Technical Analysis Basics
Interpret candlestick patterns, support and resistance boundaries, moving averages, and relative strength momentum indicators.
TL;DR
- Identify key price
support-and-resistancebreakout zones on technical charts. - Track trend direction using the
50-day-and-200-daymoving averages. - Confirm chart breakouts using surges in trading
volume-liquidity.
Support Resistance And Candlesticks
Support Price FloorPrice level where concentrated buying demand halts downward trends.
Price level where concentrated buying demand halts downward trends.Resistance Price CeilingPrice level where concentrated selling supply prevents further gains.
Price level where concentrated selling supply prevents further gains.Candlestick ComponentsOpen, high, low, and close prices summarized visually over time.
Check whether close price is greater than open price.Moving Averages And Trends
50-Day Moving AverageIntermediate trend indicator used by institutional portfolio managers.
Intermediate trend indicator used by institutional portfolio managers.200-Day Moving AverageLong-term market bull/bear demarcation line.
Check whether current price is greater than ma200.Golden Cross vs Death CrossBullish 50/200 cross vs bearish 50/200 downward cross.
Bullish 50/200 cross vs bearish 50/200 downward cross.Momentum Oscillators And Volume
Relative Strength Index (RSI)Momentum oscillator measuring velocity of price changes (0 to 100).
Check whether rsi14 is less than 30.Volume ConfirmationBreakouts accompanied by high volume validate real institutional interest.
Check whether volume is greater than avg volume times 2.0.MACD IndicatorMoving Average Convergence Divergence tracking trend momentum.
Check whether macd line is greater than signal line.Risk Defined Trade Execution
Reward-to-Risk CalculationEnforcing minimum 3:1 ratio between potential profit and stop risk.
Enforcing minimum 3:1 ratio between potential profit and stop risk.Support Break InvalidationExit trade immediately when price closes below support anchor.
Exit trade immediately when price closes below support anchor.Trailing Stop EscalationRaise stop loss behind rising 20-day exponential moving average.
Raise stop loss behind rising 20-day exponential moving average.Tips
- Use technical analysis primarily for trade timing and risk definition while using
fundamentalsto select the underlying asset. - Always demand a minimum 2:1 or 3:1
reward-to-riskratio before entering any chart breakout setup.
Warnings
- Never trade technical chart patterns in isolation without placing a guaranteed
stop-lossto limit downside. - Avoid cluttering charts with dozens of overlapping oscillators that create analysis paralysis and conflicting
trade-signals.
In Practice
Calculate entry, stop-loss, profit target, and reward-to-risk ratio for a moving average breakout.
A swing trader evaluates a breakout setup with 50-day and 200-day moving averages and a 14-day RSI of 62.
- 1. Identify Golden Cross: 50-day moving average crosses above 200-day average at $82.00.
- 2. Identify key resistance breakout at $85.00 with trading volume 2.5x above 30-day average.
- 3. Establish entry price at $85.50 and set strict support stop-loss at $82.50 ($3.00 risk).
- 4. Set upside resistance profit target at $94.50 ($9.00 reward potential).
- 5. Calculate reward-to-risk ratio: $9.00 potential profit / $3.00 risk = 3.0:1 ratio.
Technical breakout offers an asymmetric 3:1 reward-to-risk trade setup.
Combining trend indicators with volume confirmation and favorable risk-reward ratios creates disciplined technical trade setups.
FAQ
Fundamental analysis evaluates a company financial statements, business model, and intrinsic valuation. Technical analysis studies historical price action, chart patterns, and trading volume to forecast market supply and demand trends.
A Golden Cross occurs when a short-term moving average (typically the 50-day) crosses above a long-term moving average (the 200-day), signaling a major bullish momentum shift.
The Relative Strength Index (RSI) is an oscillator measuring price momentum on a scale of 0 to 100. Values above 70 typically indicate overbought conditions, while values below 30 indicate oversold territory.