Technical Analysis — What it is and How it Works
What is technical analysis, what are its foundations and most important tools. Technical analysis guide for beginner investors.
What is technical analysis?
Technical analysis (TA) is a method of evaluating financial instruments based on market data — primarily price and volume. A technical analyst doesn't study a company's financial condition (that's fundamental analysis domain), but looks for patterns on charts that might indicate future price movements.
Basic TA assumptions:
- Price discounts everything — all information is already reflected in price
- Prices move in trends — trends tend to continue
- History repeats — price patterns repeat because investor psychology doesn't change
Basic tools
Charts
- Line chart — simplest, connects closing prices
- Bar chart (OHLC) — shows open, high, low and close
- Candlestick chart — most popular, visually clear. Green/white candle = rise, red/black = fall
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 consecutive lows (uptrend) or highs (downtrend). Breaking the trend line → potential direction change.
Technical indicators
Most important:
- RSI — measures overbought/oversold conditions
- 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 watches same levels, reaction is "forced"
- Requires experience in interpretation
How Freenance can help
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