Technical Analysis: An Overview

Technical analysis is the study of historical market data—primarily price action and volume—to forecast future price movements and identify high-probability trading opportunities. Rather than evaluating a company's financial health, balance sheets, or management quality (fundamental analysis), technical analysts believe that all known economic, fundamental, and psychological factors are already fully reflected in a stock's price. By analyzing charts, indicators, and geometric patterns, traders seek to identify recurring human behaviors, market trends, and shifts in supply and demand.

The discipline rests on three core foundational premises:

Market action discounts everything: Every variable that could possibly affect a company is already priced into the stock.

1. Prices move in trends: Markets do not move randomly; instead, they trend upward, downward, or sideways over varying time frames.
2. History tends to repeat itself: Market psychology remains remarkably consistent over time due to core human emotions like fear and greed, allowing traders to use historical chart patterns to anticipate future reactions.

Ultimately, technical analysis is not about predicting the future with absolute certainty; rather, it is a risk management framework designed to tilt the mathematical probabilities in the trader's favor. When combined with strict money management, disciplined psychology, and well-timed entries and exits, it transforms trading from a speculative guess into a systematic, objective business.

Trading Basics

Traders aim to buy stocks, commodities, futures or currency pairs at a low price and sell them to close their position at a higher price. In down markets, the reverse applies, sell at a high price and buy back at a lower price. Your winning percentage is irrelevant, provided you can handle losses. What is important is that the % wins x $ won > % lost x $ lost. As an example, 40% wins x 2 reward > 60% losses x 1 risk.

Pictorially, examine the chart below. There are three trades shown (pink ellipse). Using Alexander Elder’s Impulse system as the basis for the entry, the orange triangles indicate a potential buy while the orange square above the trigger is the first profit target and the pink square under the trigger is the exit (stop loss) in case the price goes against the trader. While some traders might add to the trade as it progresses in their direction, in this example only one entry is shown.

Starting from the left, the first two trades are winners while the 3^rd trade produced a small loss. As a trader, you will have losses. They are just part of the game and say nothing about you as a person.

Psychology

Mastering trading psychology is often considered the single most critical factor separating consistently profitable market participants from those who repeatedly incur heavy losses. Emotional discipline dictates how effectively a trader can adhere to their predefined rules during periods of intense market volatility or unexpected drawdowns. Fear and greed frequently override logical decision-making, leading to premature exits, revenge trading, or holding onto losing positions for far too long.

Developing a resilient mental framework requires recognizing personal psychological triggers and establishing strict daily routines to maintain emotional equilibrium. Traders must learn to accept losses as an inevitable cost of doing business rather than a personal failure or a threat to their ego. Cultivating patience, detachment from immediate monetary outcomes, and unshakeable consistency ultimately builds the long-term confidence needed to navigate complex financial markets successfully.

Below is a 2-minute snippet of Louise Bedford talking to the group about trading psychology.

Entering a Position

There are hundreds if not thousands of ways to enter a trade. The trick is finding one that aligns to your psychology, that you can follow, has a positive expectancy, aligns to the time frame you want to trade as well as your time commitment as well as many other considerations. There is no one entry method that is optimal for all trade entries. Rather than chasing impulsive price movements, disciplined traders wait patiently for setups that align precisely with the prevailing market trend and momentum indicators. Analysts often utilize smaller time frames to fine-tune their entry points, minimizing potential slippage and allowing for tighter, more mathematically sound stop-loss placements.

Whether purchasing explosive breakouts in a strong bull market or executing calculated pullbacks toward key moving averages, consistency is paramount. Recognizing structural clues such as the 1-2-3 continuation sequence helps filter out false signals and dramatically improves the probability of a successful outcome. Entering the market with a clearly defined hypothesis ensures that positions are established with absolute clarity before capital is ever put at risk.

The 3 videos above feature Matt Caruso (Divergence), Jake Bernstein (Moving average channel) and Joe Rabil (RSI) and identify how these three traders all use different strategies to enter and exit the markets.

Money Management

Effective money management serves as the ultimate defensive shield that protects a trader's capital and ensures longevity through inevitable market cycles. Risk parameters must be strictly established before entering any position, ensuring that a single bad trade can never catastrophically damage the overall trading account. Implementing sizing rules based on account volatility and fixed percentage risk helps eliminate emotional decision-making when managing open capital.

Traders must calculate their expected value and maintain positive expectancy by ensuring that winning trades significantly outpace losing ones over a large sample size. Protecting principal takes absolute priority over chasing oversized gains, as surviving drawdowns allows participants to capitalize on future high-probability opportunities. Ultimately, professional capital allocation transforms trading from a speculative gamble into a structured, highly calculated business operation.

The video below has Dave Landry talking about money management.

Selling or Exiting your Position

Managing exits and selling positions effectively is often much harder than finding initial entries, yet it dictates the ultimate realization of trading profits. Traders must establish clear profit targets and trailing stop mechanisms well in advance to prevent emotional attachment from distorting rational decision-making. Cutting losses quickly when a trade invalidates its original thesis is vital for preserving capital for future opportunities.

Conversely, allowing winning trends to develop without premature interference requires immense psychological discipline and trust in one's overarching market system. Recognizing shifting momentum indicators or breaking structural support levels often signals that an active trend is concluding and it is time to lock in gains. A well-defined exit strategy ensures that small setbacks never compound into devastating account failures while maximizing successful positions.

In the video below Matt Caruso discusses how he keeps his losses small.

Technical Analysis – Other Areas of Interest

1. Volume

Volume acts as the underlying fuel of the stock market, providing crucial confirmation of institutional accumulation and distribution phases. Analyzing heavy volume surges during breakout attempts helps validate whether large market participants are genuinely supporting a particular price movement. Low-volume pullbacks typically indicate a lack of aggressive selling pressure, whereas expanding volume on down days warns of aggressive institutional distribution. Monitoring volume trends alongside price action gives traders a clearer picture of true supply and demand dynamics across various time frames.

In the video below Mark Leibovit describes some of his volume based indicators.

2. Candlesticks

Candlestick charts offer a visually intuitive way to interpret the daily battle between buyers and sellers through open, high, low, and close price data. Recognizing key reversal and continuation formations—such as hammers, engulfing patterns, and doji formations—allows traders to anticipate shifts in market sentiment.

These patterns carry the most significance when they form near established support or resistance levels, where institutional buying or selling pressure is likely concentrated. Combining candlestick analysis with momentum indicators helps confirm short-term timing before committing capital to a trade.

In the video below, Morley O'Neil talks about candlesticks.

3. Cycles

Market cycles highlight the recurring, rhythmic patterns of expansion and contraction that naturally occur across economic environments and individual stock charts. Understanding cyclical periodicity helps investors anticipate major turning points, seasonal shifts, and broader macro-driven trends over extended time horizons.

While cycles rarely repeat with exact mathematical precision, recognizing historical tendencies allows traders to position themselves ahead of predictable institutional capital flows. Aligning short-term technical entries with larger cyclical trends drastically improves the probability of capturing sustained market moves.

4. Seasonality

Seasonality tracks predictable calendar-based patterns and recurring historical tendencies that influence stock market performance throughout different months and quarters. Certain sectors consistently outperform during specific times of the year due to cyclical consumer behavior, corporate earnings cycles, or fiscal policy shifts.

Recognizing these tendencies allows swing traders and long-term investors to tilt their probability matrix in their favor by focusing on historically strong periods. While seasonality should never be traded in isolation, combining calendar anomalies with strong relative strength provides a powerful edge.

5. Patterns

Chart patterns represent visual blueprints of human psychology and institutional accumulation or distribution unfolding over weeks, months, or years. Classic formations such as cup-and-handles, double bottoms, and ascending triangles provide clear structural boundaries for risk management and profit projection.

Identifying these geometries enables traders to prepare precise entry triggers when price successfully breaks out of consolidation zones. Mastery of chart patterns creates a repeatable framework for spotting high-probability continuation and reversal setups across diverse market conditions.

6. Options

Options provide versatile financial instruments that allow traders to hedge existing equity portfolios, generate consistent income, or leverage directional market views with defined risk. Understanding implied volatility, time decay (theta), and option Greeks is essential for structuring trades that match specific market environments.

Buying options requires precise timing and direction, whereas selling premium strategies can capitalize on range-bound conditions and predictable volatility contractions. Incorporating options correctly requires a deep understanding of leverage so that risk exposure remains entirely under control.