Technical analysis has experienced rapid growth over the years, a broad approach examining
historical price and volume data to forecast trends in financial markets. Although technical analysis is
employed in a number of trading strategies (and trading styles), fundamental analysis is outside of its purview.
Fundamental analysts, particularly in foreign exchange (or ‘Forex’), assess a country’s economic landscape
through microeconomics and macroeconomics. Many traders and investors, however, adopt both technical and
fundamental analysis to generate investing decisions.
2. Brief History of Technical Analysis
Charles Henry Dow—the founder of the Dow-Jones Financial news service and the founder of the Wall
Street Journal—is considered by many technical analysts (or ‘chartists’) as the ‘father’ of modern technical
analysis. Dow was the first to establish an index in 1896 that measured price moves in US-based equities, now
recognised as the Dow Jones Industrial Average. Nevertheless, it’s important to note that the first index
created by Dow was the Dow Jones Railroad Average in 1884, acknowledged today as the Dow Jones Transportation
While Dow never formulated his principles into text, Robert Rhea refined Dow’s work and wrote a
book in 1932 called The Dow Theory: An Explanation of its Development and an Attempt to Define its Usefulness
as an Aid to Speculation. The evolution of Dow Theory is best described in Rhea’s book, with a key focus
on trend structure. Rhea presented three basic trends, the primary trend, the secondary trend and the minor
Other notable developments in technical analysis are Steve Nison’s work with Japanese Candlestick
patterns. Nison is responsible for bringing candlestick patterns to the Western world in his 1991 book called:
Japanese Candlestick Charting Techniques. Candlestick formations such as the hammer pattern and evening
star configuration are widely employed within the technical community.
3. Chart Types
Three types of price charts commonly used by technical analysts to view price data are the line
chart, the bar chart and the Japanese candlestick chart.
• A line chart is presented in the shape of a continuous line, often calculated by way of closing prices.
• The western bar chart—sometimes referred to as ‘OHLC’ charts—presents the open, high, low and close
(OHLC) data of each bar printed across different time periods (or timeframes).
• A Japanese candlestick chart delivers a variation of the OHLC values which, for many traders, is easier
to analyse. The key difference between a bar and candlestick is the candlestick’s ‘real body’ (between opening
and closing price action) allow traders to quickly determine price direction—bar charts display the body by way
of a vertical line.
The candlestick chart remains a popular way to view market data.
4. Popular Technical Analysis Tools
The main objective of technical analysis is to create a trading edge through market patterns,
statistics and risk management, all of which should be detailed in a well-defined trading plan to highlight
Technical analysts have a plethora of tools at their disposal. Beginner traders and investors must
understand the mechanics behind each technical indicator and drawing tool used before applying them to generate
Support and Resistance:
Support levels denote the lowest point at which a currency pair’s price (or stock’s price) has
fallen, while resistance levels indicate the highest point at which the currency pair has risen. When price
movement decreases to a price level that encourages market participants to purchase, support manifests itself,
and vice versa for resistance.
Support and resistance are considered the ‘backbone’ for many technical-based trading methodologies
(trading systems). Newer traders often adopt objective methods of identifying support and resistance. Pivot
point levels and psychological figures are two widely used approaches. Fibonacci ratios may also be used to
determine support and resistance, yet the application is open to subjectivity.
Trendlines are one of the first drawing tools most up-and-coming technicians learn about. Primarily
functioning to help market participants define trend, trendlines function well as ascending and descending
support and resistance.
An upward trend line, or an ‘uptrend line’, develops when prices experience higher highs and lower
lows. By linking the rising lows, an upward trendline is formed. A trendline tracks the progress of a rising
market and provides early signs of a trend reversal (or downtrend) in the event of a breach.
Chart Patterns (Price Patterns):
Well-known bullish and bearish chart patterns are the head and shoulders pattern, double-bottom and
double-top formations, as well as triangle structures, flags and pennants. Each configuration is organised by
way of clear guidelines which must be followed in order to take advantage of the pattern’s predictive
Examples of Technical Indicators:
• Moving Averages:
Smoothing out market data over a defined period of time, moving averages are a common view on
The 50-day and 200-day simple moving average crossover approach can be used by a beginner trader to
track a market’s price trend and deliver long-term buy and sell entry signals. A short-term moving average
breakout above the longer-term moving average is often labeled as a ‘Golden Cross’, and a ‘Death Cross’ is
identified when a shorter-term moving average crosses lower.
• Moving Average Convergence Divergence (MACD) Indicator:
The MACD is a combination of a trend-following indicator and momentum indicator, showing a
connection between two moving averages of a security's price.
• The Relative Strength Index (RSI):
A momentum oscillator that measures the ‘speed of price change’ to establish whether a stock or
currency pair is overvalued (overbought) or undervalued (oversold).
• Parabolic SAR:
This is considered one of the most effective technical analysis indicators for determining the
direction of price and also for determining when the direction of future price movements.
• Bollinger Bands:
Bollinger bands—a volatility indicator—helps trading and investors gauge a market’s volatility,
answering the question whether a market is high or low compared to an average. Mean-reversion strategies often
employ Bollinger Bands.
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