Foundations of Technical Analysis

Technical analysis studies historical price and volume data to forecast future movements. Core principles: Price discounts everything (all info reflected in price), Price moves in trends (trends persist until reversal), History repeats (human behavior creates recurring patterns).

Works across all liquid markets: stocks, forex, crypto, commodities, and indices.

Chart Types and Timeframes

• Line charts: Simple closing price. Good for spotting trends.
• Candlestick charts: OHLC with colored bodies. Most popular.
• Heikin-Ashi: Modified candlesticks that smooth price action.

Timeframe

Best For

Signal Quality

1-5 min	Scalping/Day trading	Medium
15 min - 1H	Swing entry	High
4H - Daily	Position trading	Excellent
Weekly	Long-term	Excellent

Rule of thumb: Higher timeframes for trend, lower for entry timing.

Support and Resistance

• Support: Price level where buying overcomes selling (floor)
• Resistance: Where selling overcomes buying (ceiling)
• Role reversal: Broken support becomes resistance
• Strength: More touches = stronger level
• Zone, not line: S/R are ranges, not exact prices

Identification methods: Historical price levels, round numbers, moving averages, Fibonacci retracements, volume profile.

Essential Chart Patterns

Reversal Patterns

• Head and Shoulders: Three peaks (left shoulder, head, right shoulder). ~70% success rate.
• Double Top/Bottom: Two peaks/troughs at similar levels. Signals exhaustion.
• Inverse H&S: Bullish reversal. Breakout above neckline triggers target.

Continuation Patterns

• Flags/Pennants: Brief consolidation after strong move. Target = flag pole length.
• Triangles: Ascending (bullish), Descending (bearish), Symmetrical (neutral).
• Cup and Handle: U-shaped recovery + small pullback. Entry above handle resistance.

Key Technical Indicators

Momentum

• RSI (14): 0-100. Overbought >70, Oversold <30. Best signal: divergences.
• MACD: Line crosses signal line. Histogram divergence = powerful reversal.
• Stochastic: %K/%D crosses. Best in ranging markets.

Trend

• Moving Averages: 20 EMA (short), 50 SMA (medium), 200 SMA (institutional). Golden/Death Cross.
• Bollinger Bands: 20 SMA ± 2 SD. Squeeze = big move coming.

Volume

• OBV: Cumulative volume. Leading indicator (moves before price).
• VWAP: Institutional fair value benchmark.

Candlestick Patterns

Single: Doji (indecision), Hammer (bullish at support), Shooting Star (bearish at resistance)

Two-candle: Engulfing (reversal), Tweezer (reversal)

Three-candle: Morning/Evening Star (reversal), Three White Soldiers/Black Crows (strong trend)

Reliability tips: More reliable on higher timeframes. Always confirm with volume. Context matters (hammer at key support > random hammer).

Multi-Timeframe Analysis

The Three-Screen Approach:

• Higher timeframe: Overall trend direction
• Medium timeframe: Trade setup and pattern
• Lower timeframe: Entry timing and stop placement

Rules: Never trade against higher timeframe. Multiple timeframe confluence = high confidence.

Frequently Asked Questions