Technical analysis: explanation, methods & indicators in trading

Technical analysis helps traders and investors identify patterns and trends in the price movements of assets. By analysing charts and past price movements, market participants try to understand how prices develop on the exchange. Chart analysis uses various tools such as indicators, trend lines and moving averages to make market trends visible. But how exactly does chart analysis work in trading and why do so many traders use this method? In this guide, you’ll get a clear definition of technical analysis and learn how to study methods of technical analysis step by step and apply them in trading.

• Definition: Technical analysis is a method in which traders analyse charts and historical price movements to identify trends, patterns and possible market developments.

• Basic assumptions: The method is based on three assumptions: all information is already reflected in the price, prices move in trends and recurring patterns emerge from the behaviour of market participants.

• Methods: The core methods include trend analysis, pattern analysis and indicator analysis, which traders use to examine trends, chart patterns and market signals in price movements.

• Learn technical analysis: If you want to learn chart analysis, start with the basics of trends, support and resistance, analyse charts regularly and gain practical trading experience.

Technical analysis vs. fundamental analysis: differences explained simply

Technical analysis and fundamental analysis take different approaches to examining price movements on the exchange. In technical analysis, traders primarily analyse charts and historical price data. This area is often also referred to as chart analysis. Fundamental analysis, on the other hand, evaluates the economic background of a company or asset. Understanding the difference helps you choose the right method for different strategies. In practice, market participants often combine both approaches.

The key differences between technical analysis and fundamental analysis can be seen at a glance here:

The three basic assumptions of technical analysis

Technical analysis is based on three central assumptions about the behaviour of prices in the market. These principles form the foundation for many chart analysis methods and help traders better interpret price movements in trading.

The three basic assumptions of technical analysis are:

• The market discounts all information.

• Prices move in trends.

• History repeats itself.

Below, you’ll see what these assumptions mean and why they’re important for technical analysis.

The market discounts all information

Technical analysis assumes that all available information is already reflected in the current price of an asset. Traders therefore focus primarily on charts and price movements instead of analysing extensive fundamental data as well.

Prices move in trends

Another core principle of technical analysis is that prices often move in a specific direction over a period of time. Many chart analysis methods aim to identify such trends early. Traders use tools such as trend lines, which are lines in the chart that make the course of a trend visible. They may also use trend channels, which show the possible range of movement of a trend, or indicators, which are mathematical calculations based on past prices.

These movements are referred to as trends:

• uptrend: prices rise over a longer period

• downtrend: prices fall over a longer period

• sideways trend: prices move within a narrow range without a clear upward or downward trend

History repeats itself

The third assumption is based on the observation that certain patterns repeatedly appear in price movements. This is often due to the psychology of market participants. In similar market situations, many traders react in similar ways, creating comparable patterns in the chart.

Chart types: how to read charts correctly

For technical analysis, traders use different types of charts to visualise price movements. Each chart type presents price data differently and can help identify trends or patterns in the market.

Line chart

• connects the closing prices of a period into a line

• shows the overall price development of an asset very clearly

• iis well suited for quickly identifying long-term trends

Bar chart

• shows the opening, high, low and closing price of an asset for each time unit

• this representation is also called an OHLC chart (Open, High, Low, Close)

• enables a more detailed analysis of price movement than a line chart

Candlestick chart

• also displays opening, high, low and closing prices

• the so-called candles use their shape and colour to show whether prices have risen or fallen

• is one of the most popular tools in chart analysis because trends and potential reversal points quickly become visible

Common chart patterns

In chart analysis, there are several patterns that often indicate possible price movements and help traders make decisions. They can broadly be divided into reversal and continuation patterns.

Head and shoulders pattern

• consists of three peaks, with the middle one higher (shoulder-head-shoulder)

• often signals a trend reversal when the price breaks through the “neckline”

• often indicates an upcoming end of an uptrend

Double top and double bottom

• two consecutive highs followed by a price decline in a double top

• two consecutive lows followed by a price increase in a double bottom

• both patterns signal potential reversal points in price movement

Triangles

• form when the price moves between two converging trend lines and the price range becomes increasingly narrow

• symmetrical triangles indicate a continuation of the trend, while ascending or descending triangles can signal a breakout

• particularly useful for traders speculating on breakouts

Flags and pennants

• small continuation patterns that form after a strong price movement

• flags move in a slightly downward sloping channel, pennants in a symmetrical triangle

• usually indicate that the price will continue in the direction of the original trend

Basics of chart analysis: trends, support & resistance

Chart analysis examines the price movement of an asset to identify typical market behaviour. Trends, support and resistance are particularly important because they show how supply and demand are reflected in the chart.

Trends

A trend describes the overall direction of price movement. In technical analysis, traders mainly try to determine whether an existing trend will continue or whether a potential reversal is emerging. Identifying such developments is one of the most important basics when you want to learn technical analysis.

 In practice, market participants mainly analyse:

• the structure of price movement over a specific period

• the dynamics of price movements in the chart

• signals of possible trend changes in the market

Support

Support is a price area where falling prices often reverse upwards. In this area, demand increases because many market participants see the price as attractive for entering the market. In chart analysis, these zones help identify potential areas where a downtrend may lose momentum.

Support often forms:

• at previous lows in the chart

• in areas with high trading activity

• at price levels observed by many traders

Resistance

Resistance describes a price level where rising prices often reverse downwards. In these areas, increasing prices often meet stronger selling pressure. In technical analysis of stocks or cryptocurrencies, such zones can indicate where an uptrend may lose momentum.

Resistance often forms:

• at previous highs in the price movement

• at price areas where many market participants take profits

• at key points in the chart that traders closely watch

Learn chart analysis: technical analysis step by step

If you want to learn technical analysis, a structured approach helps. Many traders start by observing charts and analysing the price movement of an asset. This way, you gradually learn how price movements develop in the market and how chart analysis methods are applied in trading.

The following steps can make getting started easier:

1. Understand the basics of technical analysis: Start with the most important concepts of technical analysis. These include analysing charts and price patterns as well as understanding trends, support and resistance. These fundamentals help you understand how trends develop in price movements.

2. Learn chart types and indicators: Get to know the most important chart types, such as line charts, bar charts or candlestick charts. These present price movements in different ways. Many traders also use indicators to better identify trends or potential market changes. Common examples include moving averages or the moving average convergence divergence (MACD).

3. Gain practical experience: The best way to learn technical analysis in trading is through practical application. Regularly observe charts and analyse how prices develop on the exchange. Many beginners start with demo accounts or simulated trading environments to analyse market movements.

4. Use learning resources: There are numerous learning materials available for chart analysis. These include books, online courses and tutorials on technical analysis. Such resources help you better understand analysis methods and tools.

5. Exchange with other traders: Exchanging ideas with other market participants can help you gain new perspectives. In trading communities, traders often discuss current market movements and share experiences with different technical analysis methods.

Conclusion: technical analysis as a tool for analysing price movements

Technical analysis helps you better understand price movements in the market and identify typical patterns in charts. By analysing trends, support, resistance and indicators, traders gain insights into how a market might develop.

If you want to learn chart analysis, it’s worth taking a step-by-step approach: regularly observe charts, practise interpreting price movements and test different technical analysis methods in trading.

At the same time, you should note that technical analysis does not provide certain predictions. Chart patterns and indicators offer signals but no guarantees. Careful analysis and conscious risk management therefore remain essential foundations in trading.

Further topics related to trading

If you want to learn technical analysis, it’s also worth understanding other fundamentals of financial markets. A better understanding of price movements, market mechanisms and different trading strategies can help you interpret charts and trends more effectively. In the Bitpanda Academy, you’ll find many additional guides on trading, chart analysis and investing. These help you expand your knowledge step by step and better understand technical analysis methods.

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