Technical Analysis for Beginners
Learn to read charts, use indicators, and understand candlestick patterns.
Educational Purposes Only
Technical analysis is a complex discipline with many different strategies. This guide is a high-level educational overview and not financial or trading advice. Past performance is not indicative of future results.
What is Technical Analysis?
Technical analysis is a trading discipline used to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Unlike fundamental analysis, which focuses on a company's financial health, technical analysts believe that all known information is already reflected in the stock's price. They use charts and other tools to identify patterns and trends that can suggest future price movements.
Understanding Charts
Visualizing price action is the first step.
Line Chart
The simplest chart type, created by connecting a series of closing prices over a time period. It's useful for seeing the general trend but lacks detailed information.
Bar Chart
Each bar shows the open, high, low, and close (OHLC) prices for a specific period. This provides much more detail than a line chart.
Candlestick Chart
The most popular chart type. Like bar charts, they show the OHLC, but the 'body' of the candle makes it easier to visualize the price movement. A green (or white) candle means the price closed higher than it opened, and a red (or black) candle means it closed lower.
Key Candlestick Patterns
Hammer & Hanging Man
A candle with a short body and a long lower wick. A Hammer appears in a downtrend and can signal a potential reversal upwards. A Hanging Man appears in an uptrend and can signal a reversal downwards.
Engulfing Patterns (Bullish/Bearish)
A two-candle pattern where the second candle's body completely "engulfs" the first. A Bullish Engulfing pattern (red then a larger green) can signal an uptrend. A Bearish Engulfing pattern (green then a larger red) can signal a downtrend.
Doji
A candle where the open and close prices are virtually equal, resulting in a very small body. It signifies indecision in the market and can often precede a reversal.
Common Technical Indicators
Mathematical calculations based on price, volume, or open interest.
Moving Averages (MA)
A continuously calculated average price over a specific period (e.g., 50-day or 200-day MA). They help smooth out price action and identify the direction of the trend. Crossovers between different MAs (like a 50-day crossing above a 200-day) are often used as buy or sell signals.
Relative Strength Index (RSI)
A momentum oscillator that measures the speed and change of price movements. RSI oscillates between 0 and 100. Traditionally, an asset is considered overbought when the RSI is above 70 and oversold when it is below 30.
Moving Average Convergence Divergence (MACD)
A trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. Crossovers of the MACD line and its "signal line" can be used as buy or sell signals.