Technical analysis is one of the fundamental methods used by advanced traders to make market decisions. Unlike fundamental analysis, which focuses on economic and financial factors, technical analysis is based on historical data on prices and trading volumes.
Basics of technical analysis
The purpose of technical analysis is to identify trends, turning points, and support and resistance levels, allowing traders to optimize the moments of entry and exit of a position. In this article, we will discuss the principles of technical analysis, the most important tools, strategies for use and integration with other investment methods.
Technical analysis is based on three key assumptions:
- The market discounts everything – all information, both public and private, is already included in asset prices.
- Prices are subject to trends – investors assume that prices move in specific directions that can be identified and exploited.
- History repeats itself – the behaviour of market participants is cyclical, which allows you to forecast future movements based on historical data.
Technical analysis does not assess the fundamental value of an asset, but examines the psychology of the market, the behavior of participants, and the reactions of prices to various stimuli. Advanced traders use it on both stock, Forex, cryptocurrency, and commodity markets, adjusting techniques to the specifics of a given instrument.
Technical analysis tools
Advanced technical analysis uses a wide range of tools to precisely determine the entry and exit points of a position.
Key tools include:
- Trend indicators – moving averages (SMA, EMA), ADX or MACD allow you to identify the direction and strength of the trend.
- Oscillators – RSI, Stochastic or CCI help determine the overbought or oversold zones of the market.
- Price patterns – head and shoulders, double top/bottom, triangles, and wedges allow you to forecast potential trend reversals.
- Support and resistance levels – determine the points where prices may encounter a strong reaction from buyers or sellers.
- Volume – analysis of trade volume allows you to verify the strength of the trend and confirm the signals coming from the charts.
Professional traders often combine several indicators to get more reliable signals while minimizing false positives.
Strategies based on technical analysis
Technical analysis forms the basis of many investment strategies, both short-term and medium-term.
Examples of strategies:
- Trend following – buying rising assets and selling falling ones based on confirmation of the trend by technical indicators.
- Breakout trading – using the moments of price breakout from specific patterns or support/resistance levels to take a position.
- Pullback trading – reacting to corrections within the main trend and entering a position after the price has pulled back to significant support or resistance.
- Scalping and day trading – fast intraday trades, using microtrends and short-term price fluctuations.
Advanced strategies require systematic testing, signal monitoring, and discipline in execution to effectively minimize the risk of false signals.
Integration with other investment techniques
Technical analysis in its most effective application is part of an integrated investment strategy. Professional investors often combine it with fundamental analysis and portfolio management.
Benefits of integration:
- Fundamental confirmation – technical analysis helps determine the optimal moment of entry while fundamentals assess the value of an asset.
- Risk control – support, resistance, and indicator signals are used to set stop-losses and take-profits.
- Asset selection – technical analysis allows you to identify the best investment opportunities in a portfolio selected based on fundamentals.
- Optimization of short-term strategies – day trading and swing trading are based on precise chart analysis and signals generated by indicators.
The integration of technology and fundamentals allows the investor to make more comprehensive decisions, reducing risk and increasing the efficiency of the portfolio.
Technical analysis is an advanced investor’s tool that allows you to identify trends, turning points, and potential investment opportunities based on historical data and market behavior. The key elements are indicators, price patterns, support and resistance levels, and volume analysis. Professional traders use technical analysis both alone and in combination with fundamental analysis, portfolio management strategy and modern trading tools. This makes it possible to make decisions based on data rather than emotions, increasing precision, minimizing risk, and maximizing potential profits. Technical analysis in the hands of an experienced investor becomes not only a tool for identifying opportunities, but also an element of a comprehensive investment strategy.