Fundamentals of Technical Analysis: A Complete Guide for Traders

Why Traders Choose Technical Analysis

Technical analysis is not magic, but a practical tool for reading the market through the lens of price and volume. The main idea is simple: all available information is already reflected in the current price of the asset. Therefore, by analyzing historical data on prices and trading volumes, one can predict where the market may move next.

Unlike fundamental analysis, which takes into account financial statements and economic indicators, technical analysis focuses exclusively on price patterns and chart formations. This makes it particularly useful for short-term traders looking for precise entry and exit points in positions.

History of Development: From Amsterdam to the Present Day

The first attempts to analyze market movements appeared in the 17th century in Amsterdam, then the method developed in Japan in the 18th century. However, the modern approach to technical analysis was shaped by Charles Dow — a financial journalist and the founder of The Wall Street Journal.

Dow noticed a pattern: individual assets and entire markets do not move chaotically, but follow certain trends that can be broken down and studied. His Dow theory became the foundation for all modern methods of technical analysis. With the development of computer technology, this approach transformed from manual calculations into a powerful analytical tool available to every trader.

How Technical Analysis Works in Practice

The essence of the method lies in studying the balance of supply and demand in the market. The price of an asset is the result of opposing forces: buyers and sellers. These forces are closely linked to the emotions of market participants, primarily fear and greed.

Technical analysis is most effective in markets with high trading volumes and good liquidity. In such markets, it is harder to manipulate prices, and external anomalies do not distort the analysis results as much.

Key Tools: Indicators for Reading the Market

Moving Averages: Defining the Trend

Moving Average (, MA) is one of the simplest and most popular indicators. There are two main types:

Simple Moving Average (SMA) calculates the average price over a selected period, smoothing out short-term fluctuations. This helps to clearly see the overall direction of the trend.

Exponential Moving Average (EMA) gives more weight to recent price data, thus reacting faster to new information. Experienced traders often use a combination of both, tracking their crossover as a signal.

The popular strategy is based on the analysis of the intersection of short-term and long-term moving averages. When the fast average crosses the slow one from below (golden cross), it may signal a rise. The opposite scenario (death cross) may indicate a decline.

RSI: measuring the momentum of movement

The Relative Strength Index (RSI) is an oscillator that measures the speed and magnitude of price changes on a scale from 0 to 100. Traditionally, a value above 70 indicates overbought (the asset may decline), while a value below 30 indicates oversold (the asset may rise).

Bollinger Bands: volatility in action

This indicator consists of three lines: a central moving average and two side lines. The side lines reflect volatility levels. When the price touches the upper line, the asset may be overbought; touching the lower line may signal oversold conditions.

MACD: convergence and divergence

MACD (Moving Average Convergence Divergence) shows the relationship between two exponential moving averages. It consists of the MACD line, the signal line, and the histogram. When the MACD crosses the signal line from below to above, it may be a bullish signal; a crossover from above to below may indicate a bearish trend.

Trading Signals: From Theory to Action

All these indicators do not work just for fun — they generate specific trading signals:

Overbought/Oversold Signals: RSI and Bollinger Bands help to identify moments when an asset may be overvalued (sell signal) or undervalued (buy signal).

Moving Average Crossovers: a golden cross is often interpreted as a bullish signal, while a death cross is seen as a bearish signal.

MACD Signals: line crossings indicate changes in market momentum.

However, it is important to remember: technical analysis does not provide 100% guarantees. Especially over short time frames, indicators can give false signals. Therefore, never rely on a single signal — always combine several indicators and be sure to manage your risks.

A Critical Look at the Foundations of Technical Analysis

Not everyone in the financial community believes in the power of technical analysis. Critics call it a “self-fulfilling prophecy” - a phenomenon that occurs simply because a large number of people believe in it.

Main objections:

Self-fulfilling effect: if many traders use the same indicators and react in the same way, it can create predictable market reactions, but this does not mean that the method works objectively.

Subjectivity of Interpretation: two traders can interpret the same chart completely differently. Where one sees a bullish trend, another may see a correction.

Vulnerability to anomalies: during high volatility, when unexpected events affect the markets ( crashes, news ), technical analysis may fail.

Nevertheless, many professional traders believe that each trader finds their own way of working with charts and indicators. In their opinion, it is this diversity of approaches that prevents the emergence of a single “perfect” strategy.

Technical Analysis vs Fundamental Analysis: Which to Choose

Two approaches solve different problems:

Technical analysis is best suited for short-term trading. It helps to find optimal entry and exit points, as well as track current price dynamics.

Fundamental analysis assesses the intrinsic value of an asset by analyzing financial statements, economic indicators, and other qualitative factors. This is an approach for long-term investment decisions.

In practice, many investors combine both methods: they use fundamental analysis to select promising assets and technical analysis to determine the best entry point.

Final Advice: Integrating Approaches

Having considered the fundamentals of technical analysis and the arguments of its critics, most professionals come to one conclusion: not to rely solely on one method. A combination of fundamental and technical analysis creates a more reliable foundation for making trading decisions.

Fundamental analysis provides long-term direction, while technical analysis indicates when to act. Together, they help traders and investors gather relevant information about market conditions and make more informed decisions.