Introduction to Technical Analysis

Technical analysis studies price patterns and market behavior to forecast future price movements. While fundamental analysis asks "What is this worth?", technical analysis asks "Where is the price going?" [DEFINITION] Technical Analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume, typically using charts. ### The Core Principles Technical analysis is built on three assumptions: **1. The Market Discounts Everything** All known information—fundamentals, news, expectations—is already reflected in the price. You don't need to analyze earnings; the price already incorporates them. **2. Prices Move in Trends** Once a trend is established, it's more likely to continue than reverse. Trends persist until something changes them. **3. History Tends to Repeat** Human psychology doesn't change. The same patterns of fear, greed, and crowd behavior repeat across decades, creating recognizable chart patterns. [TIP] You don't need to "believe" in technical analysis philosophically. Many traders find it useful simply because enough people use it—creating self-fulfilling prophecies. ### Technical vs. Fundamental Analysis | Aspect | Technical | Fundamental | |--------|-----------|-------------| | Inputs | Price, volume | Financial statements | | Time horizon | Short to medium | Long term | | Goal | Predict price movement | Find intrinsic value | | Key question | When to buy/sell? | What to buy? | [KEY] Many successful investors use both: fundamental analysis to choose WHAT to buy, technical analysis to decide WHEN to buy. ### The Charts Price charts are the technician's primary tool: **Line Chart:** Simple, shows closing prices **Bar Chart:** Shows open, high, low, close for each period **Candlestick Chart:** Most popular, visual open/high/low/close [EXAMPLE] A candlestick shows: - Body: Range between open and close - Wicks: High and low for the period - Green/White: Close > Open (bullish) - Red/Black: Close < Open (bearish) ### Time Frames Technical analysis works across time frames: **Intraday:** 1-minute, 5-minute, hourly (day traders) **Daily:** Each candle = one trading day (swing traders) **Weekly:** Each candle = one week (position traders) **Monthly:** Each candle = one month (long-term investors) [TIP] Higher time frames are more reliable. A pattern on a weekly chart is more significant than the same pattern on a 5-minute chart. ### Key Concepts We'll Cover In the following lessons, you'll learn: - Support and resistance levels - Trend lines and channels - Moving averages - Volume analysis - Common chart patterns - Technical indicators (RSI, MACD) - Putting it all together ### Limitations and Warnings [WARNING] Technical analysis has significant limitations: - Past patterns don't guarantee future results - Many signals give false readings - Doesn't work well for fundamental shocks (earnings surprises, M&A) - Easy to see patterns in hindsight, harder in real-time - Different analysts see different patterns [SCENARIO] A stock has been rising for months, forming a "beautiful uptrend." Suddenly, the company announces fraud—stock drops 80% overnight. No technical analysis could have predicted this. Technicals work until they don't, especially when fundamental news overrides price patterns. [EXERCISE] You're analyzing a stock chart and see: prices moving consistently higher over 6 months, each dip finding buyers at higher levels than the previous dip. What is this pattern called, and what does it suggest? |ANSWER| This is an uptrend (also called "higher highs and higher lows"). It suggests bullish momentum—buyers are consistently willing to pay more, and dips are being bought. The technical expectation is continuation until the pattern breaks.