What is technical analysis: what it studies and where to start
Technical analysis on a real chart: Disney
- Trend. The blue line joins the highs and lows that count: 9 highs and 9 lows, taken with a 5% zigzag. From the top of late March they fall, then from August they both rise.
- Levels. Resistance is the high of ($90.50), support is the low of ($82.63): for weeks the price stays between the two. On it closes more than 1% above resistance: the range is over. On the price comes back to $90.06 and turns up again: the old resistance acted as support.
InteractiveRead a session. Click a day on the chart: I tell you the four prices, the volume and where the close sits against the 50-day moving average.
What technical analysis studies: price and volume
Fig. 1 · What technical analysis looks at
- The price: for every session the open, high, low and close.
- The trend: highs and lows that rise, or that fall.
- The levels: the prices where the move has already stopped.
- Volume: how many shares changed hands behind each move.
The three premises of technical analysis
John Murphy lists them in the first chapter of his textbookFig. 2 · First premise: price discounts everything
- Everything known about a stock ends up in the price: earnings, rates, expectations, fears.
- Whoever knows something buys or sells: the chart moves before the announcement.
- That is why the technician studies the price and not its causes.
Fig. 3 · Second premise: prices move in trends
- An uptrend is a series of higher highs and higher lows.
- A trend in motion is more likely to continue than to reverse.
- The technician’s job is to recognise it early and follow it as long as it holds.
Fig. 4 · The three directions of a trend
- Uptrend: highs and lows rise.
- Sideways: highs and lows stay at the same height, inside a range.
- Downtrend: highs and lows fall.
Fig. 5 · Third premise: history repeats itself
- Chart patterns come from the behaviour of buyers and sellers.
- Fear and greed change little: the same patterns come back, in different markets and years.
- They come back similar, never identical: a pattern points to a possibility, not an outcome.
Deeper dives: Dow theory.
Technical analysis and fundamental analysis compared
Fig. 6 · Two different questions about the same stock
- Fundamental analysis studies balance sheets, earnings and the economy to estimate what a stock is worth.
- Technical analysis studies the chart to understand how the price moves, and when.
- The first looks for the causes of the move, the second reads its effect.
What it looks at
- Technical: price and volume, on the chart.
- Fundamental: balance sheets, earnings, rates, the economy.
The question
- Technical: how does the price move, and when?
- Fundamental: what is it worth, and why?
Cause and effect
- Technical: reads the effect, that is the price move itself.
- Fundamental: looks for the causes that drive it.
The horizon
- Technical: the same tools on minute, daily or monthly charts.
- Fundamental: thinks in quarters and years.
The markets
- Technical: the same method on stocks, indices, currencies and commodities.
- Fundamental: every market needs its own data and its own experts.
Together
- They do not exclude each other: many use fundamentals to choose what to look at.
- And technicals to understand when the price moves.
What you see on a chart
the six elements you meet firstCandlesticks
- Every candlestick is one session: open, high, low, close.
- Green if it closes above the open, red if it closes below.
The trend
- The direction of the price: read from the highs and the lows.
- Rising means uptrend, falling means downtrend.
Support and resistance
- Support is a level where declines have stopped.
- Resistance is a level where rallies have stopped.
The trendline
- A straight line joining the higher lows of an uptrend.
- As long as the price stays above it, the trend holds.
Moving averages
- The average of the last closes, recalculated every session.
- It smooths the price and shows its direction.
Volume
- The bars at the bottom: how many shares traded in each session.
- A move on heavy volume has more buyers or more sellers behind it.
Deeper dives: RSI · Bollinger Bands · the head and shoulders.
Interactive exerciseYour turn: which trend is it?
Disney, three real periods: the judge counts the highs and the lows- Pick a chart: A, B or C. They are three real periods of the same stock.
- Look at the highs and the lows: do they rise, fall or stay at the same height?
- Answer below the chart. The judge marks the highs and lows and tells you why.
Three charts, three answers: start with chart A.
No answer yet: look at the highs and lows of the chart, then choose.
The judge’s rules. A high counts when the price then falls at least 5% from it, a low when the price then rises at least 5% from it (5% zigzag). Uptrend: every high and every low above the previous one. Downtrend: every high and every low below the previous one. Sideways: neither, with the highs within 6% of each other and the lows too. The three periods: A: – · B: – · C: – .
What technical analysis is not: limits and criticisms
Fig. 7 · It is not a forecast
- After a break the price can carry on or fall back.
- A signal points to the most likely scenario, not to a certain one.
- That is why every reading also says where it proves wrong.
Fig. 8 · It is partly subjective
- Two analysts can draw two different lines on the same chart.
- Written rules narrow the gap: how many touches, which filter, which threshold.
- On these pages every example is found by a rule, with its thresholds stated.
The random walk critique
- For part of the academic world prices move at random and the past says nothing.
- It is the efficient market hypothesis: the debate is still open.
The self-fulfilling prophecy
- If many people watch the same level, the price reacts there partly for that reason.
- Murphy replies that charts are read in different ways: technicians never all act together.
It comes late
- A trend is recognised once it has already started: the first stretch is missed.
- It is the price of waiting for confirmation.
Where to start studying technical analysis
1Learn to read a session
- Open, high, low, close: the four prices of every candlestick.
- Then the type of chart and the time horizon.
2Recognise the trend
- Mark the highs and the lows that count.
- Rising, falling or flat: it is the first question in front of any chart.
3Add one tool at a time
- First levels and trendlines, then a moving average, then an oscillator.
- A few tools understood well are worth more than many piled together.
Deeper dives: support and resistance · Trendline.
Where to go from here
The basicsThe other lessons in the «The basics» section
Candlestick chart
- the four prices of a session: body and shadows
- green and red, long and short bodies, long shadows, the doji
- find the candle on a real chart: the judge says yes or no with the numbers
Uptrend: higher highs and higher lows
- higher highs and higher lows: how to recognize an uptrend
- swing points, and the two signals that end a trend
- mark the higher lows yourself on a real chart
Support and resistance
- the level where the decline stopped, and the one where the rise stopped
- touches, time and volume: how much a level counts; once broken, it switches roles
- find the level yourself on a real chart: the judge counts the touches
Trendline
- the line through rising lows: two points and the third touch
- the break with the 3% filter, the fan, the channel
- where the line runs, day by day
Frequently asked questions
What is technical analysis?
It is the study of the price and volume of a market, mostly on charts, to recognise the trend in place and the levels where the price has stopped. It does not look at balance sheets: it starts from the idea that everything that matters is already in the price.
What is the difference between technical and fundamental analysis?
Fundamental analysis studies balance sheets, earnings and the economy to estimate what a stock is worth. Technical analysis studies the chart to understand how the price moves and when. The first looks for causes, the second reads the effect; many use both.
Does technical analysis predict prices?
No. It does not say what will happen: it describes the trend in place and points to the most likely scenario, which may not come true. Part of the academic world, with the random walk theory, holds that past prices do not help at all: the debate is open.
Where do you start studying technical analysis?
From the chart: how to read a candlestick, what a trend is, where support and resistance sit. Then trendlines, moving averages and volume. Indicators come later, one at a time.
Method and sources
| Source |
|---|
| John J. Murphy, Technical Analysis of the Financial Markets: chapter 1, the philosophy of technical analysis (the three premises, the comparison with fundamental analysis, the criticisms). |
| Charles D. Kirkpatrick and Julie R. Dahlquist, Technical Analysis (CMT curriculum): the basic principles and the trend. |
| Martin J. Pring, Technical Analysis Explained: the definition of technical analysis and the weight of the evidence. |
The chart at the top and the three exercise charts use the Disney sessions from our archive, adjusted for dividends and corporate actions; highs, lows and levels are recalculated and verified at every update. The numbered figures are diagrams drawn to explain, not prices. This guide explains how the tools work: it does not contain investment recommendations and promises no returns. Our method · licence · report an error.
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