Technical Analysis of the Market: From Basics to Application

Key Provisions

• Technical market analysis predicts price trends based on historical data of price and volumes.
• Basic tools include support/resistance levels and a set of indicators (moving averages, RSI, MACD, Bollinger Bands)
• Trading signals indicate possible entries and exits, but they can be false, especially in short periods and thin markets.
• Risk management and signal verification through multiple methods is a critical necessity.

Introduction

Technical market analysis is the discipline of forecasting price movements of assets by studying historical quotes and trading volumes. Unlike fundamental analysis, which considers many external factors affecting the value of an asset, this method focuses solely on graphic patterns and price dynamics.

The trader's goal when using such an approach is to identify the trend direction, determine critical levels where the price often reverses, and find the most opportune moments to enter a position or close it.

Origins and Evolution

The first attempts to analyze market movements were made by Dutch traders in the 17th century, while Japanese merchants developed their own methods in the 18th century. However, the foundation of the modern approach was laid by journalist Charles Dow, the founder of a major financial publication. Dow was one of the first to systematize the observation that prices move in waves and trends are subject to analysis.

His work led to the creation of a theory that became the foundation for further development. In the early stages, everything was calculated manually on paper tables, but with the advent of computers, technical market analysis gained widespread popularity and became a standard tool for millions of traders.

Principle of Operation

The main hypothesis: all available information is already reflected in the current price. Therefore, by studying how the quotation and trading volume change, one can predict where the market will go next.

At a fundamental level, this study examines the balance of supply and demand. Price reflects the struggle between buyers and sellers, and their decisions are driven by emotions — fear, greed, hope.

The method is most effective in liquid markets with high volumes, where manipulations and random shocks have less impact on long-term trends.

Main Indicators

Moving Averages

There are two main options:

• Simple (SMA): averages the price over the selected period, smoothing out noise and short-term fluctuations.
• Exponential (EMA): gives more weight to recent quotes, responding more quickly to new information.

The purpose of using it is to determine the direction in which the trend is moving and to find areas where the price frequently changes direction. One of the popular strategies is to catch the crossover of the fast (short) and slow (long) moving averages.

RSI — Relative Strength Index

An oscillator that operates in the range of 0–100. A reading above 70 is typically interpreted as overbought (sell signal), while a reading below 30 is interpreted as oversold (buy signal).

Bollinger Bands

Two bands located above and below the moving average. They serve to assess current volatility and to find extremes when an asset moves outside the normal range.

MACD — moving average convergence divergence

Momentum indicator built on the relationship between two exponential moving averages. It consists of a main line, a signal line, and a histogram. Their intersections generate potential buy or sell signals.

Trading Signals in Practice

Indicators help not only to assess the overall climate but also to obtain specific recommendations:

• Overbought/Oversold: when the RSI moves above 70 or below 30, it suggests a possible reversal
• Moving Average Crossover: if the short moving average crosses the long one from below, it is called a “golden cross” (bullish signal). If it crosses from above, it is a “death cross” (bearish signal).
• MACD Signals: the crossover of the main line and the signal line also provides potential entries and exits.

However, it is important to remember that such signals often make mistakes. False triggers are especially common on short time frames. To protect against losses, it is necessary to combine indicators with proper risk management.

Criticism and Doubts

Many analysts describe this approach as unreliable and a “self-fulfilling prophecy.” Here are the main objections:

• Herding Effect: if most traders believe in the same indicators, they start to work simply because everyone acts the same way. This is not a fundamental law, but a self-fulfilling effect.
• Subjectivity: different people read the same chart differently. Two traders may see opposite signals in the same data.
• Anomalies: during crises, unexpected events, or extreme volatility, indicators often fail.

Despite the criticism, supporters argue that each trader has their own way of interpretation, and there is no single strategy. With such a variety of approaches, the market cannot be completely predictable in one way.

Technical Analysis of the Market vs Fundamental Analysis

These are two different approaches:

Technical analysis studies patterns of historical prices.

• Suitable for short-term trading
• Helps to find optimal entry and exit points
• The information is current and changes rapidly.

Fundamental analysis - evaluates the real value of assets through financial reports, economic indicators, and news.

• Better for long-term investments
• Shows the true potential of the project or company
• Requires in-depth research

Many successful investors use both methods simultaneously, applying each in their respective fields.

Conclusion

The optimal strategy is to combine both approaches. Technical analysis of the market provides a current snapshot of the short-term situation, helping to identify entry and exit points. Fundamental analysis ensures confidence in the long-term value of the asset. Together, they allow for more informed decision-making.

Important Note: This information is provided for educational purposes only. It is not financial or investment advice. Digital assets are volatile, and the value of investments may go down. Conduct your own research and consult with professional advisors before making decisions. You are fully responsible for your investment choices.