What is Technical Analysis?

Technical analysis is the study of past market data—primarily price and volume—to predict future price movements. The core belief is that “price discounts everything” — meaning all known information about a stock is already reflected in its price.

Traders analyze charts and use various indicators to identify trends, momentum, and potential reversal points.

Key Principles of Technical Analysis

1. Market Discounts Everything
   All factors (economic, political, and psychological) that can affect a stock’s price are already built into its current market price.

2. Prices Move in Trends
   Prices generally move in identifiable trends — upward (bullish), downward (bearish), or sideways (consolidation). Recognizing these trends helps traders make better entry and exit decisions.

3. History Tends to Repeat Itself
   Market patterns tend to repeat due to collective investor psychology. By studying historical price behavior, traders attempt to predict future movements.

Common Tools and Indicators

1. Price Charts

Charts are the backbone of technical analysis. Common types include:

• Line Chart: Simplest form showing closing prices.

• Bar Chart: Displays open, high, low, and close prices (OHLC).

• Candlestick Chart: Popular among traders; visually appealing and informative.

• 2. Trend Lines and Support/Resistance

• Trend Line: Helps identify the direction of the market (uptrend, downtrend, or sideways).

• Support Level: A price level where demand is strong enough to stop the price from falling.

• Resistance Level: A price point where selling pressure prevents further rise.

• 3. Moving Averages

Moving averages smooth out price data to identify trends over a period.

• Simple Moving Average (SMA)

• Exponential Moving Average (EMA)

Crossovers of short-term and long-term moving averages often signal potential buy or sell opportunities.

4. Volume Analysis

Volume shows the strength behind a price movement. Rising prices with high volume indicate strong buying interest, while low volume may signal weakness.

5. Popular Technical Indicators

• Relative Strength Index (RSI): Measures momentum; values above 70 indicate overbought, below 30 indicate oversold conditions.

• Moving Average Convergence Divergence (MACD): Tracks momentum and trend direction.

• Bollinger Bands: Show volatility and potential breakout zones.

Advantages of Technical Analysis

• Helps identify entry and exit points effectively.

• It can be applied to any market or time frame.

• Provides visual insight into market psychology and price behavior.

Limitations of Technical Analysis

• No indicator guarantees 100% accuracy.

• Market movements can be affected by unexpected news or events.

• Works best when combined with risk management and discipline.