Technical analysis is the study of historical price behavior to anticipate future movements. Its core premise: price reflects everything. All available information β fundamentals, expectations, order flow, sentiment β is already embedded in the quote. You only need to know how to read it.
Three foundational principlesβ
- History tends to repeat β Patterns recur because human behavior in markets is relatively constant across time.
- Price moves in trends β Prices don't move randomly; they form uptrends, downtrends, or ranges that tend to persist until something breaks them.
- Support and resistance β Price levels where buying (support) or selling (resistance) has historically concentrated.
Trend structureβ
A trend is defined by its sequence of highs and lows:
- HH (Higher High) + HL (Higher Low) = uptrend
- LL (Lower Low) + LH (Lower High) = downtrend
- When the sequence breaks (e.g. a downtrend creates a higher high), a potential reversal is signaled.
Chart patternsβ
Continuation patterns (trend continuation expected)β
| Pattern | Signal |
|---|
| Bull/bear flag | Brief consolidation before trend continues |
| Pennant | Converging lines after sharp move |
| Ascending/descending triangle | Breakout in direction of pressure |
| Rectangle / channel | Range before breakout in trend direction |
Reversal patterns (trend change expected)β
| Pattern | Signal |
|---|
| Head and shoulders | Bearish reversal at top |
| Inverse head and shoulders | Bullish reversal at bottom |
| Double top / double bottom | Rejection at the same level twice |
| Rising/falling wedge | Weakening momentum before reversal |
Candlestick patternsβ
| Candle | Meaning |
|---|
| Doji | Indecision β market balance between buyers and sellers |
| Hammer / Pin bar | Rejection of lower prices; potential bullish reversal |
| Shooting star | Rejection of higher prices; potential bearish reversal |
| Bullish engulfing | Strong buying overcomes previous selling |
| Bearish engulfing | Strong selling overcomes previous buying |
| Morning star | 3-candle bullish reversal at bottom |
| Evening star | 3-candle bearish reversal at top |
Technical indicatorsβ
Indicators are mathematical formulas applied to price (and sometimes volume) that help summarize information at a glance.
Trend indicatorsβ
| Indicator | What it shows | Common use |
|---|
| SMA / EMA | Smoothed price β identifies trend direction | 20/50/200 EMA as dynamic support/resistance |
| MACD | Convergence/divergence of two MAs β momentum shifts | Signal line crossovers, divergence with price |
| Parabolic SAR | Trailing stop-level dots β trend direction | Position management |
Momentum / oscillatorsβ
| Indicator | What it shows | Levels |
|---|
| RSI (14) | Overbought/oversold on 0β100 scale | >70 = overbought, <30 = oversold |
| Stochastic | Compares close to range over N periods | >80 = overbought, <20 = oversold |
| CCI | Price deviation from statistical average | Β±100 as extreme zones |
Volatility indicatorsβ
| Indicator | What it shows | Common use |
|---|
| Bollinger Bands | Volatility envelope around a moving average | Squeeze = low volatility before breakout |
| ATR | Average True Range β average pip move per candle | Stop loss sizing, position sizing |
| Keltner Channels | Volatility-based channel around EMA | Trend identification + breakout filter |
Volume indicatorsβ
| Indicator | What it shows |
|---|
| OBV (On-Balance Volume) | Cumulative buying/selling pressure |
| Volume Profile | Volume distribution by price level β identifies value areas |
| VWAP | Volume-Weighted Average Price β institutional benchmark |
Advanced conceptsβ
Smart Money Concepts (SMC)β
A framework for reading how large institutions position themselves before market moves:
| Concept | Definition |
|---|
| Order Block | The last opposing candle before a strong impulse move β often acts as future support/resistance |
| Fair Value Gap (FVG) | Price gap between three candles that tends to be revisited |
| Liquidity pool | Obvious accumulation of stop-loss orders above highs or below lows β institutions hunt these |
| Break of Structure (BOS) | Confirmation that a new trend direction has begun |
| Change of Character (ChoCH) | First signal of potential reversal β a structure break against the prevailing trend |
Market Profileβ
Statistical distribution of time spent at each price level. Identifies:
- Point of Control (POC) β price level with most time/volume
- Value Area (VA) β range containing 70% of the day's activity
- Price acceptance vs rejection zones
Order Flow analysisβ
Reading the live limit order book and executed trades to understand real-time buying/selling pressure:
- Footprint charts β volume traded at each price within each candle
- Delta β difference between buying volume and selling volume
- Imbalance β extreme one-sided pressure that often precedes continuation
Study resourcesβ
| Resource | Description |
|---|
| Investopedia β Technical Analysis | Complete overview of the discipline |
| TradingView | Industry-standard charting platform β free to use |
| Babypips β Technical Analysis | Beginner-friendly walkthrough of indicators and patterns |
| Technical Analysis of the Financial Markets β John Murphy | The canonical reference book in the field |
| Trading in the Zone β Mark Douglas | Bridges technical analysis with trading psychology |
Rayner Teo β 'Technical Analysis Masterclass' (41 min) β a comprehensive walkthrough of price action, trend trading, support/resistance, and chart patterns by one of the most-watched Forex educators.
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