Technical Analysis: Detailed and Comprehensive Explanation

Definition:
Technical analysis is a method used in financial markets (stocks, cryptocurrencies, commodities, forex, etc.) to predict future price movements by examining past price movements and trading volumes. Unlike fundamental analysis, it relies on price and volume data rather than a company’s financial condition or economic indicators.

1. Core Principles

Technical analysis is based on the following assumptions:

1. Price reflects everything
   • All market information (economic data, news, rumors) is reflected in the price.
2. Price moves in trends
   • Prices do not move randomly; they follow identifiable trends:
     • Uptrend (bullish)
     • Downtrend (bearish)
     • Sideways trend (consolidation)

3. History repeats itself
   • Price movements form recurring patterns influenced by investor psychology.
   • Example: cycles of fear and greed, panic selling, and FOMO-driven moves.

2. Main Tools Used

a) Charts

• Line Chart: Shows closing prices; simple for identifying trends.
• Bar Chart (OHLC): Displays opening, closing, high, and low prices.
• Candlestick Chart: Visually represents price movements and is widely used to detect trend reversals.

b) Trend Analysis

• Trendlines: Identify the general direction of price movements.
• Support and Resistance Levels:
  • Support: Price level where a decline is expected to halt.
  • Resistance: Price level where an upward move is likely to face difficulty.

c) Technical Indicators

• Moving Averages: Show the general direction of price movements.
• RSI (Relative Strength Index): Indicates overbought or oversold conditions.
• MACD (Moving Average Convergence Divergence): Measures trend changes and momentum.
• Bollinger Bands: Show how much price fluctuates relative to standard deviation.

d) Patterns

• Head and Shoulders, Double Tops/Bottoms, Triangles, Flags: Graphical patterns used to predict trend reversals or continuations.

3. Technical Analysis Process

1. Determine objective and timeframe
   • Intraday, daily, weekly, or monthly charts can be used.
2. Analyze trends and patterns
   • Identify upward, downward, or sideways trends.
3. Confirm with indicators
   • Example: RSI in overbought zone may indicate a selling opportunity.
4. Implement risk management
   • Set stop-loss and target levels.
5. Decision-making
   • Decide whether to buy, sell, or hold.

Summary

• Goal: Make profitable trades by predicting price movements.
• Basis: Historical price and volume data.
• Tools: Charts, indicators, trends, patterns.
• Important: Technical analysis does not guarantee success; proper risk management is essential.