Introducing Technical Analysis

Technical analysis becomes much more useful when we understand the ideas on which it is built. In the previous chapter, we introduced technical analysis and compared it with fundamental analysis. We learned that fundamental analysis mainly focuses on the financial and economic factors that determine an asset’s value, while technical analysis focuses primarily on price, volume, market behavior, and historical data.

This chapter takes that understanding one step further. It explains where technical analysis can be applied, the major assumptions behind it, and how daily market activity can be summarized using Open, High, Low, and Close (OHLC) prices.

2.1 – Overview

Technical analysis is a method of studying market data to identify patterns, trends, momentum, support and resistance, and possible future price behavior.

Unlike fundamental analysis, technical analysis does not require the analyst to understand every detail about a company’s business, management, balance sheet, industry structure, or intrinsic value. Instead, the technical analyst mainly studies what the market has already done through its price and volume data.

The basic idea is simple:

Price is the final result of the interaction between buyers and sellers.

When thousands or millions of market participants place buy and sell orders, their combined actions produce price movements. Technical analysis attempts to study those movements and identify useful patterns.

This does not mean that technical analysis can predict the future with certainty. No technical indicator or chart pattern can guarantee what a market will do next. Rather, technical analysis helps traders and investors build a structured view of market behavior and make decisions based on probabilities, risk, and predefined conditions.

To use technical analysis effectively, it is important to understand four fundamental assumptions:

1. Markets discount information.
2. The “how” is often more important than the “why.”
3. Prices tend to move in trends.
4. Market behavior and patterns tend to repeat because human psychology is relatively consistent.

Before examining these assumptions, let us understand one of the biggest strengths of technical analysis: its broad application across different asset classes.

2.2 – Application Across Asset Classes

One of the biggest advantages of technical analysis is that its basic principles can be applied to almost any actively traded asset for which reliable historical time-series data is available.

This data may include:

• Open price
• High price
• Low price
• Closing price
• Trading volume
• Open interest in derivatives
• Price changes
• Volatility
• Other market-generated data

Think of technical analysis like learning how to drive.

Once you understand the basic principles of driving, you can apply those skills to different cars. You may drive a compact hatchback, a sedan, an SUV, or another type of vehicle. The vehicle changes, but many fundamental driving principles remain the same.

Technical analysis works in a similar way.

Once you understand concepts such as trends, support and resistance, candlestick patterns, moving averages, momentum, volume, and chart patterns, you can apply those concepts to different markets.

Technical analysis can be used in markets such as:

• Equities
• Stock indices
• Commodities
• Foreign exchange
• Futures
• Options
• Cryptocurrencies
• Exchange-traded funds
• Certain fixed-income instruments
• Other liquid financial assets

The exact data and market structure may differ, but the underlying analytical framework can remain broadly similar.

Why technical analysis is relatively universal

Consider fundamental analysis.

When analyzing a company, a fundamental analyst may study:

• Revenue
• Profit
• Earnings per share
• Balance sheet
• Cash flows
• Debt
• Return on capital
• Management quality
• Competitive advantages
• Industry conditions
• Valuation ratios

However, if the analyst moves from equities to agricultural commodities, the fundamental framework changes significantly.

For example, the fundamentals of coffee or pepper may depend on:

• Weather conditions
• Rainfall
• Crop production
• Harvest expectations
• Global demand
• Inventory
• Export activity
• Supply disruptions
• Government policies

The fundamental factors affecting metals are different. Energy commodities have another set of drivers. Foreign exchange has yet another set of economic and monetary factors.

Therefore, fundamental analysis is highly dependent on the nature of the asset being studied.

Technical analysis is different.

A trendline, moving average, RSI, MACD, support level, resistance level, or candlestick pattern can generally be applied to many different markets.

For example, the Relative Strength Index (RSI) follows the same basic calculation and interpretation framework whether it is applied to a stock, index, commodity, or currency pair.

Similarly, a moving average can be used to study the trend of different assets.

However, this does not mean that the same technical strategy will work equally well in every market. Different assets have different levels of volatility, liquidity, trading hours, transaction costs, and market behavior.

Therefore, the principles of technical analysis are broadly transferable, but the strategy, settings, risk management, and interpretation may need to be adapted to the asset and timeframe.

The importance of historical data

Technical analysis depends on historical market data.

For example, if you want to study a stock on a daily chart, you may examine several years of:

• Opening prices
• Highs
• Lows
• Closing prices
• Trading volumes

The same data can be displayed on different timeframes.

A chart may represent:

• One-minute data
• Five-minute data
• Fifteen-minute data
• Hourly data
• Daily data
• Weekly data
• Monthly data

The timeframe changes the way the market is viewed, but the basic technical concepts remain applicable.

This is why technical analysis is often described as a market-data-driven approach.

2.3 – The Core Assumptions of Technical Analysis

Technical analysis is not simply a collection of indicators and chart patterns. It is built on a set of assumptions about how financial markets behave.

Understanding these assumptions is important because they explain why technical analysis attempts to derive information from price and volume.

The four major assumptions are:

1. Markets discount information.
2. The “how” is more important than the “why.”
3. Price moves in trends.
4. History tends to repeat itself.

Let us examine each one.

1. Markets Discount Information

This is one of the most important assumptions in technical analysis.

The assumption is that the current market price reflects the information and expectations that market participants have incorporated into their buying and selling decisions.

In simple words:

The price is considered to contain the collective information and expectations of the market.

Suppose a company is expected to report strong earnings.

Investors may anticipate the announcement and begin buying the stock before the actual results are released. As demand increases, the stock price may rise.

A technical analyst does not necessarily need to know every reason behind the buying. Instead, the analyst observes the price and volume behavior.

If the price starts rising strongly along with increased trading activity, the chart may indicate that market participants are positioning themselves in anticipation of something.

The technical analyst therefore focuses on the market’s response rather than attempting to identify every individual piece of information responsible for that response.

Does this mean all information is literally known to the market?

Not necessarily.

This assumption should not be interpreted as saying that every investor knows everything or that prices are always perfectly accurate.

Markets can be inefficient. Information can be incomplete, delayed, misunderstood, or interpreted differently by different participants.

The technical-analysis perspective is that whatever information and expectations are sufficiently reflected in trading activity will ultimately influence price.

This makes price behavior an important source of information.

Price as the final outcome

Imagine that hundreds of investors analyze a company differently.

Some believe the company is undervalued and buy the stock. Others believe it is expensive and sell. Institutions may have their own research. Traders may respond to news, technical levels, economic data, or market sentiment.

All these decisions interact in the market.

The resulting price is the outcome of that interaction.

Technical analysis attempts to study this outcome.

2. The “How” Is More Important Than the “Why”

This assumption follows naturally from the first one.

A fundamental analyst may ask:

Why is the price moving?

A technical analyst is often more interested in asking:

How is the price moving?

Suppose a stock suddenly rises 8% with unusually high trading volume.

A fundamental analyst may investigate:

• Was there a new contract?
• Did earnings exceed expectations?
• Was there a regulatory announcement?
• Did management announce a new project?
• Was there a change in the company’s outlook?

A technical analyst may first focus on the market behavior:

• How quickly did the price rise?
• Was volume unusually high?
• Did the stock break a resistance level?
• Did the trend change?
• Did momentum increase?
• Was the move sustained?
• Where are the important support and resistance levels?

The technical analyst does not necessarily ignore the reason behind a move. News and fundamentals can be extremely useful.

The point is that technical analysis primarily studies the observable market behavior.

Why does this matter?

The reason behind a price movement may sometimes become clear only after the movement has already occurred.

Price and volume, however, are continuously generated by the market.

Therefore, technical analysis attempts to extract useful information from the market’s behavior itself.

3. Price Moves in Trends

Trend is one of the central ideas in technical analysis.

Markets do not always move randomly from one price to another. They often display periods in which prices move predominantly in one direction.

There are three broad types of trends:

Uptrend: Prices generally form higher highs and higher lows.

Downtrend: Prices generally form lower highs and lower lows.

Sideways trend or range: Prices move within a relatively defined range without a clear sustained upward or downward direction.

Consider an asset that moves from ₹100 to ₹110, then ₹108, then ₹120, then ₹116, and eventually ₹130.

The price is not moving upward every single day. There are corrections and temporary declines.

Yet the overall structure may still represent an uptrend because the market is producing progressively higher highs and higher lows.

This is an important concept.

An uptrend does not mean the price rises continuously.

Similarly, a downtrend does not mean that the price falls every day.

Prices can move against the primary trend for short periods.

Why are trends important?

If a trend becomes established, market participants may continue responding to it.

In an uptrend:

• Buyers may become more confident.
• Investors may buy on corrections.
• Momentum traders may look for continuation.
• Short sellers may become cautious.

In a downtrend:

• Sellers may remain aggressive.
• Investors may avoid buying too early.
• Traders may sell during temporary rallies.
• Negative sentiment may reinforce the trend.

This interaction can sometimes cause a trend to persist longer than expected.

Technical analysis therefore places considerable importance on identifying the direction and strength of a trend.

4. History Tends to Repeat Itself

The fourth major assumption is that market behavior tends to repeat.

This does not mean that exactly the same event will happen again at exactly the same price.

Instead, the idea is that human psychology tends to produce recurring patterns of behavior.

Markets are influenced by emotions such as:

• Fear
• Greed
• Hope
• Confidence
• Panic
• Regret
• Euphoria

These emotions have existed for generations and continue to influence market participants.

Suppose a stock rises rapidly.

Some investors may become excited and buy because they fear missing out. Others may hold their positions because they expect the price to rise further.

Eventually, the stock may become overextended. Some participants may start booking profits. A decline may then trigger fear among recent buyers, leading to additional selling.

A similar emotional cycle can occur repeatedly across different markets.

This is one reason technical analysts study recurring patterns.

Examples include:

• Trends
• Breakouts
• Pullbacks
• Support and resistance
• Reversal formations
• Consolidation patterns
• Momentum patterns
• Candlestick formations

These patterns do not guarantee future outcomes. They simply provide a framework for understanding recurring market behavior.

Technical analysis is based on probabilities, not certainty

This point is extremely important.

A historical pattern repeating in the past does not guarantee that it will work in the future.

For example, a stock breaking above resistance may sometimes lead to a strong rally. In other cases, the breakout may fail and the price may fall back into its previous range.

Therefore, technical analysis should be used with:

• Risk management
• Stop-loss planning
• Position sizing
• Proper trade selection
• Market context
• Awareness of volatility
• A clearly defined trading or investment plan

Technical analysis provides probabilities, not promises.

2.4 – Understanding the Trade Summary

During a normal trading session, thousands or millions of transactions can occur across the market.

Consider a single actively traded stock.

A transaction may take place every few seconds or even more frequently. Each transaction can occur at a slightly different price.

If we recorded every individual trade from the beginning to the end of the trading session, we would end up with an enormous amount of information.

For example, suppose a stock trades at:

₹100.00
₹100.20
₹100.10
₹100.35
₹100.50
₹100.25
₹100.70
₹100.60
₹100.90
₹101.10
…and so on.

Recording every transaction can be useful for certain advanced forms of market analysis, but it is unnecessary for most traditional chart analysis.

What we need is a summary of the trading activity.

One of the most widely used summaries is:

Open, High, Low, and Close — OHLC.

These four prices provide a compact description of what happened during a particular period.

The period could be:

• One minute
• Five minutes
• One hour
• One day
• One week
• One month
• Or another selected timeframe

Let us understand each component.

Open Price

The Open is the first traded price recorded for an asset during the selected trading period.

For a daily chart, the open represents the first traded price of the day during the regular trading session.

For an hourly chart, it represents the first traded price within that hour.

The open is important because it provides a starting reference for measuring the price movement during that period.

For example:

If a stock opens at ₹500 and closes at ₹520, the price has gained ₹20 during that period.

If it opens at ₹500 and closes at ₹480, it has declined ₹20.

High Price

The High is the highest traded price reached during the selected period.

Suppose a stock has:

• Open = ₹500
• High = ₹535
• Low = ₹490
• Close = ₹525

The highest price traded during that period was ₹535.

The high helps us understand how far buyers were able to push the price.

Low Price

The Low is the lowest traded price reached during the selected period.

In the above example, the low was ₹490.

The low tells us how far sellers were able to push the price during the period.

The difference between the high and low is called the trading range for that period.

In the example:

Range = High − Low

Range = ₹535 − ₹490 = ₹45

A large range indicates relatively significant price movement during the period, while a small range indicates relatively limited movement.

Close Price

The Close is the last traded price recorded during the selected trading period.

For many forms of technical analysis, the closing price receives particular attention because it provides a standardized reference for comparing one period with another.

For example:

• Day 1 close = ₹500
• Day 2 close = ₹515
• Day 3 close = ₹510
• Day 4 close = ₹525

These closing prices can be used to calculate indicators, identify trends, compare performance, and construct price charts.

The close also tells us where the market ended the period relative to its opening price and its overall trading range.

Why the Close Is Important

The closing price is widely used in technical analysis because many indicators and calculations are based on closing prices.

For example, moving averages are commonly calculated using closing prices.

A daily close also provides a convenient reference point for the next trading session.

However, it is important not to treat the closing price as inherently “more important” in every situation. The open, high, low, close, volume, and the relationship between them can all provide valuable information.

For example, a stock may open strongly, reach a much higher price, fall sharply, and then close near its low. That single OHLC record tells a meaningful story about the battle between buyers and sellers.

2.5 – Reading the Story Behind OHLC

OHLC data becomes much more useful when we study the relationship between the four prices rather than looking at them individually.

Consider this example:

• Open = ₹100
• High = ₹120
• Low = ₹98
• Close = ₹118

The stock opened at ₹100, briefly fell to ₹98, then attracted strong buying interest and reached ₹120 before closing at ₹118.

This suggests that buyers were relatively strong during the period.

Now consider another example:

• Open = ₹100
• High = ₹105
• Low = ₹80
• Close = ₹82

Here, the stock opened at ₹100, reached ₹105, but sellers eventually pushed it down to ₹80. It recovered slightly and closed at ₹82.

This indicates considerable selling pressure during the period.

The four prices therefore provide much more information than a single closing price.

OHLC and Candlestick Charts

OHLC data is the foundation of candlestick charts.

A single candlestick summarizes the four key prices for a selected timeframe.

A typical candlestick contains:

• An opening price
• A closing price
• A high
• A low

The main body represents the relationship between the open and close, while the upper and lower shadows represent price extremes beyond the body.

Candlestick charts make it easier to visually understand market behavior.

For example, a long bullish candle may indicate strong buying pressure during a period, while a long bearish candle may indicate strong selling pressure.

Candlestick analysis will be explored in greater detail in later chapters.

2.6 – OHLC and Market Timeframes

OHLC is not restricted to daily data.

The same concept can be applied to almost any timeframe.

For example, on a five-minute chart, one candle represents five minutes of trading.

Its:

• Open = first traded price during those five minutes
• High = highest traded price during those five minutes
• Low = lowest traded price during those five minutes
• Close = last traded price during those five minutes

On a daily chart, one candle represents the selected trading session.

On a weekly chart, the candle summarizes the week’s trading activity.

On a monthly chart, it summarizes the month’s activity.

This makes OHLC data extremely flexible.

A trader may use shorter timeframes to study intraday behavior, while a swing trader or long-term investor may focus on daily or weekly charts.

2.7 – The Role of Volume

Although OHLC is central to price analysis, volume is another important piece of market information.

Volume represents the number of units or contracts traded during a specified period, subject to the conventions of the particular market and data source.

Price tells us what happened to the market value, while volume can provide additional information about the level of trading activity accompanying that movement.

For example, suppose a stock breaks above an important resistance level.

If the breakout occurs with substantially higher-than-usual volume, traders may consider the move more significant than a breakout occurring on very low volume.

Similarly, a sharp price decline accompanied by unusually high volume may indicate strong participation in the selling activity.

Volume should not be interpreted in isolation. It is most useful when considered together with price, trend, support, resistance, and broader market conditions.

2.8 – An Important Distinction: Price Data vs. Fundamental Information

Technical analysis does not mean completely ignoring everything outside the chart.

A technical analyst may still be aware of:

• Corporate announcements
• Economic events
• Interest-rate decisions
• Earnings announcements
• Government policies
• Global market movements
• Major geopolitical developments

However, the primary analytical input remains market-generated data.

This distinction is important because technical analysis and fundamental analysis answer somewhat different questions.

A fundamental analyst may ask:

“What is this asset worth?”

A technical analyst may ask:

“What is the market doing, and what does its price behavior suggest?”

In practice, some market participants combine both approaches.

For example, an investor may use fundamental analysis to select a company and technical analysis to identify a potential entry or exit point.

There is no requirement that an investor use only one method.

2.9 – Strengths and Limitations of Technical Analysis

Technical analysis has several important strengths.

Major strengths

1. Broad applicability

The same basic concepts can be applied to many asset classes.

2. Visual representation

Charts make complex market movements easier to understand.

3. Market-focused

Technical analysis directly studies actual trading behavior.

4. Useful across timeframes

It can be used for short-term, medium-term, and long-term analysis.

5. Helps identify trends

Trend analysis can help traders understand the dominant direction of the market.

6. Supports risk management

Technical levels can help traders define entry points, stop-loss levels, targets, and position sizes.

7. Structured decision-making

A technical framework can reduce purely emotional decision-making.

Limitations

Technical analysis also has limitations.

1. It does not predict the future with certainty.

A pattern can fail.

2. Different analysts can interpret the same chart differently.

Technical analysis involves judgment, especially when identifying trends and chart patterns.

3. False signals can occur.

Breakouts may fail, indicators may give misleading signals, and trends can reverse unexpectedly.

4. Market conditions change.

A strategy that performs well in a strong trend may perform poorly in a sideways market.

5. Transaction costs matter.

Frequent trading can reduce returns through brokerage, taxes, spreads, slippage, and other costs.

6. Historical patterns are not guarantees.

The fact that a setup worked many times in the past does not guarantee that it will work the next time.

For these reasons, technical analysis should be treated as a decision-making framework rather than a prediction machine.

2.10 – A Practical Example

Suppose a stock has the following daily data:

What can we understand from this information?

The stock opened at ₹1,000.

During the session, sellers initially pushed it down to ₹985.

Buyers then entered aggressively, pushing the price to ₹1,060.

The stock eventually closed at ₹1,050.

Because the stock closed significantly above its opening price and relatively close to its day’s high, the session indicates relatively strong buying pressure.

Now suppose the same stock had instead closed at ₹995.

The interpretation would be very different.

The stock would have opened at ₹1,000, moved as high as ₹1,060, but failed to hold those higher levels and ended below the opening price.

This would indicate that sellers were able to overcome the earlier buying strength before the session ended.

The same high and low can therefore produce a very different market story depending on where the stock closes.

This is why technical analysts study the relationship among OHLC values rather than focusing on only one number.

2.11 – Why Technical Analysis Needs Context

A common mistake among beginners is to treat one indicator or one candle as a complete trading signal.

For example:

“RSI is below 30, so I should buy.”

Or:

“The stock crossed its moving average, so I should sell.”

Such conclusions can be dangerous because indicators need context.

An RSI reading below a commonly watched level does not automatically mean that a stock must rise. A stock can remain weak for a long period.

Similarly, a moving-average crossover does not guarantee a profitable trade.

A better approach is to consider several factors together:

• Overall trend
• Price structure
• Support and resistance
• Volume
• Momentum
• Volatility
• Timeframe
• Broader market conditions
• Risk-to-reward relationship
• Trading costs

Technical analysis becomes more meaningful when these elements are interpreted as part of a larger framework.

2.12 – Key Takeaways

Technical analysis is a market-data-based approach that attempts to understand price behavior and identify potential opportunities and risks.

Its principles can be applied across many asset classes, including equities, indices, commodities, currencies, futures, and other markets with suitable historical time-series data.

The major assumptions of technical analysis are:

1. Markets discount information – Market prices reflect the information and expectations incorporated into trading decisions.
2. The “how” is more important than the “why” – Technical analysts primarily study how price and volume behave rather than trying to explain every underlying reason.
3. Price moves in trends – Markets often develop upward, downward, or sideways trends, and identifying these trends is central to technical analysis.
4. History tends to repeat itself – Recurring human emotions and market behavior can produce similar patterns over time, although no pattern is guaranteed to repeat.

A large amount of trading activity takes place during every market session. Instead of analyzing every individual transaction, technical analysis generally uses summarized price data.

The four fundamental price points are known as OHLC:

• Open – the first traded price during the selected period.
• High – the highest traded price during the selected period.
• Low – the lowest traded price during the selected period.
• Close – the last traded price during the selected period.

OHLC data forms the foundation of many chart types, especially candlestick charts.

The most important lesson is that technical analysis is not about finding a magical indicator that always predicts the market. It is about studying market behavior systematically, understanding trends and patterns, managing risk, and making decisions based on probabilities rather than certainty.

As you progress through technical analysis, concepts such as candlesticks, support and resistance, trends, chart patterns, indicators, volume, and risk management will build upon this foundation.