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MarketWise Academy

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Introduction to Technical Analysis

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Unlike fundamental analysis, which focuses on a company's financials, technical analysis seeks to predict future price movements based on historical patterns and trends.

Overview

Market trends form the foundation of technical analysis, revealing the collective psychology of traders through price movements. When analyzing charts, traders typically identify three types of trends: upward (bullish), downward (bearish), and sideways (ranging). These patterns emerge from the constant battle between buyers and sellers, where support and resistance levels act as psychological barriers that influence trading decisions.

Price action analysis focuses on raw price movements without relying heavily on indicators. Traders examine candlestick formations, chart patterns, and volume changes to gauge market sentiment. For instance, a series of higher highs and higher lows typically confirms an uptrend, while breakdowns below key support levels may signal trend reversals. Understanding these dynamics helps traders anticipate potential breakouts or pullbacks.

The most effective traders combine price action observations with volume analysis, as increasing volume during breakouts often validates the strength of a move. This approach works across all timeframes, from scalpers analyzing minute charts to long-term investors studying weekly or monthly trends. By mastering these core concepts, traders can develop a disciplined approach to navigating volatile markets while managing risk effectively.