Technical analysis is the study of historical price and volume data to forecast future price movements. Unlike fundamental analysis — which asks what an asset is worth — technical analysis focuses exclusively on what the market is actually doing. The method applies equally to stocks, commodities, currencies, and crypto and is one of the most widely used tools among short- to medium-term traders worldwide.

Technical analysis — what it is and how to use it

Technical analysis rests on three core assumptions: (1) all available information is already reflected in the price, (2) prices move in trends, and (3) historical patterns tend to repeat. These premises trace back to Dow Theory, formulated by Charles Dow in the late 19th century, and have since expanded into a broad toolkit of indicators and chart patterns.

Technical analysis is used by retail investors, fund managers, and algorithmic trading systems alike. Even sceptics find value in it: because enough market participants act on the same signals, those signals can become self-fulfilling.

Core concepts in technical analysis

Trend

An uptrend is defined by higher highs and higher lows; a downtrend by lower highs and lower lows. Trading "with the trend" is one of the most fundamental guidelines — counter-trend moves are possible but statistically harder to time.

Support and resistance

Support is a price level where buying interest has historically overcome selling pressure and reversed the price upward. Resistance is the opposite — a level where sellers have taken over. When resistance is broken, it can convert to support (and vice versa), a phenomenon called a "polarity flip."

Volume

Volume confirms price moves. A rally on high volume signals stronger buying interest than a rally on thin volume. Moves not confirmed by volume are often viewed as weak and potentially false.

Common technical indicators

Moving averages (MA)

A simple moving average (SMA) calculates the average closing price over a set number of periods. SMA 50 and SMA 200 are the most watched. A "golden cross" — when SMA 50 crosses above SMA 200 — is traditionally read as a buy signal; the "death cross" is the reverse.

RSI — Relative Strength Index

RSI measures whether an asset is overbought (RSI > 70) or oversold (RSI < 30) relative to its recent price history. It is one of the most widely used indicators and is covered in depth on the What is RSI? page.

MACD

Moving Average Convergence/Divergence (MACD) shows the relationship between two exponential moving averages (EMA 12 and EMA 26). The MACD line, signal line, and histogram together provide signals about momentum shifts.

Bollinger Bands

Bollinger Bands consist of an SMA 20 with bands at ± 2 standard deviations. Price tends to oscillate within the bands. Breakouts outside the bands can signal strong momentum, but should be confirmed by volume.

Fibonacci levels

Based on the Fibonacci sequence, traders typically mark the retracement levels 38.2%, 50%, and 61.8% as potential support or resistance after a strong move. The levels are partly self-fulfilling because many participants place orders at them.

Chart patterns

Head and shoulders

One of the most recognised reversal patterns. Three peaks — a left shoulder, a head (the highest peak), and a right shoulder — signal that an uptrend may be reversing. The neckline break is the trigger for the sell signal.

Double bottom and double top

A double bottom (W-formation) signals a potential reversal upward; a double top (M-formation) the reverse. Confirmation comes when price breaks the neckline on high volume.

Flags and wedges

Consolidation patterns that often precede a continuation of the prevailing trend. A bull flag — a brief downward consolidation after a sharp rally — typically resolves with an upside breakout.

Technical analysis for commodities and currencies

The same tools apply to commodities and currency pairs. For traders tracking gold prices or silver prices, technical analysis can help identify entry points, support levels, and resistance zones. In currency markets, TA is widely used by those monitoring major and cross pairs for timing decisions.

Technical analysis generally works better on liquid markets with high volume. Thinly traded commodities can produce noisier, less reliable signals.

Limitations of technical analysis

Technical analysis does not predict the future with certainty — it provides probabilities, not guarantees. Key limitations:

Technical analysis works best as a complement to fundamental analysis and a clear risk management strategy — not as a standalone oracle. See our guide on diversification for how technical analysis fits within a broader investment strategy.

Frequently asked questions about technical analysis

Does technical analysis work?

Academic research gives a mixed verdict. Studies show that simpler strategies (e.g., moving average crossovers) have shown some predictive power historically, but the edge is often eroded by transaction costs and markets evolve over time. In practice, the majority of professional traders use TA as one of several decision tools — not the only one.

What is the difference between technical and fundamental analysis?

Fundamental analysis answers the question "what is the asset worth?" — it draws on cash flow, balance sheets, macroeconomics, and competitive positioning. Technical analysis answers "what is the price doing right now?" Many investors combine both: fundamental analysis to decide what to buy, technical analysis to decide when.

How do I learn technical analysis?

Start by understanding trend, support/resistance, and volume before adding indicators. Good foundational sources include John Murphy's Technical Analysis of the Financial Markets (industry standard) and TradingView (free charting platform with built-in indicators). Practise with paper trading (simulated trades without real money) before committing capital.

Which indicator is best for beginners?

SMA 50 and SMA 200 are the simplest to understand and interpret. RSI is a natural next step — it gives clear signals about overbought and oversold levels. Avoid stacking too many indicators; most measure similar things and create more noise than signal.