Technical analysis is the study of price charts and trading volume to forecast future price movements. Unlike fundamental analysis (which looks at company earnings), technical analysis assumes that all relevant information is already reflected in the price — and that price patterns repeat. Here's everything you need to start.
What technical analysis is (and isn't)
Technical analysis (TA) is a method of evaluating securities by analysing statistics generated by market activity — primarily price and volume — rather than the intrinsic value of the underlying asset. It's used by day traders, swing traders, and many institutional investors to time entries and exits.
Technical analysis works on the assumption that: (1) market prices reflect all available information, (2) prices move in trends, and (3) history tends to repeat itself because human psychology drives recurring patterns. Critics argue that it's pattern-matching on noisy data (the 'chartist fallacy'). The truth is probably in between: TA is most useful as a framework for timing and risk management, not as a crystal ball.
Reading a candlestick chart
Candlestick charts are the most widely used chart type among traders. Each candle represents one time period (1 minute, 1 hour, 1 day, etc.) and shows four data points: Open (price at the start of the period), High (highest price reached), Low (lowest price reached), Close (price at the end of the period).
The body of the candle shows the open-to-close range. If the close is above the open, the candle is green (bullish). If the close is below the open, the candle is red (bearish). The thin lines above and below (called 'wicks' or 'shadows') show the high and low.
A large green body = strong buying pressure. A large red body = strong selling pressure. A small body with long wicks = indecision.
Support and resistance: the foundation of TA
Support is a price level where buying interest is strong enough to prevent further decline. When price falls to support, buyers step in and price bounces. Resistance is the opposite — a level where selling pressure prevents further advance.
These levels form because of psychological price memory. If a stock previously bounced at €50 three times, traders remember that level as support and expect it to hold again. When support breaks (price closes below it convincingly), that former support becomes the new resistance. This 'flip' is one of the most reliable concepts in TA.
Key technical indicators explained
Moving Averages (MA): Smooth price data by averaging closing prices over a set period. The 50-day and 200-day MAs are most widely watched. When the 50-day MA crosses above the 200-day MA, it's called a 'Golden Cross' — a bullish signal. The opposite is the 'Death Cross'.
RSI (Relative Strength Index): A momentum oscillator that measures the speed and change of price movements, scaled 0–100. RSI above 70 = overbought (possible reversal). RSI below 30 = oversold. RSI is best used to identify divergence between price and momentum.
MACD (Moving Average Convergence Divergence): Shows the relationship between two exponential moving averages (usually 12 and 26 periods). A MACD crossover above the signal line is a bullish signal; below is bearish.
Bollinger Bands: Three lines — a 20-day MA plus upper and lower bands 2 standard deviations away. When price touches the upper band, it may be overbought. When price touches the lower band, it may be oversold. 'Band squeezes' often precede large price moves.
Common chart patterns
Head and Shoulders: One of the most reliable reversal patterns. Three peaks — a middle peak (head) higher than the two outer peaks (shoulders). When price breaks below the 'neckline' (the support connecting the troughs), it signals a downtrend reversal.
Double Top / Double Bottom: Two consecutive peaks at roughly the same level (double top — bearish reversal) or two consecutive troughs (double bottom — bullish reversal). Confirmation comes on the break of the middle trough/peak.
Triangles: Converging trendlines form a triangle. Ascending triangles (flat top, rising bottom) tend to break upward. Descending triangles (flat bottom, falling top) tend to break downward. Symmetrical triangles can break either way — trade the breakout.
Flags and Pennants: Short consolidation patterns that form after a strong directional move. They represent a brief pause before continuation. Flag: rectangular consolidation. Pennant: small symmetrical triangle after a sharp move.
How to combine TA with risk management
Technical analysis tells you when and where to enter a trade — but risk management determines whether you survive to trade another day. Every TA trade needs: A specific entry point (e.g. break above resistance at €55), a stop-loss (e.g. just below support at €52 — limiting loss to 5.5%), and a take-profit target (e.g. next resistance at €65 — a 18% gain, giving a 3:1 reward-to-risk ratio).
The cardinal rule: never risk more than 1–2% of your trading capital on a single trade. With a €5,000 account and 2% risk, your maximum loss per trade is €100.