Technical analysis is a method for evaluating investment instruments based on the study of historical price and volume data. This approach helps traders forecast future price movements and make informed decisions. In this post, we will review the key basic concepts of technical analysis.

1) Charts and graphs

The first thing a trader encounters is charts. They display price movements over a selected time interval and come in different types:

• Line charts — show the closing price over a period of time.

• Candlestick charts — more informative, as they display the opening, closing, high, and low prices for the chosen period.

• Bar charts — similar to candlesticks but more simplified, showing only the range of price movement.

2) Trends

Trends are the directions in which the market is moving. There are three main types of trends:

• Uptrend — when prices move upwards, creating new highs and lows.

• Downtrend — when prices move downwards, creating new lows and highs.

• Sideways trend (or range-bound) — when prices oscillate within a limited range without a clear direction.

3) Support and resistance

Support and resistance levels are price points where the market experiences difficulties continuing its movement:

• Support level — a price level below which an asset is unlikely to fall. It forms when demand exceeds supply.

• Resistance level — a price level above which an asset is unlikely to rise. It forms when supply exceeds demand.

4) Indicators and oscillators

Indicators and oscillators help traders analyze the market and make decisions. Here are a few popular ones:

• Moving averages (MA) — smooth out price data to identify trends. There are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA).

• Relative strength index (RSI) — an oscillator that measures the speed and change of price movements to determine overbought or oversold conditions.

• MACD (moving average convergence divergence) — helps identify changes in the direction of the trend.

5) Technical analysis patterns

Patterns on charts can also signal future price movements:

• Head and shoulders — a trend reversal pattern that indicates a possible market reversal.

• Double bottom and double top — also indicate a potential trend reversal.

Technical analysis provides traders with tools to assess and forecast market movements. Understanding basic concepts such as charts, trends, support and resistance, indicators, and patterns is essential for successful trading. Mastering these skills will help you make more informed decisions and increase the likelihood of successful trades.