Technical analysis is a trading technique that identifies support and resistance levels and trade opportunities on stock charts. It’s used to determine whether the underlying security is bullish or bearish. Fundamental analysis deals with the intrinsic value of a company or its financials. The buying and selling of securities leave clues on charts called candlesticks, which is the foundation of how technical analysis is used. Traders can’t hide buying and selling on stock charts. Candlesticks are the best visual analysis to show potential buy and sell zones when purchasing a stock.
Technical analysis patterns are formed when data is plotted. Then, the data gets repeated, resulting in a pattern. The basics of technical analysis include price action, patterns, support and resistance levels, and volume. Other basic technical trading principles are indicators, such as moving average lines, MACD, and RSI. While indicators are helpful, it’s important not to rely on them too much as they are lagging and not real-time like price action.
What Are the Types of Technical Analysis?
- Candlestick charts: most popular and modern-day technical analysis indicator
- Line charts: a type of stock chart that connects a series of data points using a line
- Bar charts: a type of stock chart that uses bars that represent graphical data
- MACD: trend-following momentum indicator
- VWAP: intraday trading indicator used to determine the equilibrium of a stock
- RSI: overbought and oversold technical indicator
- Bollinger Bands: visual overbought and oversold indicator
- Fibonacci: series of numbers that calculate a stocks retracement levels
- Stock Volume: measures the number of shares traded during a particular period
Trendlines: determine the direction of a stock over a specific period
Predicting What a Stock Will Do
Let’s begin by stressing that no matter how much technical analysis research someone does, there’s no way anyone can predict what a stock will do. Trading isn’t magic or luck!
You can only predict what’s probable to happen based on the indicators, price action, and candlestick patterns. Then trade what’s happening and remember that only your entry and exit matter and that you manage risk. Anyone that tells you something otherwise is either not experienced enough to know this or is outright lying. Or perhaps, they might have some insider trading knowledge?
All it takes is one trader to change the movement of a stock completely. We call this the butterfly effect. It could be a major seller that pops up when bulls rush in. Or a major buyer when everyone is selling. Because the market is made up of supply, demand, and the chaos of one vs. the other…the market is NOT 100% predictable. But…there is hope…
Collection of Traders
The stock market is a collection of traders and computers from around the world buying and selling stocks. It’s one big auction house, kind of like eBay! The stock market can’t hurt you. It’s not out to get your money or leave you penniless. It can’t read your mind or sneak into your brokerage account and get you to do things you don’t want.
It may seem like the market is out to get you at times. However, the reality is that we’re in control of every single trading decision we make.
Every trading decision made leaves a digital footprint. This footprint forms bull flags, bear flags, head and shoulders, cup and handles, ascending triangles, double tops, double bottoms, and many other patterns.
Traders are creatures of habit and hunters of technical analysis patterns. When these patterns form, they put the statistical odds in your favor when entering the trade.
To increase the probability of making a good trade, it’s important to chart your stock properly and pay attention to the trends. But, of course, there are no guarantees, and that’s why proper trading risk management and always using helpful technical analysis tools are critical.
We like to use the phrases “Always Chart Your Stock!” and “Cut Your Losses!”
Daily charts show patterns to help you create a watch list for the next day. For example, the daily chart shows the price movement from that day and forms patterns.
There are millions of transactions daily in the stock market. Technical analysis patterns show you the big picture because it’s impossible to decipher these traders’ motives. Instead, patterns identify trading signals and future price movement.
Patterns can shift a market from optimism to fear. History repeats itself, so it can move a market when patterns consistently form and have the same outcome. If a bearish pattern emerges, traders start selling and send lower prices. This is where it’s important to learn shorting.
The opposite is true for a bullish pattern. When you see that pattern forming, you know to buy, which raises the price.
Patterns have established criteria and definitions, but nothing is 100% certain. For example, they may form bullish but then break down. Nevertheless, technical patterns help you identify trends and patterns.
Technical Analysis Tools
Essentially, every trader leaves a footprint—even those who use fundamental analysis to make their trades. So, you can get into the minds of fundamental traders by watching the technical analysis patterns they leave behind.
We aren’t saying that technical analysis of stocks is better than fundamental analysis. Instead, they have a symbiotic relationship and complement each other. Knowing both is a great thing.
We always tell our community members to do proper research (due diligence) before entering any trades, including using both the technical and fundamentals. Your odds of a successful trade go up if you use both in harmony!
When hunting for patterns, it’s critical to use good charting software. We recommend using ThinkorSwim, TradingView, or StockCharts.com. Many great charting companies exist, but these are our personal preferences.
Technical analysis tools are essential to search for patterns and setups to trade.
If you’re saying to yourself, this all makes sense, but I don’t know how to do the basics of technical analysis—or even fundamental analysis, for that matter. Don’t worry; we’ve got you covered! Our trading courses can help you get started.
So, candlesticks are the most popular technical analysis indicator when charting your stock. They are the digital footprint left behind by the battle between the bulls and the bears.
We’d say that technical analysis patterns are the first trading signal indicator you’d want to look at, followed by learning how to draw and support and resistance levels. They have a symbiotic relationship. Finding support and resistance lines will give you a good idea of where buyers and sellers might come in before entering a stock.
Moving average lines are next up on deck. Simple moving average and exponential moving average lines show key support and resistance lines on charts.