most popular, visually clear. Green/white candle = rise, red/black = decline
Support and resistance
- Support — price level below which price has difficulty falling (demand)
- Resistance — level above which price has difficulty rising (supply)
Breaking support/resistance often leads to dynamic movement in the direction of the break.
Trend lines
Connecting successive bottoms (uptrend) or tops (downtrend). Breaking a trend line → potential direction change.
Technical indicators
Most important:
- RSI — measures overbought/oversold
- MACD — identifies trend changes
- Moving averages (SMA/EMA) — smooth price and show trend
- Bollinger Bands — measure volatility
- Volume — confirms strength of price movements
Price formations
Reversal formations
- Head and shoulders — signal of uptrend end
- Double top / double bottom — reversal signal
Continuation formations
- Triangle (symmetrical, ascending, descending) — consolidation before continuation
- Flag and pennant — short pause in trend
TA vs fundamental analysis
You don't have to choose — many investors combine both methods. Fundamental analysis tells you what to buy, technical analysis — when.
TA limitations
- Doesn't work 100% of the time — it's a probabilistic tool
- Self-fulfilling prophecy — if everyone looks at the same levels, the reaction is "forced"
- Requires experience in interpretation
How Freenance can help
Freenance gives you a complete portfolio picture, so technical analysis of individual positions has context. You see allocation, results and dependencies — it's a better base for decisions than analyzing one chart in isolation.
Want full control over your finances?
Try Freenance for free