Technical analysis is the study of price charts and trading volume to predict future price movements. Unlike fundamental analysis, which looks at company earnings, revenue, and economic data, technical analysis focuses purely on what the market is doing: price and volume.
The basic principle
Technical analysis is based on three assumptions:
- The market discounts everything. All available information (news, expectations, emotions) is already reflected in the price.
- Prices move in trends. A rising trend tends to continue until there is a signal that the trend is reversing.
- History repeats itself. Patterns that worked in the past reappear because human behavior does not change.
Identifying trends
The foundation of technical analysis is identifying trends. There are three types:
Uptrend
A series of higher highs and higher lows. As long as this pattern remains intact, the trend is upward.
Downtrend
A series of lower highs and lower lows. The market is moving structurally downward.
Sideways trend (consolidation)
The price moves between an upper and lower boundary without a clear direction. The market is waiting for a breakout.
Key concepts
Support and resistance
Support is a price level where the price historically finds a floor and buyers step in. Resistance is the opposite: a level where sellers become active. When support breaks, it often becomes resistance, and vice versa.
Volume
Volume confirms or invalidates a price movement. A breakout above resistance with high volume is more reliable than one with low volume. The OBV indicator is a commonly used tool to analyze volume trends.
Candlesticks
Candlestick charts display the open, high, low, and close price of a period in a visual pattern. Certain candlestick formations (such as a hammer, doji, or engulfing pattern) provide signals about potential trend changes.
Commonly used indicators
Indicators are mathematical calculations based on price and volume that provide additional information about the direction and strength of a trend:
- RSI (Relative Strength Index) measures whether an asset is overbought or oversold. Above 70 is overbought, below 30 is oversold.
- MACD (Moving Average Convergence Divergence) shows the relationship between two moving averages and signals trend changes.
- Bollinger Bands measure volatility by drawing bands around the price. When the bands narrow, a large movement is often approaching.
- VWAP (Volume Weighted Average Price) is the average price weighted by volume. Widely used by institutional investors.
- OBV (On Balance Volume) links volume to price direction to measure the strength behind a movement.
Patterns
Technical analysts identify recurring patterns in charts:
- Head and Shoulders: a topping pattern that often signals a trend reversal.
- Double Top / Double Bottom: two peaks or troughs at the same level, signaling a reversal.
- Triangles: the price converges to a point, after which a breakout follows.
- Divergences: when the price makes a new high but the indicator does not follow. This is often a warning that the trend is weakening.
Technical analysis and the VECTOR method
JackBot's VECTOR method combines technical analysis with broader portfolio intelligence. The V-dimension (Validation) detects technical patterns, the C-dimension (Chart) analyzes trend structure, and the T-dimension (Timing) examines entry distances and momentum.
The difference: where traditional technical analysis tells you what is happening, VECTOR tells you what requires your attention right now.
Limitations
Technical analysis is not a crystal ball. Important caveats:
- Patterns are probabilities, not certainties
- In illiquid markets (low volumes), technical signals are less reliable
- Unexpected events (earnings, geopolitics) can override any technical analysis
- Confirmation from multiple indicators provides a stronger basis than a single signal
The best investors combine technical analysis with fundamental analysis and risk management. Technical analysis tells you when, fundamental analysis tells you what, and risk management determines how much.