Technical Analysis

Using price charts to predict stock movements

Understanding how traders use price patterns and trends to time their buying and selling
Modified

September 7, 2025

Category: Analysis & Research
Difficulty: Beginner

Definition

A method of predicting stock prices by looking at charts, price patterns, and trading volume instead of studying the company’s business fundamentals.

How It Works

Basic Idea

Technical analysts believe:

  • Stock prices already include all known information
  • Prices move in trends that can be identified
  • History repeats - similar patterns happen again
  • Human emotions drive predictable price patterns

vs. Fundamental Analysis

  • Technical analysis: “When should I buy or sell?”
  • Fundamental analysis: “What should I buy or sell?”

Common Chart Types

Line Charts

  • Connect closing prices with a line
  • Shows overall trend clearly
  • Good for beginners

Candlestick Charts

  • Show open, high, low, and close prices
  • Green/white = price went up
  • Red/black = price went down
  • Most popular type

Basic Concepts

Support and Resistance

Support: Price level where buyers typically step in - Stock keeps bouncing off this price - Like a floor the stock price can’t break through

Resistance: Price level where sellers typically step in - Stock keeps getting stopped at this price - Like a ceiling the stock price can’t break through

Common Patterns

Breakouts

  • Stock breaks above resistance = potential to go higher
  • Stock breaks below support = potential to go lower
  • Works best with high volume

Double Top/Bottom

  • Price hits same level twice and fails
  • Often signals trend reversal
  • Needs confirmation with volume

Limitations

Why It May Not Work

  • Markets can be unpredictable
  • Patterns sometimes fail
  • News can override technical signals
  • Past performance doesn’t guarantee future results

Criticisms

  • Some say it’s like reading tea leaves
  • Academic studies show mixed results
  • Can become self-fulfilling prophecy

Practical Tips

For Beginners

  • Start with simple concepts (support, resistance, trends)
  • Don’t try to learn everything at once
  • Practice with paper trading first
  • Focus on major timeframes (daily charts)

Risk Management

  • Always have a stop-loss plan
  • Don’t risk more than you can afford to lose
  • Technical analysis works better for timing than picking stocks
  • Combine with common sense

Common Mistakes

  • Seeing patterns that aren’t there
  • Ignoring fundamental news
  • Trading too frequently
  • Not having a plan before entering trades

External Resources