Technical Analysis Explained: How To Learn It the Correct Way

Technical analysis is a method investors use to predict the future price movements of assets like stocks and currencies by examining past market data, focusing primarily on price and volume. This approach operates on the premise that price movements are not random and can, therefore, be anticipated by studying patterns and trends. Technical analysis relies on chart patterns and statistical indicators to guide trading decisions. 

It’s a skill that, when developed, can offer insightful perspectives on market directions, providing a strategic edge in trading decisions. This guide aims to explain the basics of technical analysis, the platforms you can use, and the best technical indicators. We’ll also discuss the best beginner-friendly course you can take to expand your knowledge of this subject.

Key Facts Technical Analysis
  • Technical analysis studies past market data, primarily price and volume, to forecast future price movements.
  • Technical analysts use charts and other tools to identify patterns that can suggest future market movements.
  • Common chart types for technical analysis are line charts, bar charts, and candlestick charts. Each offers different insights into market behavior.
  • Technical indicators, like moving average, Bollinger bands, and relative strength index, help analysts identify trading opportunities. 
  • Technical analysis can be applied to any market with price data, such as stocks, bonds, commodities, currencies, cryptocurrency, and ETFs.

Technical Analysis Basics

Before discussing how technical analysis works, we’ll go over the basics because it’s important to understand its foundational elements. This section will introduce the basic concepts every trader should know – chart types, chart patterns, and technical indicators.

Chart Types

Charts visually represent market data, allowing traders to analyze patterns, trends, and potential trading opportunities at a glance. They are the primary tool for technical analysis, and each chart type offers a unique perspective on market activity. Understanding the benefits of different chart types is essential for any technical analyst, as each option conveys price data differently. Below, we’ll go over the most popular charts and what data they focus on.

Line Charts

A line chart is the simplest form, plotting the closing prices of a security over a specified period. By connecting these prices with a line, investors can easily see the general price movement. This type of chart is useful for seeing the overall trend, making it a favorite among beginners for its ease of use.

Bar Charts

Bar charts provide more detail than line charts by showing each period’s open, high, low, and close prices. Each bar represents the trading range of a security within a specific time frame, with a horizontal tick to the left indicating the opening price and to the right for the closing price. Bar charts offer a clearer view of the market’s volatility and the intensity of trading activity, making them valuable for analyzing short-term price movements.

Candlestick Charts

Candlestick charts offer a detailed view of market sentiment by displaying the open, high, low, and close prices, similar to bar charts. The body of the candlestick shows the difference between the opening and closing prices, while the wicks show the high and low prices. Colors differentiate between bullish (usually white or green) and bearish (usually black or red) periods. Candlestick charts are great for spotting potential market reversals and continuations by looking at specific chart patterns.

Chart Patterns

Chart patterns are specific shapes within price charts that indicate potential future price movements to traders. They form due to traders buying and selling the underlying asset throughout the trading day. There are two main categories of chart patterns: Continuation patterns, which signal the continuation of an existing trend, and reversal patterns, which indicate a potential change in the trend direction.

Recognizing these patterns helps predict whether a current trend is likely to continue or reverse, offering insights into strategic entry and exit points. Let’s explore a few examples of chart patterns and what they mean.

Head and Shoulders

The head and shoulders pattern is one of the most reliable reversal patterns and is used to predict the end of a prevailing trend. It’s characterized by three peaks, with the middle peak (the head) being the highest and the two outside peaks (shoulders) being lower and roughly equal height. A head and shoulders pattern signals that an upward trend is likely ending.

Conversely, the inverse head and shoulders pattern, which appears upside down, indicates the reversal of a downward trend. This suggests an upcoming upward movement in price.

Double Top and Double Bottom

Double top and double bottom patterns are among the simplest yet most effective reversal patterns. A double top pattern appears at the peak of an uptrend, marked by two distinct highs at approximately the same price level, signaling that the asset may start to decline.

The double bottom pattern occurs at the bottom of a downtrend, featuring two distinct lows. This pattern suggests that selling pressure is diminished, and a reversal to an uptrend may be imminent.

Cup and Handle

The cup and handle pattern resembles the shape of a teacup on a chart. It’s a bullish continuation pattern that starts with a downward trend, followed by a stabilizing period and a rally back up to the initial trend level, forming the “cup”. The “handle” forms through a slight downward price drift on reduced volume. This pattern suggests that after a brief consolidation, the price is likely to break out from the handle and continue the initial upward trend.

Technical Indicators

Technical indicators are used by traders to forecast future price movements, identify trends, and generate trading signals. They can help clarify the market’s direction, momentum, volatility, and strength. Technical indicators are often combined with chart patterns and other analysis tools to make more informed trading decisions. Here’s an overview of some key technical indicators.

Relative Strength Index

The relative strength index (RSI) measures the speed and change of price movements on a scale of 0 to 100. It’s used to see if an asset is overbought or oversold. An asset is considered overbought when the RSI is above 70 and oversold when below 30, indicating a reversal or pullback.

Moving Average Convergence Divergence

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period EMA (Exponential Moving Average) from the 12-period EMA. The result is then plotted on a chart alongside a signal line, helping traders spot price trends, measure trend momentum, and identify entry points for buying or selling.

Stochastic Oscillator

The stochastic oscillator compares a particular closing price of a security to a range of its prices over a certain period. It oscillates between 0 and 100, indicating momentum and potential reversal points where the trends might stall or reverse, especially when the lines cross over each other.

How Does Technical Analysis Work? – Identifying Trends and Reversal Points

Technical analysis works by identifying patterns in market data that signal the future direction of asset prices. They are mathematical calculations based on the price, volume, or open interest of a security or market. Technical analysis hinges on the concept that market prices move in trends and that these trends will continue until something happens to change the momentum. 

By recognizing these trends and potential reversal points, traders can make more informed decisions about when to buy or sell an asset. Below, we’ll explore how to identify trends and reversal points using technical analysis.

Support and Resistance

Support and resistance levels are crucial in technical analysis for identifying where the prices of assets tend to stop and potentially reverse. As the price drops to a support level, buyers become more interested, and sellers are less inclined to sell, often leading to a bounce in the price. Resistance is the opposite; it’s where price increases tend to halt because of a build-up of selling pressure.

To find support and resistance levels, traders often rely on various technical indicators. Here’s a list of some widely used technical indicators for this purpose.

  • Fibonacci Retracement: This technical indicator helps identify potential support and resistance levels based on previous market movements by applying percentages derived from the Fibonacci sequence.
  • Pivot Points: Pivot points calculate support and resistance levels using the high, low, and close prices from the previous trading session. Pivot point calculations can offer multiple levels of support and resistance.
  • Moving Averages: Both simple moving averages and exponential moving averages can act as dynamic support or resistance levels. Prices often bounce off these moving averages or break through them, signaling changes in market sentiment.
  • Bollinger Bands: Bollinger bands consist of a middle band and two outer bands. These bands adjust based on market volatility and can act as support and resistance levels.
  • Ichimoku Cloud: Ichimoku Cloud offers multiple indicators in one, providing support and resistance levels, trend direction, momentum, and buy or sell signals. 

Trends and Reversal Points

Knowing how to identify trends and reversal points will increase the chance of profitable trades, allowing investors to anticipate future price movements. Trends indicate a sustained movement in prices in one direction and can be classified as upward (bullish), downward (bearish, or sideways (neutral). Recognizing these trends helps align trading strategies accordingly.

Reversal points signal a shift in market momentum, indicating that the current trend may be coming to an end and a new opposite trend might start. Accurately pinpointing these moments allows for strategic entry and exit decisions, maximizing potential gains while minimizing losses.

Several technical indicators are used to help detect trends and reversal points. These tools analyze price movements and volume to provide market insights. Below, we’ll explore some of the most popular technical indicators for this purpose.

  • Moving Averages (MA): Used to smooth out price data over a specified period, moving averages are pivotal in identifying the direction of the trend. The crossover of short-term MAs and above long-term MAs can signal the start of an uptrend, while the opposite suggests a downtrend beginning. 
  • Relative Strength Index (RSI): This technical indicator shows overbought or oversold conditions. An RSI reading over 70 suggests an asset might be overbought and due for a reversal or pullback. A reading of under 30 indicates oversold conditions, potentially leading to a trend reversal to the upside.
  • Moving Average Convergence Divergence (MACD): Tracks the momentum of an asset by comparing two moving averages. A MACD crossing above its signal line suggests bullish momentum and the possibility of an upward trend beginning, while a cross below indicates bearish momentum and potential downward reversal.
  • Bollinger Bands: The squeezing of the bands suggests a period of low volatility and is often followed by a significant move in price, indicating trend formations or reversals. 
  • Fibonacci Retracements: If the price retraces to a Fibonacci level and then resumes its previous movement, this can act as confirmation of the continuation of a trend.

Trend Lines

Trendlines are a vital component of technical analysis, offering a straightforward method to visualize the market’s direction by connecting a series of highs or lows on a chart. These lines not only help identify the prevailing trend, whether it’s an uptrend, downtrend, or sideways movement but also serve as indicators for potential support or resistance areas.

In an uptrend, trend lines are drawn below the price action, connecting the lows, and act as support lines that can indicate buying opportunities when prices dip towards the line. Conversely, in a downtrend, trendlines are drawn above the price connecting highs and function as resistance levels, signaling selling opportunities when prices bounce off the line.

The breach of a trend line can signify a reversal or weakening of the current trend, making trend lines important for predicting shifts in market momentum. While trend lines provide valuable insights on their own, their effectiveness is enhanced when used in conjunction with other technical indicators, which can offer additional confirmation or warning signals regarding trend strength, reversals, and continuation patterns.

Pros and Cons of Technical Analysis

ProsCons
✅ Technical analysis can be applied across various financial markets like stocks, forex, and commodities.❌ Past performance is not always indicative of future results.
✅ Provides the ability to analyze real-time data and make immediate decisions.❌ Highly dependent on the subjective interpretation of chart patterns and indicators.
✅ Can help predict future price movements by looking at historical price data and patterns.❌ May not account for new or unexpected news and events that can impact prices.
✅ Effective for short-term and long-term trading strategies.❌ Requires a lot of time and effort to monitor and analyze charts.
✅ Helps with risk management by identifying stop-loss and take-profit levels.❌ Technical indicators ignore factors like company health and industry conditions.
✅ There are many technical indicators available that can be adapted to multiple trading strategies.❌ Requires continuous learning and adaptation as markets evolve.
✅ Can be used to supplement fundamental analysis for a more comprehensive market overview.❌ Beginner traders may find using technical indicators confusing.
✅ Accessible to traders at all levels of experience.❌ Psychological biases can affect the interpretation of technical analysis results.
✅ Technical indicators help traders to adapt to changing market conditions.❌ Can lead to analysis paralysis due to an overabundance of indicators and patterns.

Technical Analysis Tools

Technical analysis tools are required to analyze the market and forecast future prices. These platforms host multiple technical indicators traders can use and apply to charts. Here are a few great trading platforms you should consider trying for their in-depth technical analysis tools and chart types.

TradingView

TradingView is a highly interactive platform that specializes in providing a comprehensive suite of charting tools, technical indicators, and live data feeds, making it appealing for traders who rely heavily on technical analysis. Its standout feature is the social component, where users can share their analysis, follow other traders, and discuss market movements in real-time.

This collaborative environment can be incredibly beneficial for beginners looking to learn from more experienced traders. Also, TradingView supports a broad range of markets to which users can apply technical analysis, such as stocks, forex, cryptocurrencies, and more.

MetaTrader

MetaTrader, available in versions 4 (MT4) and 5 (MT5), is a platform widely known for its advanced technical analysis capabilities. MT4, specifically designed for Forex trading, provides over 30 built-in technical indicators, enabling traders to analyze market trends, volumes, and price dynamics in real time. These indicators, along with 24 analytical objects, facilitate detailed market analysis, allowing traders to find profitable opportunities more easily.

MT5 builds upon the foundation of MT4, offering more than 38 technical indicators and 44 analytical objects alongside an economic calendar integrated directly into the platform. This version caters to a broader range of markets, making it a more versatile tool for traders looking to conduct comprehensive technical analysis across different asset classes. 

Thinkorswim

Thinkorswim, developed by TD Ameritrade, is a platform that stands out for its advanced technical analysis capabilities. The platform offers more than 300 technical indicators that help with a wide spectrum of strategies and market analysis techniques. This extensive selection allows traders to gain deeper insights into trends, volatility, momentum, and other factors to make informed decisions.

Beyond the sheer volume of technical indicators, Thinkorswim differentiates itself with customizable charting tools. Traders can modify existing indicators or build their own from scratch using ThinkScript, the platform’s proprietary scripting language. This level of customization ensures novice and experienced traders can tailor their analysis to fit their unique trading style. 

After creating a technical indicator or if you want to test out their selection before committing money, the paperMoney feature offers simulated trading environments. This feature offers risk-free trading, helping novices refine their skills without risking real capital. 

How to Learn Technical Analysis With Witzel Trading

Beginners looking for extra guidance may be interested in taking a course on Witzel Trading. This platform offers in-depth courses that cover multiple topics, including technical analysis. You’ll have access to some of the best traders in the industry to discuss trading techniques and more. Also, your trades will be analyzed by a professional to help you improve your trading skills and technical analysis abilities. 

Conclusion: Technical Analysis is the key to success

In conclusion, mastering technical analysis requires a lot of time and effort, but It’s worth it as it will improve your chances of predicting price movements, resulting in winning trades. We’ve covered the most popular technical indicators and chart patterns to look out for. Now, it’s up to you to apply this knowledge.

Consider using one of the platforms we’ve mentioned, as they provide all the tools necessary to conduct technical analysis. Also, these platforms offer useful tutorials on how to use their software so beginners won’t have trouble learning the basics. Alternatively, you may want to join Witzel Trading, as this course covers all the information needed on technical analysis and comes with several insightful webinars a month. 

Frequently asked questions on Crypto Trading:

How Do You Practice Technical Analysis?

You can practice technical analysis by using demo accounts offered by trading platforms. These accounts allow you to analyze real market data and make trades without risking actual money. Reading charts, applying different indicators, and following market trends in a simulated environment are great for beginners looking to test their skills.

Is Technical Analysis Worth It?

Yes, technical analysis is worth it because it provides insights into price movements and prevailing trends. Applying technical analysis will help predict how an asset’s price will move in the future and allow you to set trades accordingly.

How Do You Do Technical Analysis for Beginners?

Beginners should start by learning the basics of chart reading, understanding key indicators, and practice on demo accounts to apply these concepts in real-time market conditions. Consider learning how to use moving averages, Bollinger bands, and relative strength index.

How Long Does It Take to Learn Technical Analysis?

The time it takes to learn technical analysis can vary widely among traders, but with consistent study and practice, a basic understanding can be developed within a few weeks or months. However, to minimize the learning curve, you can join courses that provide one-on-one help, like Witzel Trading.

What Is the Best Place to Learn Technical Analysis?

The best place to learn technical analysis is through a combination of reputable online courses, videos, and educational websites. Also, hands-on practice via demo accounts is great for learning, as you can make mistakes without consequences and learn from them.

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