Technical Analysis Basics for Investors on the Warsaw Stock Exchange

What Is Technical Analysis?

Technical analysis (TA) is a method of evaluating financial instruments based on historical data — primarily price and trading volume. Unlike fundamental analysis, which examines a company's financial health, TA focuses solely on what the chart is telling you. Its core premise is: price discounts everything — all information about a company, the economy, and investor sentiment is already reflected in the current price.

Technical analysis rests on three key assumptions:

1. Price discounts everything — the market processes all available information and reflects it in prices.
2. Prices move in trends — once a trend begins, it tends to continue until clear reversal signals appear.
3. History repeats itself — investor behaviour patterns recur, producing repeatable chart formations.

On the GPW (Giełda Papierów Wartościowych — Warsaw Stock Exchange), technical analysis is widely used by both individual and institutional investors. Whether you trade WIG20 blue chips or smaller sWIG80 companies, familiarity with TA gives you an edge in timing your decisions.

Types of Charts

Line Chart

The simplest type — it connects closing prices with a continuous line. Good for spotting the overall trend, but it loses much of the intra-day detail.

Bar Chart (OHLC)

Each bar shows four data points: Open, High, Low, and Close. A horizontal tick on the left marks the opening price; one on the right marks the close.

Candlestick Chart

The most popular chart type among traders. Like OHLC it displays four prices, but in a more intuitive form. The body (rectangle) represents the range between open and close. A green or white candle means the close was higher than the open (bullish); a red or black candle indicates a decline. Shadows (wicks) above and below the body show the session's extremes.

Candlestick charts originated in 18th-century Japan, where rice traders used them to analyse prices. Today they are the standard on every brokerage platform available in Poland — from xStation (XTB) to eMakler (mBank).

Trend — the Foundation of Technical Analysis

Recognising trends is the most important skill for a technical analyst.

Uptrend (Bull)

Characterised by a series of higher lows and higher highs. Each successive price trough is above the previous one, and each peak surpasses its predecessor. An uptrend line connects the successive lows and acts as a support line.

Downtrend (Bear)

A series of lower highs and lower lows. The downtrend line connects the successive peaks and serves as a resistance line.

Sideways Trend (Consolidation)

The price moves within a defined range with no clear direction. This often precedes a strong breakout in one direction.

Drawing Trend Lines

A trend line should connect at least two (preferably three) turning points. The more points that lie on the line and the longer the trend persists, the stronger the line. A break of the trend line is a potential signal that the direction is changing.

Support and Resistance

Support

A price level at which demand is strong enough to halt a decline. As the price approaches support, buyers step in actively. On the GPW, common supports are round numbers (e.g. PLN 100, PLN 50) and historic lows.

Resistance

A price level at which supply outweighs demand, halting an advance. Sellers take profits or open short positions.

Role Reversal

Broken support often becomes new resistance, and vice versa. This is one of the most important TA principles — re-testing broken levels is a frequent occurrence on the GPW.

Key Technical Indicators

Moving Averages

A moving average smooths price data and helps identify trends.

• SMA (Simple Moving Average) — a straightforward average of the last N sessions. The most popular periods are SMA 50 (medium-term trend) and SMA 200 (long-term trend).
• EMA (Exponential Moving Average) — assigns greater weight to recent data, reacting more quickly to price changes.

Signals:

• Golden Cross — SMA 50 crosses above SMA 200 → buy signal
• Death Cross — SMA 50 crosses below SMA 200 → sell signal

RSI (Relative Strength Index)

An oscillator measuring the speed and magnitude of price changes, ranging from 0 to 100.

• RSI > 70 → overbought zone (potential sell signal)
• RSI < 30 → oversold zone (potential buy signal)

RSI is one of the most widely used indicators on the GPW. However, it should never be the sole reason for opening a position — it works best in combination with other tools.

MACD (Moving Average Convergence Divergence)

MACD consists of two lines:

• MACD line = EMA 12 − EMA 26
• Signal line = EMA 9 of the MACD line

Signals:

• MACD crosses above the signal line → buy
• MACD crosses below the signal line → sell

Volume

Volume is the number of shares that changed hands during a given period. It confirms the strength of a price move:

• Rising price on increasing volume → strong uptrend
• Rising price on declining volume → weakening trend, potential reversal
• Falling price on increasing volume → strong selling pressure

On the GPW, volume is particularly important when analysing smaller sWIG80 companies, where low liquidity can lead to sudden price swings.

Bollinger Bands

Three lines:

• Middle: SMA 20
• Upper: SMA 20 + 2 standard deviations
• Lower: SMA 20 − 2 standard deviations

The bands widen during periods of high volatility and narrow during consolidation. Price near the upper band suggests overbought conditions; near the lower band, oversold. A squeeze (narrowing bands) often precedes a strong move.

Price Patterns

Reversal Patterns

Head and Shoulders: One of the most reliable formations. It consists of three peaks — the middle one (head) is the highest, and the two outer ones (shoulders) are lower and roughly equal. A neckline connects the troughs between the shoulders. A break below the neckline is a sell signal.

Double Top: The price tests the same resistance level twice and falls each time. Shaped like the letter M. A break below the support between the two peaks confirms the pattern.

Double Bottom: The inverse — shaped like a W. The price tests support twice and bounces up. A break above the resistance between the troughs is a buy signal.

Continuation Patterns

Triangle:

• Ascending triangle — flat resistance, rising support → usually breaks upward
• Descending triangle — flat support, falling resistance → usually breaks downward
• Symmetrical triangle — converging trend lines → breakout direction uncertain

Flag and Pennant: Short consolidation patterns after a strong move. A flag is a parallel channel counter to the trend. A pennant is a small symmetrical triangle. Both suggest continuation of the prior move.

Practical Application of TA on the GPW

Building a Trading System

Effective technical analysis requires a systematic approach:

1. Identify the trend — use moving averages and trend lines on a daily chart
2. Find support and resistance — identify key price levels
3. Seek confirmation — use 2–3 indicators (e.g. RSI + MACD + volume)
4. Set an entry point — a specific price at which you buy
5. Set a stop loss — the level at which you accept a loss (e.g. 5–8 percent below your buy price)
6. Set a profit target — the price at which you plan to sell

Time Frames

The most commonly used intervals on the GPW:

• Weekly chart — long-term trend analysis
• Daily chart — the standard interval for medium-term investors
• Hourly / 15-minute chart — for active traders

Rule of thumb: analyse the trend on a higher time frame and look for entry signals on a lower one.

Example Analysis of a GPW Stock

Suppose you are analysing a WIG20 constituent:

1. On the weekly chart the price is above SMA 200 — long-term uptrend
2. On the daily chart RSI has dropped to 35, approaching the oversold zone
3. The price has reached a strong support level (former resistance that was broken)
4. MACD shows bullish divergence (price makes a lower low, MACD makes a higher low)
5. Volume on recent down sessions is declining

Conclusion: The convergence of several signals suggests a potential buying opportunity, with a stop loss set below support.

Limitations of Technical Analysis

TA is not a crystal ball. Key limitations:

• Subjectivity — two analysts can read the same chart differently
• False signals — no indicator is 100 percent accurate
• Self-fulfilling prophecy — popular levels may work because many traders react to them
• Ineffectiveness in extreme conditions — during crashes or euphoria, TA often fails
• Low liquidity on the GPW — smaller companies have thin order books, making TA harder to apply

Combining TA with Other Methods

The most successful investors combine technical and fundamental analysis. TA helps with timing; fundamental analysis helps with stock selection. It is also worth monitoring your personal finances — tools like Freenance help track your investment budget and assess how much capital you can allocate to riskier strategies.

Summary

Technical analysis is a powerful tool, but it requires study and practice. Start with the basics:

1. Learn to read candlestick charts
2. Master drawing trend lines and identifying support and resistance
3. Begin with 2–3 indicators (RSI, moving averages, volume)
4. Practise on historical data (backtesting) before risking real money
5. Keep a trading journal and analyse your mistakes

Remember: no indicator guarantees profit. The key is risk management and consistent application of your system. Good luck charting on the GPW!