Technical Analysis for Beginners — Chart Patterns & Indicators

What is Technical Analysis?

Technical analysis is the study of past price movements to forecast future price direction. It's based on three core principles:

1. Price discounts everything — All information is reflected in price
2. Price moves in trends — Trends persist until something changes them
3. History repeats itself — Market psychology creates recognizable patterns

Contrast with Fundamental Analysis:

• Fundamental: Analyzes company/economic data, intrinsic value
• Technical: Analyzes price charts, patterns, momentum

Both have merit; many successful traders use both.

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Core Concepts

1. Trend Analysis

The Trend is Your Friend — Most important concept in technical analysis.

Types of Trends:

Uptrend (Bullish):

• Series of higher highs and higher lows
• Buyers in control
• Strategy: Buy dips, don't fight it

Downtrend (Bearish):

• Series of lower highs and lower lows
• Sellers in control
• Strategy: Sell rallies, don't catch falling knives

Sideways / Range-bound:

• No clear direction
• Price bouncing between support and resistance
• Strategy: Buy at support, sell at resistance

Drawing Trend Lines

Uptrend Line:

• Connect at least 2 higher lows
• More touches = stronger trend line
• Price bouncing off = trend confirmation

Downtrend Line:

• Connect at least 2 lower highs
• More touches = stronger resistance
• Price rejecting = downtrend confirmation

Breakout:

• Price breaks through trend line
• Potential trend change
• Confirm with volume and candle close

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2. Support and Resistance

Support — Price level where buying pressure overcomes selling pressure

Characteristics:

• Previous lows
• Psychological levels ($100, $50, etc.)
• Moving averages
• Horizontal levels where price bounced multiple times

How to use:

• Look for buy signals at support
• Place stop loss below support
• If support breaks → potential downtrend

Resistance — Price level where selling pressure overcomes buying pressure

Characteristics:

• Previous highs
• Psychological levels
• Supply zones
• Horizontal levels where price rejected multiple times

How to use:

• Look for sell signals at resistance
• Place stop loss above resistance
• If resistance breaks → potential uptrend

Key Concept: Support becomes resistance (and vice versa) after a break.

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3. Chart Patterns

Continuation Patterns

Flag Pattern:

• Strong move (pole) followed by consolidation (flag)
• Breakout continues original direction
• Reliable in trending markets

Pennant:

• Similar to flag but triangular consolidation
• Usually shorter duration
• Breakout expected in trend direction

Ascending/Descending Triangle:

• Flat top/bottom with converging trend line
• Breakout expected in direction of flat side
• Continuation pattern in trends

Reversal Patterns

Head and Shoulders:

• Three peaks: left shoulder, head (highest), right shoulder
• Bearish reversal after uptrend
• Target: Measured move from neckline

Inverse Head and Shoulders:

• Three troughs instead of peaks
• Bullish reversal after downtrend
• Mirror image of regular H&S

Double Top / Double Bottom:

• Two peaks at same level (double top) = bearish
• Two troughs at same level (double bottom) = bullish
• Neckline break confirms pattern

Rising/Falling Wedge:

• Converging trend lines both sloping same direction
• Rising wedge = bearish reversal
• Falling wedge = bullish reversal
• Opposite of what you'd expect!

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Essential Technical Indicators

Moving Averages

What they do: Smooth out price data to identify trends

Types:

Simple Moving Average (SMA):

• Average of X periods
• Popular: 50 SMA, 200 SMA
• Slower to react

Exponential Moving Average (EMA):

• Gives more weight to recent prices
• Faster to react
• Popular: 12 EMA, 26 EMA

How to use:

1. Trend identification:

   • Price above MA = uptrend
   • Price below MA = downtrend

2. Dynamic support/resistance:

   • Price bounces off MA in trends
   • 50 MA and 200 MA are key levels

3. Moving Average Crossovers:

   • Golden Cross: 50 MA crosses above 200 MA (bullish)
   • Death Cross: 50 MA crosses below 200 MA (bearish)

4. Entry signals:

   • Buy when price pulls back to MA in uptrend
   • Sell when price rallies to MA in downtrend

Limitations:

• Lagging indicator (based on past data)
• Whipsaws in sideways markets
• Need confirmation from other signals

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Relative Strength Index (RSI)

What it measures: Momentum and overbought/oversold conditions

Scale: 0 to 100

Key Levels:

• Above 70: Overbought (potential reversal down)
• Below 30: Oversold (potential reversal up)
• 50: Neutral midpoint

How to use:

1. Overbought/Oversold:

   • RSI > 70 → Look for sell signals
   • RSI < 30 → Look for buy signals
   • Don't trade blindly; confirm with price action

2. Divergence (powerful signal):

   • Bullish divergence: Price makes lower low, RSI makes higher low → reversal up likely
   • Bearish divergence: Price makes higher high, RSI makes lower high → reversal down likely

3. Trend identification:

   • Uptrend: RSI stays above 40-50
   • Downtrend: RSI stays below 50-60

Settings: Default 14 periods works well; some use 7 for faster signals

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MACD (Moving Average Convergence Divergence)

What it shows: Trend direction and momentum

Components:

• MACD Line: 12 EMA - 26 EMA
• Signal Line: 9 EMA of MACD
• Histogram: Distance between MACD and Signal line

How to use:

1. Crossovers:

   • MACD crosses above Signal line → Bullish signal
   • MACD crosses below Signal line → Bearish signal

2. Zero line:

   • MACD above 0 → Bullish momentum
   • MACD below 0 → Bearish momentum

3. Divergence:

   • Similar to RSI divergence
   • Very reliable reversal signal

4. Histogram:

   • Expanding → Momentum increasing
   • Contracting → Momentum decreasing

Best for: Trend-following in medium timeframes

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Bollinger Bands

What they show: Volatility and potential reversal zones

Components:

• Middle Band: 20-period SMA
• Upper Band: SMA + 2 standard deviations
• Lower Band: SMA - 2 standard deviations

How to use:

1. Volatility:

   • Narrow bands → Low volatility (potential breakout coming)
   • Wide bands → High volatility (potential consolidation coming)

2. Overbought/Oversold:

   • Price at upper band → Potentially overbought
   • Price at lower band → Potentially oversold

3. Bollinger Squeeze:

   • Bands tighten (low volatility)
   • Followed by expansion and strong move
   • Direction determined by breakout direction

4. Mean Reversion:

   • Price tends to return to middle band
   • Extreme touches can be fade opportunities

Important: Price can "walk the bands" in strong trends

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Fibonacci Retracement

What it identifies: Potential support/resistance levels

Key Levels:

• 23.6% — Shallow retracement
• 38.2% — Common retracement
• 50% — Psychological level
• 61.8% — Golden ratio (most important)
• 78.6% — Deep retracement

How to use:

1. Identify swing high and swing low
2. Draw Fib levels between them
3. Watch for price reaction at key levels
4. Look for confluence with other support/resistance

In uptrend:

• Buy on pullbacks to 38.2%, 50%, or 61.8%
• Stop loss below next Fib level

In downtrend:

• Sell on rallies to Fib levels
• Stop loss above next Fib level

Works best when combined with other indicators

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Multiple Timeframe Analysis

The Professional Approach:

Use 3 timeframes for complete picture:

1. Higher Timeframe (Trend)

Purpose: Identify overall trend direction

Example: Daily or Weekly chart

• Is the major trend up or down?
• Where are key support/resistance levels?
• What's the bigger picture?

Rule: Trade WITH the higher timeframe trend

2. Medium Timeframe (Entry)

Purpose: Find entry signals

Example: 4-hour or 1-hour chart

• Look for pullbacks in trend
• Identify patterns and setups
• Time your entries

3. Lower Timeframe (Timing)

Purpose: Fine-tune exact entry

Example: 15-minute or 5-minute chart

• Precise entry point
• Reduce drawdown
• Better risk-reward

Example Setup:

• Daily: Strong uptrend ✓
• 4-hour: Pullback to support at 1.0900 ✓
• 15-minute: Bullish engulfing candle at 1.0905 → ENTER

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Putting It All Together

Step-by-Step Analysis Process

1. Identify the Trend

• Check higher timeframe
• Draw trend lines
• Note moving average direction

2. Mark Key Levels

• Support and resistance
• Previous swing highs/lows
• Psychological levels

3. Look for Patterns

• Chart patterns forming?
• Continuation or reversal?
• Pattern complete or developing?

4. Check Indicators

• RSI: Overbought/oversold or divergence?
• MACD: Crossover or histogram?
• Moving averages: Crossovers or dynamic S/R?

5. Find Confluence

• Multiple signals agreeing?
• Support + Fib + RSI oversold = strong buy zone
• Resistance + bearish pattern + RSI overbought = strong sell zone

6. Plan the Trade

• Entry: Where exactly?
• Stop loss: Below/above what level?
• Take profit: Target based on pattern/R:R
• Position size: Based on stop distance

7. Execute and Manage

• Enter only if all conditions met
• Set stop and target immediately
• Monitor but don't interfere
• Journal the trade

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Common Beginner Mistakes

❌ Using too many indicators

• Clutters chart
• Conflicting signals
• Analysis paralysis
• Solution: Stick to 2-3 indicators max

❌ Ignoring the trend

• Trying to pick tops and bottoms
• Fighting the momentum
• Solution: Trade WITH the trend

❌ Not waiting for confirmation

• Entering too early
• False breakouts
• Solution: Wait for candle close and volume confirmation

❌ Seeing patterns that aren't there

• Forcing patterns to fit bias
• Seeing what you want to see
• Solution: Be objective, follow rules

❌ Relying solely on indicators

• Indicators lag price
• Can give false signals
• Solution: Price action is king; indicators confirm

❌ Overtrading every signal

• Not all setups are equal
• Quality over quantity
• Solution: Be selective, wait for A+ setups

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Technical Analysis Strategies

1. Trend Following

Goal: Ride established trends

Method:

• Identify trend on higher timeframe
• Enter on pullbacks to MA or support
• Trail stop loss
• Exit when trend breaks

Indicators: Moving averages, MACD, ADX

2. Breakout Trading

Goal: Catch explosive moves

Method:

• Identify consolidation (triangle, range)
• Wait for breakout with volume
• Enter on breakout or pullback
• Target measured move

Indicators: Bollinger Bands (squeeze), volume

3. Reversal Trading

Goal: Catch trend changes

Method:

• Wait for trend exhaustion signs
• Look for divergence (RSI, MACD)
• Confirm with reversal pattern
• Enter with tight stop

Indicators: RSI, MACD, candlestick patterns

⚠️ Riskier than trend following; requires experience

4. Range Trading

Goal: Profit from sideways markets

Method:

• Identify clear support and resistance
• Buy at support, sell at resistance
• Use oscillators for timing
• Exit if range breaks

Indicators: RSI, Stochastic, Bollinger Bands

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Creating Your Technical Toolbox

Recommended Starter Setup:

Chart:

• Candlestick chart (most popular)
• Clean background
• Clear timeframe labels

Indicators (Don't use all at once!):

• Trend: 50 MA, 200 MA
• Momentum: RSI (14)
• Trend + Momentum: MACD
• Support/Resistance: Horizontal levels manually drawn
• Optional: Bollinger Bands or Fibonacci

Start simple, add complexity only if needed.

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Practice Tips

1. Backtest Your Strategies

• Review historical charts
• Identify setups that would have worked
• Note what didn't work
• Build pattern recognition

2. Forward Test (Demo)

• Apply analysis in real-time
• Track performance
• Adjust based on results
• No real money until consistent

3. Keep a Trading Journal

• Screenshot every setup
• Record your analysis
• Document outcome
• Review weekly/monthly

4. Study Failed Trades

• What went wrong?
• Missed signal?
• Broke rules?
• Market condition changed?

5. Continuous Learning

• Review charts daily
• Study successful traders
• Read books and courses
• Practice, practice, practice

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Recommended Resources

Books:

• "Technical Analysis of the Financial Markets" by John Murphy
• "Japanese Candlestick Charting Techniques" by Steve Nison
• "Trading in the Zone" by Mark Douglas

Platforms:

• TradingView (best charting, free tier available)
• MetaTrader 4/5 (popular, free with brokers)
• Your broker's platform

Practice:

• Demo accounts (risk-free)
• Paper trading
• Small live account ($100-500)

👉 Compare brokers with advanced charting: Best Trading Platforms

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Key Takeaways

🔑 Price action is king — Indicators support, don't lead

🔑 Trade with the trend — Don't fight the market

🔑 Wait for confirmation — Patience pays

🔑 Multiple timeframes — See the complete picture

🔑 Look for confluence — Multiple signals agreeing

🔑 Keep it simple — 2-3 indicators maximum

🔑 Practice first — Demo before live trading

🔑 No holy grail — Technical analysis is probability, not certainty

Remember: Technical analysis is a skill developed through practice, not memorization.

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Next Steps

📚 Continue Learning:

• How to Read Trading Charts
• Risk Management Basics
• Creating a Trading Plan

🔍 Practice:

• Open demo account
• Analyze 20-30 historical charts
• Forward test your strategies
• Journal everything

⚠️ Disclaimer: Technical analysis increases probability but doesn't guarantee success. Always use proper risk management and never risk more than you can afford to lose.

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Last Updated: October 2025