Ultimate Guide to Technical Analysis (With ZERO Experience)

Ultimate Guide to Technical Analysis (With ZERO Experience)

Reading time: 9 minutes

The financial markets are often viewed as a confusing place. Their esoteric jargon, intimidating charts, and a seemingly never-ending flow of price fluctuations can make it seem impossible to understand. 

Although several concepts must be understood to function successfully as a trader or investor in the markets, including proficiency in risk management, trading psychology, and fundamental analysis, many begin their journey learning the basics of technical analysis. 

Technical Analysis Defined

Technical analysis (TA) is a broad vehicle of research that, at the core of things, involves predicting future price movement by assessing historical price data, trading volume and open interest. Unlike fundamental analysis, which can mean assessing monetary policy and economic indicators, as well as a company’s financial health, TA works with three core assumptions:

1. The market discounts everything.
2. Price movement in the markets moves in trends.
3. Price action tends to repeat itself.

Where Should I Begin?

Understanding how a chart functions is a key starting point for any aspiring technical analyst; this is where most of the work is done, after all. And this is why technical analysts are sometimes referred to as ‘chartists’. There are several different chart types, but three of the most popular are the line chart, the bar chart, and the most common of them all, the candlestick chart. 

Another important consideration is which trading style you plan to follow. Are you a trader with time on your hands? If so, day trading or scalping could be something to investigate. Or are you a trader who works full time and can only trade in the evening? In this case, you may explore swing trading or even position trading.

What is a Candlestick Chart?

The candlestick chart’s basic formation possesses a y-axis and an x-axis; the former shows the security’s price, while the latter represents the time and date. 

In one glance, in addition to the current price and date, the technical analyst can view a lot of information, such as how high and low prices traded over a given time period, together with its opening and closing prices. The real body represents the range between the candle open and the candle close. 

As illustrated on the H1 chart of the EUR/USD below, the highlighted candle is a bearish candle which always has its open above the closing price (coloured in black here); a bullish candle is the same, but the candle open will always be below the candle close (examples of bullish candles are coloured white here).

Candlestick Chart Features:

• Candlestick charts are often preferred among technical analysts and are more visually appealing than bar and line charts. Check out this article for a comprehensive illustration of these chart types: 
• Analysing the length and colour of candlesticks can provide insights into market sentiment (bullish or bearish) and potential future price movements.
• Technical analysts can choose from a range of timeframes on all chart types, such as the 5-minute chart for a short-term view of the market and the daily chart for a longer-term view of price action. 
• The candlestick chart's flexibility allows traders to change the colours of the candlesticks and backgrounds to suit their preferences.
• Candlestick charts can be used across global markets, including Forex, Shares and even Digital Currencies.  

How Technical Analysts Use Charts?

With an understanding of the basics of charts, this is the point at which traders and investors begin learning how to identify things like Japanese candlestick patterns, chart patterns, price action and the application of technical indicators.

Candlestick patterns are regularly one of the first things technical analysts are drawn to. Most prefer learning Japanese candlestick formations, such as the hammer, shooting star, bullish and bearish engulfing candlestick patterns, to help identify potential trend reversals and continuations. You can find more out about these candlestick patterns here and here.  

Chart patterns are another way TA attempts to recognise markets that may be in the process of forming a trend reversal or signalling continuation. Some popular trend reversal chart patterns to consider are the double-bottom and double-top patterns and the head and shoulders top (and inverse head and shoulders pattern). Like the candlestick configurations, learning how to use and implement these chart patterns takes time, and professional traders rarely use them as standalone indicators of future price movement. Consider checking out this article, which details five essential chart patterns in the stock market (they are applicable to any financial market). A key point to note is that chart patterns and candlestick patterns generally have predefined rules of engagement regarding the location of one’s protective stop loss orders and entry. One difference between the two concepts, though, is that chart patterns offer take-profit objectives while candlestick patterns do not. This is generally where a knowledge of price action is useful.

Price action analysis is another key component for many technical traders. This approach entails assessing how price action moves between support and resistance levels, supply and demand as well as trendlines and perhaps pivot points. It can also help outline a basic risk-management approach, which could be as simple as positioning one’s stop-loss order below support for a buy position. Further to this, it supports trade management and arranging take-profit objectives. Explore more about support and resistance here. However, while it is essential to learn, price action can quickly become a complex and advanced way of analysing a security’s price action, often involving trend studies, psychology and multi-timeframe analysis. 

Finally, technical analysts employ technical indicators to monitor momentum, volatility, volume and trend. Some of the most popular indicators include the Stochastic oscillator (measures momentum), the Bollinger Bands and the Average True Range (ATR) to measure volatility and the Average Directional Index (ADX) to gauge the trend of one’s chosen market. If you are interested in learning more about technical indicators, consider watching FP Markets Analyst Aaron Hill’s webinar on technical indicators here or explore more here and here. 

Technical Analysis Tips:

• The Trend is Your Friend: With the trend as your guide and only taking trades in line with the current trend, you have a higher probability of a trade moving favourably. 
• Confirmation is Key: Don't rely on a single indicator or pattern. Look for confluence (agreement) between multiple indicators for stronger signals.
• Risk Management is Paramount: Always use protective stop-loss orders to limit potential losses.
• Practice Makes Perfect: Before risking real money, test your TA strategies on a demo account.

Conclusion

As a beginner technical analyst, you are encouraged to visit the FP Markets Trading Academy, which offers in-depth videos and articles. Additionally, visit the Traders Hub for daily and weekly analyses provided by our in-house research team. 

If you have not already, consider opening an account with FP Markets and begin to apply your new-found knowledge using real-time price action across the global markets.