Technical Analysis
Technical Analysis
Technical Analysis
Technical analysis is the practice of using historical data and current price action to predict future price
movements. Technical analysis uses price charts to identify signals and patterns that provide a lens into
market psychology. Technical traders aim to benefit from this analysis by catching trend reversals and riding
price momentum.
This analysis is significantly different from fundamental analysis, which is a longer-term analysis evaluating
the financial strength and growth prospects of a company. While fundamental analysis can be more
beneficial for long-term investing, technical analysis is helpful for timing entries, exits, and shorter-term
trades. Together, technical and fundamental analysis can be coupled to create a trading strategy geared
towards providing alpha.
I highly recommend using tradingview.com to view candlestick charts. They are one of the best online
platforms to view candlestick charts and conduct technical analysis for free.
Assume each candle represents one day for each of the following examples.
1. Hammer Candle
2. Shooting Star
This candle is usually a sign of a reversal, or at least a pullback in an uptrend. An example of this signal
being used can be observed on ticker SPOT on November 2nd, 2021.
3. Bullish Engulfing
This is a bullish signal that occurs when one day’s range completely
covers the previous day’s range. Typically, the first day is a bearish
red candle, covered by the following day’s bullish green candle that
opens lower than the previous day and closes above the previous
day’s range. The buyers regain control and push the price up,
indicating a bullish signal.
An example of this signal being used can be observed on ticker SPY on June 21 st, 2021.
4. Bearish Engulfing
There are many more signals that you can learn about here: https://www.ig.com/us/trading-strategies/16-
candlestick-patterns-every-trader-should-know-180615
Assume each candle represents one day for each of the following examples.
The opposite of this pattern is known as the Inverse Head and Shoulders. This pattern has one low bottom
with two slightly lower lows on each side. If the neckline breaks, it is likely that the stock will reverse from an
uptrend to a downtrend. An example of this pattern can be observed on ticker ADSK from September 8 th to
October 9th, 2021. After breaking the neckline, ADSK continued its uptrend until Jan 8th, 2021, resulting in an
approximately 40% appreciation in stock price.
2. Double Top
on December 14th. As of today, December 20th, 2021, NKE has continued falling.
The opposite of this pattern is known as the Double Bottom. This pattern has two bottoms that act as
support near a similar price level. The stock then breaks through resistance to begin a new uptrend. An
example of this pattern can be observed on ticker MSFT from May 12 th to June 4th, 2021. MSFT had a
double bottom around $$239, and entered an uptrend until September 24 th since it broke the resistance level
of $247.
There are many more chart patterns that you can learn about here: https://www.ig.com/us/trading-
strategies/10-chart-patterns-every-trader-needs-to-know-190514
3. Bollinger Bands
Final Notes
1. There are many more technical indicators. The ones introduced in this guide are the basics for anyone
who is new to technical analysis and does not know where to begin.
2. Remember that no pattern or indicator will always be right. Set stop losses appropriately to prevent
extensive losses if a trade goes sideways.
3. When using technical analysis, try to find multiple indicators that align. Often, setups with 3-5
indicators that confirm an entry are more successful than setups that only confirm an entry with 1-2
indicators.
I hope this introductory guide to technical analysis was helpful! If you have any further questions or would
like to discuss possible trade ideas, feel free to reach out to me at aagarwal7@babson.edu.