Technical analysis is a trading approach that involves looking at past price patterns to identify potential future trading opportunities. technical analysts believe that prices move in trends, and by studying these trends, they can identify entry and exit points for trades.

Technical analysis is not an exact science, however, it can be a helpful tool in identifying trading opportunities if you know what patterns to look for.

Technical Analysis vs. Fundamental Analysis

Technical analysis and fundamental analysis are the two main schools of thought when it comes to trading. Technical analysis focuses on price patterns, while fundamental analysis looks at a company’s financial records to find value-focused opportunities. Fundamental analysts predict future increases in price based on a company’s historical track record and look for discrepancies based on what they believe the stock price is worth.

Both technical and fundamental analysis have their pros and cons, but many traders use a combination of both approaches to make trading decisions. A popular trading approach that combines both technical analysis and fundamental analysis is CANSLIM.

The bottom line is that technical analysis can be a helpful tool for identifying trading opportunities if you study proper strategies that stick to the basics.

Understanding Technical Analysis

Technical analysis is the study of price patterns. The theory behind technical analysis is that all relevant information is reflected in the price movement of a security, and by studying past price patterns, traders can determine the direction of future price movements. Technical analysts believe that prices move in trends, and by studying these trends, they can identify entry and exit points for securities.

What are Technical Indicators?

Technical indicators are calculations based on historical price and volume (aka they are lagging indicators). Technical analysts use these indicators on their charts to help add additional context to the price action.

Some popular technical indicators include moving averages, support and resistance levels, the relative strength line, and Fibonacci retracement levels.

Technical analysts will often use multiple technical indicators to make trading decisions. Be aware of trading strategies that rely on too many indicators. This can often give too many mixed signals that are conflicting and cause analysis paralysis.

Can traders use technical analysis to predict future price movement?

The underlying assumption of technical analysis is that human emotions repeat themselves, and those repetitions can be seen in the form of chart patterns. By identifying these patterns, traders can predict future price movements. Technical analysis can be used for short-term day traders, or longer-term, multi-month investors.

Regardless of the timeframe or market that you are trading, you can accurately identify trends on charts and ride the momentum until the trend reverses. Charting is a visual way of identifying patterns and technical analysis is the framework for charting.

What is an example of technical analysis?

An example of technical analysis is a trader looking at a stock chart to identify possible entry and exit points for a trade. By looking at a stock chart, technical traders can determine areas where the price is supported and areas where the price is meeting resistance. You can use this information to place trades at a point where the risk/reward is in your favor.

Some technical traders find value in adding technical indicators to their charts. Technical indicators are lagging indicators that can help traders confirm price movements. All technical indicators are just interpreting the price and volume data on the chart, so at TraderLion, we focus on that price and volume itself and keep our charts very simple.

Does Technical Analysis work?

Technical Analysis works and can be used for short-term day traders, or longer-term, multi-month investors. If you are an investor with a long-term outlook, you are going to perform your analysis on longer-term time frames such as daily or weekly charts. Technical analysis can also be used for intraday trading and scalping on shorter time frames such as 5-minute charts or 30-minute charts.

Past market action tends to repeat itself, so by studying price patterns, traders can attempt to predict future market movements. Technical analysis is just one piece of the puzzle. In order to be successful, you need to have a complete trading strategy that takes into account your risk tolerance, your financial goals, and your overall view of the market.

Technical analysis works best when you use both price and volume. Volume adds weight to what the price is doing and can be used to confirm price movements.

Chart Patterns

One of the most popular methods of technical analysis is chart pattern recognition. Technical analysts believe that the collective behavior of all the participants in the market accurately reflects all relevant information, and that price movements reflect the impact of this collective behavior.

Some popular bullish chart patterns include the cup and handle, the high tight flag, and the double bottom pattern. Bearish chart patterns include the head and shoulders pattern, the double top pattern, and the bearish wedge.

Candlestick Patterns

Another popular method of technical analysis is candlestick pattern recognition. Candlesticks are graphical representations of price data that can be used to determine market trends.

Some popular bullish candlestick patterns include the bullish engulfing pattern and the hammer candlestick. Bearish candlestick patterns include the bearish engulfing pattern and the evening star pattern.

Candlestick Pattern Cheat Sheet

We put together an infographic of the top most powerful candlestick trading patterns so you have an easy reference guide to use.

Candlestick patterns are a valuable tool that can be used in any type of trading, whether you’re day trading, swing trading, or even investing. And while there are many different candlestick patterns out there, some are more powerful than others.

In this infographic, we’ve compiled the most powerful candlestick patterns that every trader should know. Use it as your everyday cheat sheet when you’re scanning the markets for opportunities.

Technical Analysis Summary

Frequently Asked Questions