Technical analysis is the study of past price movements on a chart to understand how a market is trading and where it might react next. Traders use it to plan where to enter and exit, and it works on any market with a price history.
What Is Technical Analysis?
The Core Idea
Technical analysis reads price charts to find trends and the levels where a market has turned before. It rests on the idea that people tend to react in similar ways to similar situations.
A chart shows how a market has behaved, but it can’t tell you what happens next. Every signal in this guide is a possibility, and any of them can fail.
Technical and Fundamental Analysis Compared
| Technical analysis | Fundamental analysis | |
| Main question | How is the price moving, and where has it turned before? | What could make the price move? |
| What you study | Price charts, volume and indicators | Earnings, interest rates, inflation, jobs data |
| Common use | Timing entries and exits | Forming a view on direction |
Many traders use both.
How to Read a Candlestick Chart
The Parts of a Candle
Each candle covers one period, such as an hour or a day, and shows four prices. The open and close form the thick body. The thin wicks above and below mark the highest and lowest prices traded. A candle that closes higher than it opened is usually green, and one that closes lower is usually red.
What Candles Can Tell You
A long lower wick means sellers pushed the price down, but buyers pushed it back up before the close. Two patterns come up often:
- Hammer: a small body near the top with a long lower wick, often read as buyers stepping in after a fall.
- Doji: the open and close are almost the same, which shows a session where neither side won.
[Chart: Daily candlestick chart with a hammer candle labeled, showing its small body, long lower wick, open, close, high and low]
You’d see the wick reaching well below the body, marking the low that buyers pushed back from. A single candle carries little weight by itself, and traders pay more attention when one forms at support or resistance.
Support and Resistance
Support
Support is a price area where a falling market has stopped and turned higher before, a sign that buyers stepped in there.
Resistance
Resistance is an area where a rising market has stalled and turned lower, often because sellers took over at that price.
Both work best as zones. If GBP/USD has held at 1.2600 before, a dip to 1.2585 that turns higher still counts as the zone holding.
[Chart: GBP/USD daily chart with a support zone around 1.2600 shaded, showing three separate bounces over four months]
You’d see three lows in the same band, and each bounce makes the level more widely watched.
When a Level Breaks
When the price closes clearly through a level, old support often becomes new resistance, and the reverse applies too. A false breakout is when the price pushes through a level, then quickly moves back.
Trends and Trendlines
Spotting a Trend
An uptrend makes higher highs and higher lows, and a downtrend makes lower highs and lower lows. A market moving sideways between clear support and resistance is called ranging.
Drawing a Trendline
In an uptrend, connect two or more rising lows. In a downtrend, connect two or more falling highs. A third touch gives traders more reason to take the line seriously.
[Chart: Brent crude oil daily chart with a rising trendline connecting three higher lows near $72, $75 and $78 a barrel]
You’d see oil pull back to the line three times and bounce each time. A close well below it would suggest the uptrend may be weakening.
Moving Averages
How They Work
A moving average plots the average closing price over a set number of candles. On a daily chart, the 50-day moving average is the average of the last 50 closes. It smooths out daily swings and makes the trend’s direction clearer. An exponential moving average (EMA) gives recent closes more weight and reacts faster.
How Traders Read Them
A price holding above a rising 50-day line is often read as an uptrend. When the 50-day crosses above the 200-day it’s called a golden cross, and a cross below is called a death cross.
[Chart: US stock index daily chart with the 50-day and 200-day moving averages, showing the 50-day crossing above the 200-day]
You’d see the cross appear weeks after the index turned higher. Moving averages are built from past prices, and they confirm a trend after it has started.
The Relative Strength Index (RSI)
What the Number Means
The RSI compares the size of recent gains with recent losses. J. Welles Wilder introduced it in 1978 with a 14-period setting, which most platforms still use as the default. It moves between 0 and 100 in a panel under the chart. Above 70 is usually called overbought, and below 30 oversold.
How Traders Use It
Overbought means the price has risen fast. It doesn’t mean it has to fall, and in a strong uptrend the RSI can stay above 70 for weeks.
Many traders watch for divergence, where a share makes a new high but the RSI makes a lower high.
[Chart: Share price daily chart with RSI panel below, showing price making a higher high while RSI makes a lower high, with both highs marked]
You’d see two rising peaks in the price and two falling peaks in the RSI. Divergence suggests upward momentum may be fading, though the price can keep rising.
Trading Volume
Volume shows how much of a market changed hands in each period, usually as bars under the chart. A breakout on heavy volume tends to carry more weight than one on light volume, which is more often a false breakout.
Forex has no central exchange, and many forex charts show tick volume, which counts how often the price changed.
Planning a Trade on a EUR/USD Chart
The figures in this example are for illustration.
[Chart: EUR/USD daily chart in an uptrend above a rising 50-day moving average, with support at 1.0800, a hammer candle at the support zone and resistance at 1.0920 marked]
EUR/USD is making higher lows above a rising 50-day moving average. It pulls back to 1.0800, a level that was resistance last month and now acts as support. A hammer forms there, and the RSI turns up from 42. A trader reading this as a possible continuation might plan:
- Entry: buy at 1.0820
- Stop loss: 1.0780, just below support, a risk of 40 pips
- Take profit: 1.0900, just under resistance at 1.0920, a target of 80 pips
- Position size: 10,000 units, where each pip (a 0.0001 move) is worth $1
| Outcome | EUR/USD at close | Pips | Result |
| Price reaches the target | 1.0900 | +80 | $80 gain |
| Price hits the stop loss | 1.0780 | -40 | $40 loss |
| Price gaps past the stop loss | 1.0760 | -60 | $60 loss |
The third row shows that a standard stop loss closes at the next available price, which can be worse than your level. The spread comes off every result.
The position is worth about $10,820, and the margin needed depends on the pair’s margin rate. CFDs are leveraged, and leverage increases both gains and losses.
Common Mistakes With Technical Analysis
Filling the Chart With Indicators
Most indicators are calculated from the same prices, and five of them often repeat one message. Price, volume and one or two indicators are plenty.
Reading Patterns as Certainties
A hammer or a golden cross shows what has happened before in similar conditions. Each one fails some of the time.
Drawing Lines to Fit a View
It’s tempting to draw the trendline that suits the trade you want. Marking levels before choosing a direction helps.
Looking at One Timeframe
A 15-minute chart can show an uptrend inside a daily downtrend. A quick look at the higher timeframe gives the shorter chart context.
Missing Scheduled News
An interest rate decision or jobs report can push the price through any level. Our Fundamental Analysis Guide explains how these releases move markets. [link to: Fundamental Analysis Guide]
Key Takeaways
- Technical analysis studies past price movements to find trends and levels where the market has reacted before.
- Support and resistance are zones, and a broken level often switches roles.
- Moving averages show the trend’s direction but confirm it after it has started.
- An RSI above 70 or below 30 describes momentum, and the price can keep going.
- Chart signals are possibilities, and a stop loss sets your exit if one fails.
Technical Analysis FAQs
Does technical analysis work?
Technical analysis can help you read how a market is moving and plan your entries and exits, but no chart signal is right every time. Patterns fail, and news can move prices in ways a chart can’t anticipate. Many traders use it to structure decisions and manage risk, alongside an understanding of what drives their market.
What is the best timeframe for technical analysis?
The best timeframe depends on how long you plan to hold a trade. Day traders often use 5-minute to 1-hour charts, while swing traders who hold for days or weeks tend to use 4-hour and daily charts. Many beginners start with the daily chart, because signals form more slowly and each candle covers a full session.
Can you use technical analysis on forex and crypto?
Yes, technical analysis works on any market with a price chart, including forex and crypto. Forex charts often show tick volume, because currencies don’t trade on one central exchange. Crypto is highly volatile and trades through the weekend, which means prices can move sharply and break through levels quickly. [BRAND] shows the trading hours for each market.
Which technical indicators should beginners learn first?
Moving averages and the RSI are a good place to start, because they’re on almost every platform and show two different things. A moving average shows the trend’s direction, and the RSI shows the strength of recent moves. Learning to read support, resistance and candlesticks on a plain chart first makes both easier to interpret.
Should beginners learn technical or fundamental analysis first?
Most beginners get on best learning the basics of both side by side, because they answer different questions. Fundamental analysis looks at why a market might move, using earnings, interest rates and economic data. Technical analysis looks at how the price is moving and where it has reacted before. Many traders use fundamentals to understand a market and charts to time their trades.