What is technical analysis?
Interpreting Price Behaviour and Market Data
Technical analysis is the study of historical price movements and market behaviour to better understand current market conditions. Instead of focusing mainly on economic reports, company performance or geopolitical developments, technical analysis looks directly at price data and how market participants have responded over time.
Charts are at the centre of technical analysis. They allow traders to observe whether a market is trending, moving within a range or experiencing increased volatility. Technical analysis can also help identify areas where price has previously changed direction, slowed down or attracted increased market activity.
A wide range of tools can be used, including candlestick charts, support and resistance levels, moving averages and momentum indicators such as the Relative Strength Index.
Technical analysis does not predict future prices with certainty. Its purpose is to provide a structured framework for interpreting market behaviour and evaluating different market scenarios.
Candlestick charts
Open, High, Low and Close
Candlestick charts are one of the most commonly used methods of displaying price movements. Each candlestick represents how the price of an instrument moved during a selected period, such as one minute, one hour, one day or another chosen timeframe.
Every candlestick contains four important prices: the opening price, highest price, lowest price and closing price. The main body represents the relationship between the opening and closing prices, while the upper and lower wicks show the highest and lowest levels reached during that period.
Bullish Candle
A candle closing above its opening price generally represents upward price movement.
Bearish Candle
A candle closing below its opening price generally represents downward price movement.
The size of a candle body and its wicks can provide additional context about buying and selling activity. Rather than relying on one candle, traders often observe a sequence to understand how price behaviour is developing over time.
Support and resistance
Areas Where Price Has Previously Responded
Support
A price area where downward movement has previously slowed, stopped or reversed. Traders may observe whether buying activity begins to increase when price approaches it again.
Resistance
An area where upward movement has previously slowed, stopped or reversed. Sellers may become more active as price approaches a previously significant level.
Support and resistance should not always be viewed as exact prices. In many situations, they are better understood as price zones. Markets can move slightly above or below previous levels before determining their next direction.
When an established support or resistance area is broken, traders may monitor whether that level begins to perform a different role as the market develops.
Understanding market trends
Uptrend, Downtrend and Range
A market trend describes the broader direction in which price is moving over a selected period. Recognising the current trend can provide useful context before applying other technical indicators.
Uptrend
A sequence of higher highs and higher lows as price progresses upward.
Sideways
Price moves between relatively established support and resistance areas.
Downtrend
A sequence of lower highs and lower lows as price progresses downward.
Trends can look different depending on the timeframe. A market could be moving upward on a daily chart while experiencing a short-term decline on an hourly chart, making timeframe selection an important part of technical analysis.
Relative Strength Index
Observing Recent Market Momentum
The Relative Strength Index, commonly known as RSI, is a momentum indicator used to measure the speed and magnitude of recent price movements. It is displayed on a scale ranging from 0 to 100.
Traditionally, an RSI reading above 70 is described as overbought, while a reading below 30 is described as oversold. These readings should not automatically be interpreted as signals that a market is about to reverse. Strong trends can remain within higher or lower RSI ranges for extended periods.
Traders sometimes monitor situations where price continues moving in one direction while RSI begins moving differently. This is commonly referred to as divergence. RSI is generally more informative when considered alongside price action, trends and important support or resistance areas.
Moving averages
Smoothing Price Data Over Time
A moving average is a technical indicator that smooths price data over a selected period. By reducing some short-term fluctuations, moving averages can make the broader direction of a market easier to observe.
Simple Moving Average
A Simple Moving Average (SMA) calculates the average price across a specified number of periods.
Exponential Moving Average
An Exponential Moving Average (EMA) gives greater weighting to more recent price data, making it more responsive to recent movements.
Traders may use moving averages to observe market direction, potential changes in trends and areas where price repeatedly interacts with an average. Different periods can be selected according to the timeframe and type of analysis.
A moving average should not be viewed as a prediction. It is based on historical price data and therefore provides information about how the market has already behaved.
Technical indicators
Momentum, Volatility and Trend Direction
Technical analysis includes many indicators beyond RSI and moving averages. Each is designed to examine a particular aspect of market behaviour.
MACD
Can be used to study momentum and changes in trend behaviour.
Bollinger Bands
Can help visualise how price moves relative to a moving average and changes in volatility.
Average True Range
ATR focuses on the degree of price movement and can provide context around changing market volatility.
Combined Context
Indicators may conflict because they measure different aspects of market behaviour. Several pieces of information are often considered together.
Bringing technical analysis together
Build a Broader Picture of Current Conditions
Technical analysis is not simply about finding one indicator or chart pattern. It involves building a broader understanding of how different elements of price behaviour relate to each other.
A trader might identify the overall market trend, locate important support and resistance areas, observe candlestick behaviour and then use RSI or moving averages for additional context.
Important information
No Technical Method Guarantees Future Behaviour
Market conditions can change quickly. Technical signals should be considered within a broader understanding of trading risk and should not be treated as a guarantee of future market performance.