Technical Analysis

Price charts summarise the underlying opinions and emotions of the real market participants.
Every chart tells a story.
It pays to understand the stories in the price charts.
You are here: Share Market ToolboxTechnical Analysis
Related links: Technical Analysis - Getting StartedTechnical Analysis - What is it?; Chart patterns;
Technical analysis (chart) indicators; TA - The Proof; 4 Windows approach
Practical applications and more about Technical Analysis; Published ATAA articles; Beware the falling stocks;
Blue Chips; Dow Theory; Price Action Context;
Moving Average; Weinstein's 30-week MATrends and trend-spotting; Support and Resistance;
Breakouts; Candlestick charts; Divergence; semi-log price charts; Exit strategies; Stop Loss;
Fundamental analysis; Funda-Technical Analysis; eBook Articles Master List; eBook Articles INDEX; about the eBook Articles

Technical Analysis - what on earth is it?
and how can we use it?

The day-to-day and week-to-week performance of companies in the share market depends on the underlying mood and sentiment of all the investors and traders who participate in the market. When a company's share price rockets upward, or dives downward, it is because enough of the market participants have a strong enough view of the stock, or of the market generally, to cause the share price to move. It is their actions of buying and selling. And their purchase decisions tend to be based on an opinion about the value of the shares. It might be a broker's share price valuation (an opinion about fair value), or that of an analyst. Whatever it is, each share trade takes place at a specific price, and this price value is captured and shown in the price chart.

Hence, the statement at the top of this page:
"Price charts summarise the underlying opinions and emotions of the real market participants.
Every chart tells a story, and it pays to understand the stories in the price charts".

Seem too hard? or confusing?

In case you are already aware of technical analysis, and perhaps it seems to be a little difficult or confusing, make sure to see the Simple and Practical Applications web page.
 

Don't believe it?

Perhaps you are somewhat sceptical about the idea that there are stories in the price charts that are left behind by the market participants? Look at the chart at right and consider the following observations (click on the chart for a larger version with more details and comments).

In this price chart, we can see that in late 2013 there were no buyers of CBA shares who thought the stock was worth more than $80. When the price rose this high in October 2013, sellers stepped in to take profits. [ie. the opinion of market participants was that CBA was not worth $80.] The $80 level was a resistance level.

This caused the price to fall away, but trade mostly higher than about $73. So the $73 price level was a floor (or support level) for the price. And for the next few months it traded no higher than $78. [ie. the opinion of market participants was that CBA was worth between $73 and $78 - no lower and no higher.] 

This was the case until April 2014 when buyers started falling over each other to buy the stock. This caused the price to push above the $80 level, and keep rising in a strong uptrend. [ie. the opinion of market participants was that CBA was now worth more than $80.] 

CBA - the stories in the price charts
Weekly price chart of CBA 
from October 2013 to May 2014.
(Click on the chart for a larger view
with more details and comments)

The opinion of market participants
is captured in the price charts.

Brief Introduction Video

Watch a 6-minute "Very brief Introduction to Technical Analysis" video on YouTube:


 
NOTE: You can also see the full 60-minute version of this video - see the link below.
.  

Not convinced? See some supporting materials that provide evidence.

Why is it so?

It is the underlying emotions of fear, greed and hope which drive share prices, often based on fundamental data or news stories. And all of these are reflected in the share price charts. The underlying sentiment is reflected in the price charts, and in the volume bars on the chart, and in the relative height of candlesticks on a candle chart, and the presence and length of tails on the individual candlesticks. And successive days or weeks of price movement can form patterns on the chart which also reflect the underlying market sentiment.

"The interpretation of past share prices and volume
(typically on share price charts)
to try to gauge likely future price action."

The field of Technical Analysis is the study and interpretation of the price action of financial instruments (eg. shares, currencies, commodities, bonds, etc.) and the “statistical prediction” of their future behaviour. In Technical Analysis there is a substantial body of knowledge ranging from simple price charts to complex mathematical and computer studies. 


For some tips and guidance to help you get started with utilising technical analysis, see Robert's
4 Windows approach
which provides a great check list, as well as an introduction to a number of key aspects of technical analysis.
 
The 4 Windows approach

How is technical analysis useful?

Firstly, it is worth re-stating that the price charts summarise the opinions of the market participants regarding so-called fair value for the share price. The price charts can tell us a story about what “Mister Market” is thinking. It pays to understand the stories in the price charts - this is technical analysis. The more insight we can gain into the share price history, the more we can understand the opinions of the market participants, and the underlying balance of supply and demand for the shares. And this can help give us greater confidence about the more likely scenarios for future price movements. Don’t forget that we are not trying to predict future share prices. We are trying to anticipate the likely future movements so that when a move happens we won’t be surprised by the move.

In it's purest form, the application of technical analysis can involve no consideration of Fundamental Analysis; but the two approaches can be combined - eg. in the Funda-Technical Analysis approach.

People who use technical analysis might invest in shares in the share market, or in currencies (forex), or options, warrants, commodities or other sorts of financial instruments. Thousands of people around the world use this to successfully time the market. Nothing is 100% perfect, but when coupled with the right approach, strategy and money management and risk management methods, one can be very successful and profitable.

The study of technical analysis has been around for many centuries - see History details in Wikipedia.

How can we use simple technical analysis to be profitable?

Okay, so how can we use the simple aspects of technical analysis to: identify potentially profitable stocks, invest wisely, manage the risk, and protect our capital against downside risks? See the details here...

To read more about the key aspects of technical analysis, see the details below.

Not convinced? See some supporting materials that provide evidence.


60-minute Introduction Video

Watch a 60-minute "Introduction to Technical Analysis" video on YouTube:
 

 .

See the proof

See some academic and research papers that provide evidence to support the notions of Technical Analysis.

Practical applications
and case studies

  • See Robert's contributions to several of the ASX Investor Update newsletters, which cover some of the material at left.

More details

For more information on this topic, see:

Also see Wikipedia for another view of technical analysis.

Also a range of classic text books on the subject.


Before investing money in the markets, make sure to check with a qualified financial advisor to check if your planned investment is appropriate for you.

STOP! - Are you Share Market Ready?

Whatever you do,
beware of the sharks
in the ocean!

Beware the sharks in the ocean.
 

Key aspects of technical analysis

Price trend

Many people who use technical analysis will look for a rising trend, and invest in the direction of the trend - "the trend is your friend".

See more information about trends.

And this is related to one aspect of Dow Theory.

(Click on the image for a larger version.)
A simple uptrend.

Support and resistance

The ideas of support and resistance on a price chart
have a lot of signifance, and
are clearly explained by the
underlying mood and opinions of
the investors and traders.

See more information about support / resistance.

(Click on the image for a larger version.)
Support and Resistance

Not convinced? See some supporting materials that provide evidence.

Chart patterns

Some people look for chart patterns,
such as an Ascending Triangle.

(Click on the image for a larger version.)
 
See more information on chart patterns.
Ascending Triangle

Chart patterns

The Head and Shoulders chart pattern has
strong underlying significance,
especially when volume is considered.

(Click on the image for a larger version.)
 
See more information on chart patterns.
Head and Shoulders chart pattern

Not convinced? See some supporting materials that provide evidence.

The line chart

The share price chart shown at right is a
basic weekly line chart. The jagged black line
shows the close price at the end of each week.
And each weekly close price is joined
to the next one with a short straight line.
The line chart gives no indication of the
range in price during the period
(compare this to the candlesticks below).
 
The blue curve shown in this chart is the
Moving Average of the price. In this example, it is
the 21-period moving average. That is, each point
along the curve is the average of the previous
21 weekly close prices.
Simple line chart with its Moving Average

Candlesticks

The size, shape and key features of individual
candlestick on a candlestick chart can also tell us a lot.
Each candle on a daily price chart summarises
the price action for one day.
Likewise, each candle on a weekly chart summarises
the price action for one week.
Each candle indicates the open price for the day (or week), and the
close price, as well as the high for the period and the low for the period.
The Bullish Kicker candle at right is a good warning of
a possible positive change in market sentiment.
See more information about candlesticks.
Bullish Kicker candle pattern

Not convinced? See some supporting materials that provide evidence.

Price break out

Some people look for a price break-out above a trading range,
or outside a chart pattern (like a Triangle)
especially with higher volumes
which shows an underlying interest in the security.

See more information about breakouts.

This is explained in another aspect of Dow Theory.

(Click on the image for a larger version.)
A sample break-out

Semi-log price charts


A common feature of price charts is to use
a logarithmic scale on the vertical axis
See more information about semi-log charts.
Semi-log price charts

Volume is important

It is also very useful to understand that the volume traded each day and week is very important. Observing the volume in each scenario above will provide a greater insight to the majority view of the market participants.

Time periods - daily weekly, etc.

All of the above observations of the share price (and volume) behaviour can be performed on daily price charts, or weekly charts, or monthly charts, or quarterly or yearly charts. They can also be done on various intraday time periods (1-minute, 2-minute, 5-minutes, 10-minutes, half hour, hourly, 2-hourly).
 
The daily line chart, for example, shows the close price at the end of each day - all joined together with short straight line segments. Likewise, the weekly line chart shows the close price each week joined together with straight lines. And so on for the other periods.

Dow Theory

The term Dow Theory refers to a body of knowledge which underpins key aspects of contemporary technical analysis. There are six tenets of Dow Theory, and it is very useful to understand each of them. Read more about Dow Theory.

Chart indicators

The above key aspects of technical analysis provide insights into the underlying opinions of the market participants by studying only the plain price action, and the volume. The broad subject of technical analysis also includes the use of chart indicators which are derived from the price action. There are many technical analysis indicators.
 

Chart indicators

Some people use chart indicators such as the Moving Average.
There are many more to choose from.
See more information about indicators.

(Click on the image for a larger version.)
Moving Average on a price chart

Divergence

 Divergence (and bearish divergence)
The chart feature where the share price is
trending in one direction while
a chart indicator trends in the other.

(Click on the image for a larger version.)
Bearish divergence on the index
 

More about chart indicators?

See more information about indicators.


Price Action Context

This is another aspect to the study of the price charts, and one which is not mentioned very much.

You can read more about Price Action Context here in the Toolbox.

How can we use simple technical analysis to be profitable?

Okay, so how can we use the simple aspects of technical analysis to: identify potentially profitable stocks, invest wisely, manage the risk, and protect our capital against downside risks? See the details here...


In summary

The study of technical analysis provides invaluable insights into the underlying mood and sentiment of the security or the market. It can be applied to price charts of stocks, and the market index, and commodities, and other financial instruments.

Price charts summarise the underlying opinions
and emotions of the market participants.
Every chart tells a story. Understand the stories in the price charts.

The above samples are merely a small collection of samples - there is much more to this field of study.

And if you have trouble with the charts, some people study technical analysis without using price charts at all - the branch of study referred to as numerical analysis, or computational analysis.

There are a number of basic strategies that some people consider implementing.

More information

Technical Analysis - What is it? (more details)...

Technical Analysis - Some simple and useful applications

Technical Analysis - how to get started...

Also see the links in the column at top right.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.

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Last revised: 7 February 2023