Learn the Basics of Technical Analysis
Module 5 – Stock & Forex Trading Basics
Technical analysis is a popular approach traders use to understand market behaviour by studying price charts, patterns, and indicators. Instead of focusing on company financials or news, it assumes that all available market information is already reflected in the price.
By analysing historical price movements and trading volume, traders aim to anticipate future price direction, momentum, and potential trading opportunities.
6.1 What Is Technical Analysis?
Technical analysis is a method of analysing financial markets by examining price action and trading volume using charts and indicators.
The core belief behind technical analysis is:
Price reflects everything.
This means that economic data, company news, market sentiment, and global events are already priced into the market. Therefore, by studying how prices move, traders can gain insight into market psychology, trends, and momentum.
Technical analysis focuses on:
Identifying trends
Recognising price patterns
Timing trade entries and exits
One common criticism of technical analysis is its subjectivity. Two traders may analyse the same chart and reach different conclusions. This usually happens due to:
Different tools being used
Different timeframes
Individual interpretation
However, with practice, consistency, and experience, traders can significantly improve their accuracy. Studying how experienced traders interpret charts can also help speed up the learning curve.
Traders who primarily rely on charts and indicators are known as technical traders.
6.2 Candlestick Charts
Technical analysis is performed on price charts, and the candlestick chart is the most widely used format.
Candlestick charts display four key price points for each time period:
Open
High
Low
Close
Each candlestick visually summarises what happened during a trading period (minutes, hours, days, or weeks).
By studying:
Individual candlesticks
Groups of candlesticks
Repeating patterns
Traders can identify:
Trend direction
Market strength
Potential reversals
Candlestick charts also work extremely well with other technical tools such as:
Trendlines
Support and resistance
Moving averages
Tip: Refer back to Module 4: Essentials of Chart Reading for a refresher on candlestick anatomy and patterns.
6.3 Trendlines
Trendlines are simple yet powerful tools used to visualise the direction of price movement.
A trendline is drawn by connecting:
Higher lows during an uptrend
Lower highs during a downtrend
Markets generally move in three phases:
Uptrend – prices rise
Downtrend – prices fall
Sideways (range) – prices consolidate
Trendlines help traders:
Identify existing trends
Estimate future support or resistance
Anticipate potential breakouts or reversals
Trendlines are flexible — traders choose where to draw them based on visible price structure. The longer the timeframe used, the more reliable the trendline tends to be.
6.4 Support and Resistance
Support and resistance are key price levels where the market tends to pause, reverse, or react strongly.
Support: A price level where buying interest prevents further decline
Resistance: A price level where selling pressure limits further rise
Markets often move between these levels for extended periods.
Role Reversal
Support and resistance can switch roles:
In a bullish market, price may break above resistance — that level can become new support
In a bearish market, price may fall below support — that level can become new resistance
Identifying these levels helps traders:
Manage risk
Set stop-loss and take-profit points
Avoid emotional decision-making
6.5 Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator that measures whether a market is overbought or oversold.
RSI ranges from 0 to 100:
Above 70 → Overbought
Below 30 → Oversold
RSI is commonly used to:
Spot potential reversals
Identify weakening momentum
However, RSI should never be used alone, especially in volatile markets where it can remain overbought or oversold for extended periods.
Best practice: Use RSI as a confirmation tool, not a standalone signal.
6.6 Moving Averages
A moving average smooths price data to help traders identify trend direction and reduce market noise.
It is a lagging indicator, meaning it reacts after price has moved.
The most commonly used moving averages are:
50-period moving average
200-period moving average
Moving averages help traders:
Identify trends
Locate dynamic support and resistance
Confirm trend strength
Moving Average Crossovers
Using two moving averages together can signal trend changes:
50 MA crossing above 200 MA → Bullish signal
50 MA crossing below 200 MA → Bearish signal
Types of Moving Averages
Simple Moving Average (SMA): Equal weight to all prices
Exponential Moving Average (EMA): More weight to recent prices
EMA reacts faster to price changes and is preferred by short-term traders.
6.7 Fundamental Analysis vs Technical Analysis
Fundamental and technical analysis take very different approaches:
| Fundamental Analysis | Technical Analysis |
|---|---|
| Focuses on economic data, company performance, and news | Focuses on price charts and indicators |
| Answers what to trade | Answers when to trade |
| Long-term valuation based | Short- to medium-term timing |
Rather than choosing one over the other, many traders combine both.
Example:
A trader believes an upcoming political or economic event may strengthen a currency or stock (fundamental view).
They then use technical analysis to:
Confirm trend direction
Identify entry points
Manage risk
If technical signals contradict the fundamental idea, the trader may delay, adjust, or hedge the trade.
For beginners, learning both approaches provides a stronger foundation and better decision-making ability.
Module Recap
Technical analysis studies price action and volume
Candlestick charts are the most commonly used chart type
Trendlines help visualise market direction
Support and resistance highlight key price levels
RSI indicates overbought and oversold conditions
Moving averages smooth price and identify trends
SMA and EMA differ in responsiveness
Combining technical and fundamental analysis can improve trading decisions