Technical Analysis

Module 2 of Trading & Markets

What Is Technical Analysis?

Technical Analysis (TA) studies price and volume to predict future movements. Unlike fundamental analysis (which asks "what is this worth?"), TA asks "what are other traders likely to do?"

Core Assumptions

1. Market action discounts everything - All information is reflected in price
2. Prices move in trends - Momentum tends to continue
3. History repeats - Patterns recur due to human psychology

The Debate

Critics argue TA is self-fulfilling prophecy or astrology. Supporters counter that it captures market psychology. The truth: TA works because enough people believe it works, creating real effects.

Chart Types

Candlestick Charts

The most popular format, showing four prices per period:

    ▲
    │   ← Wick/Shadow (High)
┌───┴───┐
│       │ ← Body (Open to Close)
│ GREEN │   Green/White = Close > Open (Bullish)
│       │   Red/Black = Close < Open (Bearish)
└───┬───┘
    │   ← Wick/Shadow (Low)
    ▼

Common Candlestick Patterns

Support and Resistance

Support

Price level where buying pressure exceeds selling - price "bounces" off this floor.

Resistance

Price level where selling pressure exceeds buying - price "rejected" at this ceiling.

Price
  │
──┼────────────────────
  │     Resistance      ▼
  │  ╱╲    ╱╲    ╱╲    Price rejected
  │ ╱  ╲  ╱  ╲  ╱  ╲
  │╱    ╲╱    ╲╱    ╲
──┼─────────────────────
  │     Support         ▲
  │                     Price bounces

Key Concepts

• Role reversal: Broken support becomes resistance (and vice versa)
• Round numbers: Psychological levels ($50,000 BTC, $1 for altcoins)
• Multiple tests: More touches = stronger level

Trend Analysis

Identifying Trends

Uptrend:
  Higher Highs (HH) and Higher Lows (HL)
         ╱╲ HH
        ╱  ╲
   ╱╲ HL    ╲╱╲ HH
  ╱  ╲        ╱
 ╱ HL ╲──────╱

Downtrend:
  Lower Highs (LH) and Lower Lows (LL)
 ╲    LH
  ╲  ╱╲
   ╲╱  ╲  LH
   LL   ╲╱╲
          ╲
          LL

Trendlines

Connect lows in uptrend, highs in downtrend:

• Minimum 2 touches to establish
• 3+ touches = stronger line
• Breaking trendline = potential reversal

Moving Averages

Smooth price data to identify trends:

Simple Moving Average (SMA)

Average of last N periods:

SMA(20) = (P₁ + P₂ + ... + P₂₀) / 20

Exponential Moving Average (EMA)

Weights recent prices more heavily - faster to react.

Common Uses

Golden Cross / Death Cross

• Golden Cross: 50 SMA crosses ABOVE 200 SMA → Bullish
• Death Cross: 50 SMA crosses BELOW 200 SMA → Bearish

Key Indicators

Relative Strength Index (RSI)

Momentum oscillator (0-100):

• Above 70: Overbought (potential reversal down)
• Below 30: Oversold (potential reversal up)
• Divergence: Price makes new high but RSI doesn't = weakness

MACD (Moving Average Convergence Divergence)

Trend-following momentum indicator:

• MACD Line: 12 EMA - 26 EMA
• Signal Line: 9 EMA of MACD Line
• Histogram: MACD - Signal

Signals:

• MACD crosses above signal = bullish
• MACD crosses below signal = bearish

Bollinger Bands

Volatility indicator - 20 SMA with 2 standard deviation bands:

• Squeeze: Bands narrow = low volatility, big move coming
• Walk the band: Strong trend rides upper/lower band
• Mean reversion: Price returns to middle band

Volume

Volume confirms moves:

• Price up + volume up = strong buying
• Price up + volume down = weak rally
• Breakout + high volume = legitimate
• Breakout + low volume = likely false

Chart Patterns

Continuation Patterns

Signal trend will continue:

Reversal Patterns

Signal trend may reverse:

Measuring Moves

Many patterns have "measured move" targets:

• Head & Shoulders: Target = neckline - (head - neckline)
• Double Top: Target = neckline - (top - neckline)
• Breakout: Target = base of pattern projected from breakout

Crypto-Specific Considerations

Volatility

Crypto is more volatile than traditional markets:

• Wider stop losses needed
• Patterns can break faster
• 24/7 trading means no gaps (usually)

Manipulation

Lower liquidity enables manipulation:

• Watch for stop hunts (wicks through obvious levels)
• Whale walls can create artificial S/R
• Be skeptical of "perfect" patterns

Timeframes

Higher timeframes = more reliable signals

Risk Management

Position Sizing

Never risk more than you can afford to lose on any trade:

Position Size = (Account × Risk%) / (Entry - Stop Loss)

Example:
Account: $10,000
Risk per trade: 2% = $200
Entry: $50,000 BTC
Stop: $48,000 BTC
Position = $200 / $2,000 = 0.1 BTC

Stop Losses

• Fixed: Set percentage below entry
• Technical: Below support/trendline
• Trailing: Follows price up, locks in profit

Risk/Reward

Target minimum 2:1 reward/risk:

• Risk $100 to make $200
• Only need to be right 40% of time to profit

Key Takeaways

1. TA is probabilistic - not prediction, pattern recognition
2. Combine indicators - no single indicator is reliable alone
3. Higher timeframes are more reliable than lower
4. Risk management matters more than entry signals
5. Psychology - TA works because traders make it work
6. Crypto is manipulated - be skeptical of "obvious" setups