Securities & Trading Basics – Lesson 9: Technical Analysis & Trading Indicators Now that you understand derivatives, let’s explore technical analysis—a method traders use to predict future price movements based on historical data. This lesson covers: 1. What Is Technical Analysis? 2. Key Chart Patterns & Price Action 3. Common Technical Indicators 1. What Is Technical Analysis? Technical analysis (TA) involves analyzing past price movements and volume to forecast future trends. Unlike fundamental analysis, which focuses on a company’s financials, TA is based purely on market behavior. Core Principles of Technical Analysis Price reflects all information: Market movements already factor in fundamentals. History repeats itself: Patterns and trends tend to reoccur. Prices move in trends: Uptrends, downtrends, and consolidations guide decision-making. 2. Key Chart Patterns & Price Action A. Trend Types Uptrend (Bullish): Higher highs and higher lows. Downtrend (Bearish): Lower highs and lower lows. Sideways (Consolidation): No clear trend, price fluctuates within a range. B. Common Chart Patterns Pattern Type Meaning Head & Shoulders Reversal Signals trend reversal (bullish or bearish) Double Top/Bottom Reversal Indicates strong resistance (top) or support (bottom) Triangles (Ascending, Descending, Symmetrical) Continuation Suggests a breakout in the direction of trend Flags & Pennants Continuation Brief consolidation before trend resumes Cup & Handle Bullish Signals potential upside breakout 3. Common Technical Indicators A. Trend-Following Indicators Moving Averages (MA): Simple Moving Average (SMA): Average price over a period (e.g., 50-day SMA). Exponential Moving Average (EMA): Puts more weight on recent prices for faster signals. Moving Average Convergence Divergence (MACD): Measures momentum and trend strength. Bollinger Bands: Expanding bands signal volatility increases, contracting bands signal consolidation. B. Momentum Indicators Relative Strength Index (RSI): Measures overbought (>70) or oversold (<30) conditions. Stochastic Oscillator: Identifies potential reversals by comparing a stock’s closing price to its price range. C. Volume-Based Indicators Volume Weighted Average Price (VWAP): Used by institutional traders to assess fair value. On-Balance Volume (OBV): Measures buying and selling pressure. D. Support & Resistance Levels Support: A price level where demand prevents further decline. Resistance: A price level where supply prevents further rise. Breakout Trading: Entering trades when price breaks above resistance or below support.
Next Steps
Now that you understand technical analysis tools, the next lesson will cover algorithmic trading and how institutions automate trades using quantitative strategies.