Technical Analysis: Charts, Patterns & Indicators

Technical analysis trading has become increasingly popular in recent years. More and more people believe that an asset’s historical performance is a solid indication of its future performance. It contributes greatly to traders’ profitability in the market by providing real-time signals. If you are wondering how to go about it, here is a guide that will help you understand how to perform technical analysis in trading.

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Why Use Technical Analysis in Trading?

Getting into technical analysis in trading is highly worthwhile because it:

Suits trading beginners perfectly: the information is easier to process. Indeed, applying fundamental analysis requires knowledge not only of macroeconomics and the economics of innovation, but also of other factors that can influence markets, such as geopolitics.
Gives you an overall view of market movement
Makes it easy to identify the general trend of a financial asset’s price
Helps you detect key zones such as support and resistance levels
Provides real-time signals to determine the best entry and exit points for your positions in the market.
Makes it easier to set up your positions in the market so you can better manage your risk exposure.

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What Is Technical Analysis?

In trading, technical analysis is the study of past market movement, mainly through the use of charts, chart patterns, volume or other indicators, with the aim of predicting the future direction of prices.

It is mainly applied in short-term trading.

Types of Technical Analysis in Trading: Chart Patterns, Indicators and Theory

Technical analysis:

based on price movement: such as trend direction, flags, head and shoulders, double tops, double bottoms, support, resistance, supply zones, demand zones, etc.
based on the observation of indicators: such as moving averages, MACD, oscillators, RSI (Relative Strength Index), volume, Fibonacci, etc.
based on psychology / theory: such as Dow theory, Elliott wave theory, relative strength, etc.

Moving Averages

Moving averages are advanced technical indicators specifically designed to identify the general trend of the market. They take the form of a line drawn on a chart, and are used to assess the average value of a financial asset (stocks, currency pair, indices, etc.) over a set period, such as 14 days or 200 days. They provide important information for a trader performing technical analysis.

Advantages:

Stable: simple moving averages tend to be a more stable indicator than other analysis tools.
Used for the long term: in general, moving averages are more advantageous for long-term traders.

Disadvantages:

Lagging data: indeed, moving averages are based on historical data, which means they react more slowly to market volatility.

Oscillators

Oscillators indicate when a financial asset is overbought or oversold. This means that a correction in the opposite direction of the current trend becomes very likely. For example, when the price of a financial asset rises too high, analysts say it is overbought, meaning the price will stay flat or fall. The same applies in the opposite direction. Oscillators can also be used to forecast a turning point in market price movement through the « Divergence » strategy.

Advantages:

Oscillators:

Help traders identify trends and reversals before a price move happens. This helps traders maximize their profits.
Provide valuable information for detecting large moves (momentum).

The disadvantages:

Oscillators can give false signals. Indeed, like any advanced indicator, oscillators are not infallible.

Fibonacci Retracement

This is a tool based on the Fibonacci sequence. It is used in technical analysis to find key levels in the price of a trading instrument. Fibonacci retracement is based on the following concept: the market reacts, or retraces, up to the level of the Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, 78.6% and 100%.

Experienced traders generally use it to place stop-losses or to determine target prices (take profit).

Advantages:

Fibonacci retracement is:

Used by virtually all traders for decades.
A tool that has succeeded in predicting many retracements in the market.
Easy to use, especially for doing technical analysis trading on Forex.

The disadvantages:

Fibonacci retracement involves a subjective assessment, unlike technical indicators.

RSI or Relative Strength Index

The RSI is an oscillator used to find market conditions that are oversold or overbought. Zero is considered oversold, while 100 is considered overbought.

This indicator is particularly useful for technical analysis in day trading.

Advantages:

The RSI is an easy-to-use indicator, and traders can set RSI alerts that notify them when the value of a currency pair reaches a certain threshold.

Disadvantages:

The RSI is known for its many false signals, so it is best used as a starting point for evaluating a position: when traders receive an RSI notification, they can then start a more in-depth assessment of the trade’s potential.
The RSI is less reliable when used to assess currency pairs involving volatile markets.

Bollinger Band

The Bollinger Band is a widely used volatility indicator for performing technical analysis in trading.

This indicator is based on a simple concept: if the price of a financial instrument moves beyond a moving average by a certain amount, it indicates the beginning of a trend. Generally, Bollinger Band values are two or 2.5 standard deviations from a simple moving average.

Advantages:

Bollinger Bands:

Offer a simple visual representation of volatility in the market: a wider distance between the two outer bands reflects increased market volatility.
Are easy for a trading beginner to learn

Disadvantages:

Bollinger Bands need to be combined with other indicators to be reliable. Indeed, they reflect past performance, which can make them difficult to use for quickly identifying trading opportunities.

Technical Analysis Basics: How to Understand Technical Analysis

To understand technical analysis, you must first have a basic grasp of:

The different types of stock chart
Technical indicators

Traders analyze stock charts to assess the past performance of a financial asset. They then add technical indicators in an attempt to predict price movement.

Understanding Technical Analysis Trading – How to Read Charts

There are three main types of stock chart that traders generally use the most:

Simple chart, or line chart
Candlestick chart (Japanese candlesticks)
Bar chart

Technical analysis in trading can be performed on different chart time frames, ranging from one minute to monthly or even annual periods. The time frames most frequently examined by technical analysts include:

5 minutes (M5)
15 minutes (M15)
Hourly (H1)
4 hours (H4):
Daily (D1)

The time frame a trader chooses to study is generally determined by that trader’s personal trading style. Day traders prefer to analyze price movements on shorter-duration charts, such as 5-minute or 15-minute charts. Long-term traders prefer to analyze the market using hourly (H1), 4-hour (H4), daily (D1) or even weekly (W1) charts.

Understanding Technical Analysis – Technical Indicators

Technical indicators are mathematical calculations that allow traders to detect the general trend (moving average). They also show when an asset is experiencing overbought or oversold conditions (oscillators).

They use historical price and volume information to forecast which direction a financial asset will move. Mastering technical indicators can help a trader identify trading opportunities.

We have listed the top 5 best technical indicators at the top of this article.

Advantages of Technical Analysis in Trading

Technical analysis in trading provides many advantages:

Technical analysis trading tools are, for the most part, available for free. Fundamental analysis, on the other hand, may require access to tools that can be costly.
Technical analysis can be used on any market and at any time.
Many different approaches
Adopted by many retail traders as well as professionals
Data available across multiple time frames: indeed, prices can be monitored on an annual, quarterly, monthly, daily, hourly and minute basis.
Technical analysis helps traders and investors monitor their investment decisions. Indeed, prices tend to discount, that is, anticipate, fundamental information well before an actual event occurs.
All results and indicators can be tested and verified historically.
The advent of low-cost personal computers has made technical analysis even easier to test and use.
Today, many technical analysis software programs are available on the market
Technical analysis is considered a disciplined approach because it uses stop-loss theory.

Disadvantages of Technical Analysis

This approach is not an exact science: mastering technical analysis does not guarantee that all your positions will be winners 100% of the time.
Technical analysis is difficult to implement, even though the basics may be easy to learn.
The existence of many different approaches can also be a drawback: most beginner traders tend to get lost among several different approaches. They therefore fail to follow their analysis consistently, which ultimately results in losses more often than gains.

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Does Technical Analysis Work?

Yes, technical analysis works, because analysts and experienced traders have been able to discern price movements that repeat themselves over time. What is more, since many traders use technical analysis trading, it can become an effective predictive tool. However, technical analysis works, but not in 100% of cases.

It also works thanks to mass adoption. For example, the 200 moving average is a tool that many traders use to identify the market trend. If enough market participants believe that the price of a falling instrument will bounce off the 200 DMA and buy ahead of it or at that support level, this indicator can be considered to have predictive qualities.

The same applies to traditional support/resistance levels. For example, the 1.20 level of EUR/USD is a major psychological level.

Technical analysis works best over the short term.

Technical Analysis Trading vs Fundamental Analysis – Which Is More Interesting?

The debate over technical analysis vs fundamental analysis misses the point, because the two complement each other. In trading, you can use fundamental data (news, economic data, earnings releases in the case of stocks, etc.) to get an overall view of the market trend. Then, you can detect precise entry points thanks to technical analysis.

The Difference Between Technical Analysis and Fundamental Analysis

In terms of trading, technical analysis is:

A way of forecasting price movements using various candlestick chart patterns.
Ideal for short-term or medium-term trading.
A tool for entering a position in the market precisely
A way of forecasting where and when to exit your position

Fundamental analysis is:

A method that involves analyzing various economic data, news and central bank updates to anticipate future price movements.
Generally applied to long-term trading or to investments spread over several years.
A tool for simply knowing whether the market is going to rise or fall. You therefore cannot know where or when to enter and exit the market – you only know that the market is going to fall or rise.

Which Financial Instruments Can Technical Analysis Be Applied To?

Technical analysis can be applied to all types of financial instrument, namely:

Currency pairs: Forex
Cryptocurrencies
Stocks
Indices

Forex Technical Analysis

You can perform technical analysis on the Forex market, not only on major currency pairs such as EUR/USD, GBP/USD, EUR/CHF, etc., but also on minor pairs (NZD/USD, USD/ZAR, etc.).

Many Forex traders use technical analysis styles based on chart patterns such as wedges, triangles, channels, double tops and bottoms and head and shoulders. To this they add the use of popular technical indicators such as moving averages, Fibonacci retracements, and oscillators such as MACD, RSI and stochastics.

Technical Analysis for Cryptocurrency Trading

Although cryptocurrency trading is very recent, technical analysis can also be applied to it.

Indeed, chart patterns occur frequently on the Bitcoin chart (BTC/USD). For example, the « head and shoulders » pattern can be seen on the chart illustrated below. It was an opportunity to short this crypto. This shows that technical analysis trading also works in the cryptocurrency market.

Technical Analysis Bitcoin

However, the cryptocurrency market stands out for its highly volatile nature. That is why using the « Bollinger Band » indicator is recommended to detect imminent high volatility. This way, you, as a trader, can know where and when to buy cryptocurrencies by combining chart patterns and the Bollinger Band.

Technical Analysis for Stock Trading

Technical analysis is also important in stock trading on the stock market. Indeed, it not only tells you where and when to buy a stock, but also provides information on where and when to exit your position.

In stock trading, it is gaps and flags (bull flag or bear flag) that occur most often. You can even build a trading strategy with these two concepts. Let’s take an example from the Facebook stock chart.

In the FB stock chart illustrated below, we can see what this looks like.

Gaps: what is the nature of gaps? They tend to be filled in by the price. In our FB chart, we can see three gaps on this chart. Let’s label these three gaps G1, G2 and G3, from left to right. The first gap, G1, has formed, which tells us that the price of FB is going to rise to fill it. We therefore decided to be « bullish » on FB.NQ stock. Gap G2 serves as entry confirmation for our LONG position, since it appears after a bull flag. Gap G3 confirms our exit point, since it indicates a trend reversal.
The Bull Flag: this bullish flag confirms that the price is going to rise to fill gap G1. Thus, the lower side of the bull-flag triangle will serve as our exit point in case of loss (stop-loss).
Entry point for buying the stock: this entry point is detected through the combination of the logic behind gap G1, the bull flag and gap G2. The exit point, for its part, is confirmed by gap G3 and a former swing-high price.

Technical Analysis for Index Trading

You can also apply technical analysis trading to stock indices such as the CAC 40, the Dow Jones, the Nasdaq 100, etc.

Indices mainly serve to get an overall view of the trend of a particular sector. For this reason, moving averages are the tools generally used, in particular the simple 200 and 50 moving averages.

What Is Stock Market Technical Analysis?

Technical analysis definition – a technical analysis is a technique by which you can study charts, namely the price charts of assets on the stock market. It should also be pointed out that there are indicators that are derived from these charts. The goal is to make an accurate forecast of asset prices in the future. The direct consequence is that you will be able to make an investment to earn greater profits.
Application of chart extrapolation – chart extrapolation can be used in many fields. Indeed, all markets can use it with the aim of making a good forecast. It can also help with stock indices, asset prices and even commodities. There is no limit to this technical analysis on the stock market. Whether tools or methods, they are all usable on the underlying assets.
The main tool of technical analysis – to perform quality stock market technical analysis online, there is one tool at your disposal: the chart. The reason you should do free stock market technical analysis is to know the future trends of an asset. With this technique, you will be able to see whether there will be a fall in price or a rise. From a set of signals or patterns, you will be able to make very good decisions.

What Are the Fundamental Axioms Underlying Stock Market Technical Analysis?

The Market Discounts Everything – The most important point to emphasize is that the market discounts everything. In reality, this assertion will help you learn stock market technical analysis better. Through this reasoning, you will be able to understand that technical analysis is based solely on market data. It does not focus at all on fundamental data.
Prices Move in Trends – Technical analysis plays a major role for assets and decision-making. It should be pointed out that it shows that the market follows a trend throughout the entire process. With this technique, you will be able to more easily determine the moments of rises and even falls in asset prices. The forecast made following this assessment will range from a few minutes to years into the future.
History Repeats Itself – The future of an asset is determined on the basis of its present on the stock market. This is described as a pattern that occurs every time, as with the formation of bubbles and crashes. You should nonetheless know that this assertion comes from the analytical psychology of the crowd. According to sociologists, the crowd has a behavior of its own. Moreover, these facts bear no resemblance to individual behaviors. There are therefore points of difference between these two notions. The crowd is governed by principles. Every individual making up a crowd is bound to comply with the conditions for the common goal.
Support and Resistance – Technical analysis is one method among many for making good decisions. It is carried out jointly with stock market fundamental analysis and is very effective according to experts. Stock market technical analysis is accurate and errors are not frequent in its determination. It is even possible to find a better stock market technical analysis site to get all the possible results. Whatever the means used, you must come to the realization that there are more gains to be made by doing a technical analysis before investing.

Stock Market Technical Analysis – The Chart Tools of Technical Analysis

When the subject of stock market technical analysis tools comes up, charts must necessarily be discussed; they are often available from brokers. These are indicators that let you truly see where asset prices stand. In the course of price action, some prices mark a zone. These are psychological prices that will have a major role to play in the future. The goal is to determine support zones and resistance zones more easily. A study of a security’s charts will be used as an example.
In this case, there will be zones where a fall is likely and the price is heading down. The appreciation of an asset over a period of time indicates a situation of strong demand. There are more buyers than sellers in the market. The value of the security will rise until sellers take control of the price. The level where supply rises against demand is designated the resistance. This is nonetheless due to the fact that the fall in price occurs within the ascent.

The Mathematical Indicators of Technical Analysis

Charts are not the only elements used on a stock market technical analysis site. Mathematical indicators are also useful. In reality, the data must be evaluated, and given the figures that are going to be studied, some calculation is required. This is where the mathematical indicator comes in. It makes it possible to perform an in-depth analysis of price levels. Added to this is the study of all the indicators developed to track the trend and volatility of the market. The psychology of buyers and sellers is also studied through the mathematical indicator.

To carry out the work properly, several elements are taken into account. One of the best attributes is the Relative Strength Index (RSI). The Moving Average Convergence Divergence (MACD), the stochastic oscillator and the Directional Movement Index (DMI) must all be considered. This makes it possible to perform the analysis with the best forecasts. However, it is important for every investor to research technical analysis websites in order to succeed in making the right decision.

Stock Market Technical Analysis – What Are the Advantages of Technical Analysis?

Knowledge of trends – Performing an analysis offers many advantages for investors. One of the biggest reasons to favor the technical method is the knowledge of trends. In reality, you will be able to see the price movements of a stock more quickly. You can also make a prediction about asset prices in the future. Whether it is a rise or a fall, it is possible to know it in advance and prepare for it. What makes it even more suitable is that you will know the exact timing. If you are an analyst, you can use it to advise people who do not have enough knowledge. However, you will know when to enter or exit the market.
Speed of analysis – The special feature of technical analysis is that it is done more quickly and does not take too much time. All you have to do is use the tools well and remain vigilant. As for the cost, it is very low. With the software provided by the providers, it is easier to perform a technical analysis. Whether you choose a stock market technical analysis site or not, the results are obtained in a short time. It is nevertheless recommended to take a course in order to do it yourself instead of turning to a service provider.

Final Word – Should You Use Technical Analysis in Trading?

Indeed, technical analysis is necessary in trading, whether you are trading Forex, investing in cryptocurrencies, buying stocks, or trading indices. This approach tells you the trend of the market and provides precise signals on where and when to enter a position in the market. Combined with fundamental analysis, it can be a formidable tool for a trader.

If you want to find the best platform for performing technical analysis, head over to Vantage. This broker offers a wide range of technical indicators and drawing tools to help you analyze the market better.

This article is for educational purposes only and does not constitute investment advice. The investments mentioned carry a risk of loss of capital.

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