Complete Guide to Technical Analysis: Predicting Market Trends with Charts

Technical Analysis 2025-12-20

What is Technical Analysis?

Technical analysis is an investment analysis method that predicts future price trends by studying historical market data (mainly price and trading volume). Technical analysts believe that market prices reflect all available information, and price trends have certain regularity and trend.

Three Assumptions of Technical Analysis

1. Market Action Discounts Everything

Technical analysts believe that all factors affecting asset prices (fundamentals, macroeconomics, market sentiment, etc.) are already reflected in prices. Therefore, it is only necessary to study price trends without paying attention to other external factors.

2. Prices Move in Trends

This is the core assumption of technical analysis. Technical analysts believe that price trends have inertia. Once a trend is formed (upward, downward, or sideways), it will continue for a period until new forces change this trend.

3. History Repeats Itself

Technical analysts believe that the psychology and behavior patterns of market participants will repeat in different periods. Therefore, by studying historical price patterns and trends, we can predict price reactions in similar situations in the future.

Four Basic Tools of Technical Analysis

1. K-line Chart

K-line chart is the most commonly used chart type in technical analysis. It uses candle-shaped bodies and shadows to represent opening price, closing price, highest price, and lowest price within a period. K-line charts can clearly show price fluctuations and trends, helping investors identify buying and selling signals.

2. Trend Lines

Trend lines are straight lines connecting price highs or lows, used to identify the direction of price trends. An upward trend line connects a series of gradually rising lows, while a downward trend line connects a series of gradually falling highs. Trend lines can help investors judge the strength of the trend and possible reversal points.

3. Pattern Analysis

Pattern analysis predicts future price trends by identifying specific patterns in price charts. Common patterns include:

  • Reversal Patterns: Head and Shoulders Top/Bottom, Double Top/Bottom, Triple Top/Bottom, Rounding Top/Bottom, etc.
  • Continuation Patterns: Triangles, Rectangles, Flags, Wedges, etc.

4. Moving Averages

Moving averages are curves formed by connecting the average prices over a period of time, used to smooth price fluctuations and identify trend directions. Common moving averages include:

  • Short-term moving averages: 5-day MA, 10-day MA, 20-day MA
  • Medium-term moving averages: 30-day MA, 60-day MA
  • Long-term moving averages: 120-day MA, 250-day MA
The crossing and arrangement of moving averages can generate important buying and selling signals.

Six Common Indicators of Technical Analysis

1. MACD (Moving Average Convergence Divergence)

MACD is a trend-following and momentum indicator that measures price momentum by calculating the difference between two exponential moving averages (EMAs) with different periods. The golden cross (fast line crossing above the slow line) and death cross (fast line crossing below the slow line) of MACD are common buying and selling signals.

2. RSI (Relative Strength Index)

RSI is a momentum indicator used to measure overbought and oversold conditions of prices. The value range of RSI is between 0 and 100. Generally, RSI > 70 indicates overbought, while RSI < 30 indicates oversold. RSI divergence (price makes a new high/low, RSI does not make a new high/low) is also an important reversal signal.

3. BOLL (Bollinger Bands)

Bollinger Bands consist of three lines: middle band (usually 20-day MA), upper band (middle band + 2 times standard deviation), and lower band (middle band - 2 times standard deviation). Bollinger Bands can be used to measure price volatility and overbought/oversold conditions. Price breaking through the upper band usually indicates strength, while breaking through the lower band usually indicates weakness.

4. KDJ (Stochastic Oscillator)

KDJ is a momentum indicator used to measure the relative position of prices over a period. The value range of KDJ is between 0 and 100, which can also be used to judge overbought and oversold conditions. The golden cross and death cross of KDJ are also common buying and selling signals.

5. Trading Volume

Trading volume refers to the number of transactions within a certain period, which is an important auxiliary indicator in technical analysis. Trading volume can verify the authenticity of price trends: increasing volume in an upward trend usually indicates sufficient upward momentum, while increasing volume in a downward trend usually indicates strong downward momentum.

6. OBV (On-Balance Volume)

OBV measures the buying and selling power of the market by accumulating trading volume. When prices rise, OBV increases; when prices fall, OBV decreases. OBV divergence can predict price reversals: if prices make a new high but OBV does not, it may indicate weak upward momentum; if prices make a new low but OBV does not, it may indicate weak downward momentum.

Five-Step Practical Method of Technical Analysis

  1. Determine Trend Direction: Use trend lines, moving averages, and price patterns to determine the main trend of the current market (upward, downward, or sideways)
  2. Identify Support and Resistance Levels: Find key support levels (prices may stop falling) and resistance levels (prices may stop rising)
  3. Confirm Signals with Indicators: Combine multiple technical indicators (such as MACD, RSI, KDJ, etc.) to confirm buying and selling signals
  4. Formulate Trading Plan: Determine entry points, stop-loss points, and take-profit points to control risks
  5. Execute and Adjust: Strictly implement the trading plan and timely adjust strategies according to market changes

Advantages and Disadvantages of Technical Analysis

Advantages

  • Intuitive and easy to understand, suitable for beginners
  • Can be used for short-term, medium-term, and long-term investments
  • Clear signals, easy to quantify and systematize
  • Can be applied to various financial markets (stocks, futures, foreign exchange, etc.)

Disadvantages

  • Prone to misleading signals (false breakthroughs, false crosses, etc.)
  • Lagging, signals often appear after the trend has been formed
  • Cannot predict major fundamental changes (such as policy adjustments, emergencies, etc.)
  • Different analysts may have different interpretations of the same chart
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