Technical Analysis is the study of a security’s historical price movements and trading volume to forecast future price behaviour. It is primarily used by traders and short-term investors to decide when to enter or exit a trade.
Unlike fundamental analysis (which focuses on financial statements), technical analysis assumes that all information — fundamentals, news, sentiment — is already reflected in the price.
Therefore, analysing the price itself is enough to predict possible future moves.
Core Assumptions of Technical Analysis
Principle
Meaning
Market Discounts Everything
All factors—economic, political, psychological—are already priced in.
Price Moves in Trends
Prices follow identifiable trends that tend to continue over time.
History Repeats Itself
Investor behaviour is cyclical, forming repeatable patterns.
Why is Technical Analysis Used?
Identify trends in prices
Spot trading opportunities
Determine entry and exit points
Manage risk through stop-loss and support/resistance analysis
Especially useful for:
Intraday Traders – Buy & sell within the same day, avoiding overnight risk.
Swing Traders – Hold for days/weeks to capture price swings.
Options Traders – Use derivatives for speculation or hedging with defined risk/reward setups.
Algorithmic Traders – Use pre-programmed strategies based on price, volume, and indicators.
Tools Used in Technical Analysis
Tool Type
Description
Examples
Price Charts
Visual representation of historical prices
Line, Bar, Candlestick
Indicators
Mathematical calculations based on price/volume
RSI, MACD, Moving Averages
Patterns
Repeated formations indicating behaviour
Head & Shoulders, Double Top/Bottom
Volume Analysis
Measures trading activity
Volume Spikes, Accumulation/Distribution
Support/Resistance
Key levels where buying/selling occurs
Support Zones, Resistance Breakouts
Understanding Candlestick Charts
Candlestick charts are the most used tool in technical analysis. Each candle shows Open, High, Low, and Close (OHLC) prices for a time period.
Example – Bullish Engulfing Pattern:
Day
Open
High
Low
Close
Volume
Day 1
₹950
₹970
₹940
₹945
1,00,000
Day 2
₹940
₹980
₹935
₹975
1,80,000
Interpretation:
Day 2's candle engulfs Day 1’s body.
Rising volume confirms the move.
Indicates a bullish reversal – traders may go long.
Price Trends: The Foundation of Technical Analysis
Trend Type
Description
Uptrend
Higher highs and higher lows
Downtrend
Lower highs and lower lows
Sideways / Range-bound
Moves between support & resistance
“The trend is your friend – until it bends.”
Common Technical Indicators
Indicator
Purpose
What It Tells You
Moving Average (MA)
Trend
Smooths price action
RSI
Momentum
Overbought (>70) / Oversold (<30)
MACD
Trend + Momentum
Entry/exit via crossovers
Bollinger Bands
Volatility
Breakouts & overextensions
Volume
Strength
Confirms or invalidates price moves
Price Action vs Indicator-Based Trading
Price Action Traders – Focus on price movement & candlestick patterns.
Indicator-Based Traders – Use tools like RSI, MACD for confirmation.
Many experienced traders combine both.
Limitations of Technical Analysis
Not always accurate — markets are unpredictable.
Works better in liquid, high-volume markets.
Doesn’t account for sudden events (e.g., crises, earnings surprises).
Key Takeaways
Technical Analysis forecasts prices using past price & volume data.
Uses charts, indicators, and patterns to identify opportunities.