Module 6: Basics of Technical Analysis

Module 6 – Ohio Markets Indices Beginner Course

6.1 What Is Technical Analysis?

Technical analysis is a method used by traders to study price behaviour in financial markets. In indices trading, this involves analysing the historical price charts of an index to identify potential trading opportunities.

The core principle behind technical analysis is that all relevant market information is already reflected in price. Instead of focusing on economic data or news events, traders examine price movement and trading volume to understand market behaviour.

Technical analysis aims to identify:

Trends and trend changes
Market momentum
Potential entry and exit points

By recognising repeating patterns and price structures, traders can estimate the likelihood of future price movements. While technical analysis does not predict outcomes with certainty, it helps traders make probability-based decisions.

One common criticism of technical analysis is its subjective nature. Different traders may interpret the same chart differently. However, with practice, discipline, and consistent use of tools, traders can improve their accuracy and confidence. Studying how experienced traders apply technical analysis can also accelerate learning.

Traders who base their decisions primarily on price charts and indicators are known as technical traders.

6.2 Candlestick Charts

Technical analysis is performed using price charts, with candlestick charts being the most widely used format.

Candlestick charts visually display four key price points for a given period:

Open
High
Low
Close

Each candlestick provides insight into market sentiment during that period. By studying individual candlesticks and candlestick patterns, traders can identify:

Potential trend reversals
Market indecision
Continuation signals

Candlestick charts are especially powerful when combined with other tools such as trendlines, support and resistance levels, and moving averages.

For a deeper refresher, revisit Module 4: Essentials of Chart Reading.

6.3 Trendlines

Trendlines are simple yet effective tools used to visualise market direction. They help traders identify whether an index is in:

An uptrend
A downtrend
A sideways (ranging) market

Trendlines are drawn by connecting key highs or lows on a price chart. Once established, they can help traders estimate where price may react in the future.

Since technical analysis is based on historical behaviour, trendlines drawn on past price action can provide insight into how a similar trend might develop again.

Generally, trendlines drawn across longer timeframes tend to be more reliable than those on shorter intervals.

6.4 Support and Resistance

Support and resistance are key price levels where markets tend to pause, reverse, or accelerate.

Support represents a price level where buying interest is strong enough to prevent further decline.
Resistance represents a price level where selling pressure limits further price increases.

Prices often move within these boundaries until enough momentum builds to break through them.

Market conditions can cause these levels to switch roles:

In a bullish market, when price breaks above resistance and holds, that level may become new support.
In a bearish market, when price breaks below support and fails to recover, that level may turn into resistance.

Identifying support and resistance helps traders manage risk, plan entries, and set exit targets more effectively.

6.5 Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum indicator that measures the speed and magnitude of price changes.

RSI values range from:

0 to 100
Below 30: market may be oversold
Above 70: market may be overbought

RSI is commonly used to identify potential reversal zones. However, during strong trends or volatile conditions, RSI signals can remain extreme for extended periods.

For this reason, RSI should be used as a confirmation tool, not a standalone signal. Traders often combine RSI with trend analysis or support and resistance levels for better accuracy.

6.6 Moving Averages

A moving average smooths price data to reduce short-term noise and highlight the underlying trend. It is a lagging indicator, meaning it relies on past price information.

The most widely used moving averages include:

50-period moving average
200-period moving average

Moving averages can help:

Identify trend direction
Act as dynamic support or resistance levels
Spot potential trend reversals

A common strategy involves using two moving averages:

When the shorter moving average crosses above the longer one, it may signal a bullish trend.
When it crosses below, it may indicate a bearish trend.

There are two main types:

Simple Moving Average (SMA): Equal weight to all prices
Exponential Moving Average (EMA): Greater emphasis on recent prices

6.7 Fundamental Analysis vs Technical Analysis

Fundamental and technical analysis approach markets from different angles.

Fundamental analysis focuses on economic data, policy decisions, and global events.
Technical analysis focuses on price patterns, indicators, and chart behaviour.

Rather than choosing one over the other, many traders use both together.

For example, a trader may identify a potential opportunity based on a major economic event, then use technical indicators to confirm timing and risk levels. If technical signals conflict, the trader may reconsider or adjust their strategy.

For beginner traders at Ohio Markets, learning both methods provides a stronger foundation and greater flexibility when navigating market conditions.