Technical analysis (TA) is not magic — it is the systematic study of how prices have behaved in the past to inform predictions about how they will behave in the future. Markets are driven by human psychology, and human psychology tends to repeat itself. Technical analysis captures those repeating patterns.
Everything in technical analysis is oriented around the price. If you understand price, you understand the market.
What Is Technical Analysis?
Technical analysis is the study of historic price movements in order to make accurate decisions about what the market may do next.
Technical Analysis Purpose
Historical Price Data
|
v
+---------------------+
| Pattern Recognition |
| Trend Identification|
| Indicator Analysis |
+---------------------+
|
v
Informed Trading Decision
(Entry / Exit / Stop Loss / Target)
Unlike fundamental analysis (which asks "what is this asset worth?"), technical analysis asks "where is price likely to go next?"
Candlestick Charts: The Foundation
The candlestick chart is the foundation of technical analysis. Every candle represents a specific period of time — 1 minute, 1 hour, 1 day, etc.
Anatomy of a Candlestick
| <-- Upper wick (shadow)
| High: Highest price during the period
_|_
| | Open price (bottom of body in green/bullish candle)
| |
| | Body: distance between Open and Close
| |
--- Close price (top of body in green/bullish candle)
|
| Low: Lowest price during the period
| <-- Lower wick (shadow)
A candlestick has two parts:
- Body — the rectangle between the open and close price
- Green (bullish) — close price is higher than open price (price went up)
- Red (bearish) — close price is lower than open price (price went down)
- Wicks — the thin lines above and below the body showing the highest and lowest prices reached during the period
The pattern and color of candlesticks reveal not just where price ended, but how aggressively it moved and who was in control — buyers or sellers.
Trending Markets
There are three types of market conditions:
| Market Type | Description |
|---|---|
| Uptrend (Bullish) | Price making higher highs and higher lows |
| Downtrend (Bearish) | Price making lower lows and lower highs |
| Consolidation (Sideways) | Price fluctuating rapidly between up and down without a clear peak |
Always decide the trending market from a **timeframe higher than** the trade timeframe. If you trade on the 1-hour chart, determine the trend on the daily chart.
Understanding Impulsive Moves and Pullbacks
The objective way to identify market trend is by detecting impulsive moves — strong, decisive movements from low to high (or high to low).
After an impulsive move, the market takes a breath because participants begin to take profits. This is called a pullback.
Uptrend Pattern
Price
| HH3
| HH2 /
| HH1 / HL2
| / HL1/
| / /
| / /
| / /
| //
+---------------------> Time
HH = Higher High
HL = Higher Low
Uptrend (Bullish)
To confirm an uptrend, look for:
- Higher High
- Higher Low
- Higher High (in sequence)
An uptrend is confirmed when the low of a pullback cannot be broken by the next pullback low, and the high of each impulsive move breaks the previous high.
Downtrend (Bearish)
To confirm a downtrend, look for:
- Lower Low
- Lower High
- Lower Low (in sequence)
Downtrend Pattern
Price
| \\
| \\
| LH1 \\
| \\ LL1
| LH2\\
| \\ LL2
| LH3\\
| \\ LL3
+---------------------> Time
LH = Lower High
LL = Lower Low
A downtrend is confirmed when the low of each impulsive move is broken by the next impulsive move, and the pullback highs do not break the previous pullback high.
Consolidation
Consolidation is where the price changes rapidly between up and down without establishing peaks in either direction. Consolidation is neither bullish nor bearish — it is a period of indecision and balance.
Support and Resistance Structure
Support is an area in the market where price is likely to find buyers and move up from.
Resistance is an area in the market where price is likely to find sellers and move down from.
These areas are based on historic prices — levels where price has reacted before tend to react again.
Support and Resistance Example
Price
| R---------R---------
| | |
| | v (potential sell zone)
| v
| S---------S---------
| (potential buy zone)
+---------------------> Time
R = Resistance area
S = Support area
How to identify them:
- Support — when price hits a low point, bounces up, and then returns to that same level, it will likely bounce again (buy zone)
- Resistance — when price hits a high point, drops down, and then returns to that same level, it will likely drop again (sell zone)
In an **uptrend**, the previous resistance level will likely become a new support level as the market climbs.
Indicators
Indicators are mathematical calculations applied to price (and sometimes volume) data. They simplify what price is doing and are used to:
- Identify the trend direction
- Identify areas of value
- Identify entry points
- Determine where to place stops and targets
Average True Range (ATR)
The ATR measures the average price movement over the last 14 candles. It adds up the total price movement (in pips or points) and divides by 14.
ATR Calculation (simplified)
Period | Movement
-------|----------
1 | $200
2 | $350
3 | $180
... | ...
14 | $220
ATR = Sum of all movements / 14
= Average volatility of the asset
Practical use:
- Use 1% ATR for your stop loss distance
- Use 1.4% ATR for your profit margin target
ATR adjusts automatically to the current volatility of the market — wider stops in volatile conditions, tighter stops in quiet conditions.
Moving Average (MA)
The Moving Average is the average closing price of N candles divided by N.
20-Period Moving Average
Price
| /
| /\/\ /\/
|/ \/ Actual Price
|
| ~~~~~ 20 MA (smooth average line)
|
+---------------------> Time
When the price candle is above the MA, the market is in a highly volatile uptrend.
Practical use:
- The MA acts as a dynamic support or resistance area
- When price touches the MA from above, it often acts as support
- When price touches the MA from below, it often acts as resistance
- Common periods: 20, 50, and 200
Relative Strength Index (RSI)
The RSI is a momentum indicator that tells you when price has been moving in a certain direction for a long period of time.
RSI Scale
100 |--- Overbought zone (above 70)
70 |---
| (asset may be due for a reversal or pullback)
50 |--- Neutral midpoint
| (asset may be due for a bounce)
30 |---
0 |--- Oversold zone (below 30)
RSI oscillates between 0 and 100.
Practical use:
- RSI above 70 — asset may be overbought; potential reversal downward
- RSI below 30 — asset may be oversold; potential reversal upward
- RSI divergence — when price makes a new high but RSI makes a lower high, a reversal may be coming
Combining the Tools
Technical analysis is most powerful when multiple tools confirm the same signal:
| Signal | Confirmation | Action |
|---|---|---|
| Price at support | RSI oversold + bullish candle | Consider long entry |
| Price at resistance | RSI overbought + bearish candle | Consider short entry |
| Price above MA | MA acting as support + uptrend | Trend-following long |
| Price below MA | MA acting as resistance + downtrend | Trend-following short |
Final Thoughts
Technical analysis is a language. Candlesticks, trends, support and resistance, and indicators are the vocabulary. The more fluently you read this language, the better you understand what the market is communicating.
No indicator or technique is perfect. The goal is to stack probabilities in your favor — combine multiple signals, manage your risk, and execute with discipline.
Price tells the story. Learn to read it.