Technical analysis is a method of studying past price and trading volume patterns, mainly through charts, to try to anticipate future price movements. Instead of studying a company's business, technical analysts study how its share price has behaved.
What technical analysis is
Technical analysis rests on three ideas: prices reflect available information, prices tend to move in trends, and market behaviour, driven by human psychology, tends to repeat. Technical analysts look for patterns and signals that suggest whether a trend is likely to continue or reverse.
Common tools
Charts: line, bar and candlestick charts show price over time; candlesticks show the open, high, low and close for each period. Trends: a series of higher highs and higher lows suggests an uptrend; lower highs and lower lows, a downtrend. Support and resistance: price levels where buying or selling has repeatedly appeared. Moving averages: average prices over periods such as 50 or 200 days, smoothing out daily noise. Indicators: such as the Relative Strength Index (RSI), which measures how fast prices have moved, and MACD, which compares moving averages. Volume: used to judge the strength behind a price move.
How it works in practice
A technical analyst might look at a share trading above its 200-day moving average, making higher highs, with rising volume on up days, and conclude the uptrend is intact. They might plan to buy near a support level and set a stop-loss just below it. Technical analysis is used mostly by traders with shorter time horizons, from minutes to months.
A simple example
A share has bounced off ₹400 three times in six months; traders call ₹400 a support level. When it falls to ₹405 again, some traders buy, expecting another bounce, with a stop-loss at ₹390 in case support breaks. If the price instead falls through ₹400 on heavy volume, they read it as a sign of further weakness.
Limitations
Patterns are open to interpretation, and different analysts can read the same chart differently. Signals often fail, especially around unexpected news. Past patterns may not repeat. Technical analysis also ignores whether a business is fundamentally sound, so a share can look technically strong while the company is deteriorating, or the reverse.
Technical versus fundamental analysis
Fundamental analysis asks "what is this company worth?" and suits long-term investing. Technical analysis asks "where is the price likely to move next?" and suits trading. Some investors combine them, using fundamentals to choose companies and technicals to time entries and exits.
Why it matters for investors
Even if you invest for the long term, understanding basic technical terms helps you read market commentary and avoid buying purely on short-term chart excitement.
Timeframes matter
The same share can look bullish on a daily chart and bearish on a weekly chart. Short-term traders focus on minute or hourly charts; swing traders on daily charts; longer-term investors who use technicals often prefer weekly or monthly charts, which filter out noise. Always be clear about which timeframe a signal refers to.
Common misconceptions
"Charts predict the future." They show probabilities and patterns, not certainties.
"More indicators mean better decisions." Too many indicators often give conflicting signals.
"Technical analysis works for every share." It is less reliable for thinly traded shares.
Frequently asked questions
What is a candlestick chart?
A chart showing each period's open, high, low and close.
What is a moving average?
The average price over a set number of days, updated daily.
What is support?
A price level where buying has repeatedly stopped declines.
Is technical analysis gambling?
It is a structured method, but it carries high risk when used for frequent trading.
How to use this on PositoAI
PositoAI focuses on company research rather than charts. Use company pages, Go Deep and red flags to understand the business behind any chart pattern, and read our guide to fundamental analysis. PosiStep 18 of the free PosiCourse covers risk, FOMO and tips.
Summary
Technical analysis studies price and volume patterns, using charts, trends, support and resistance, moving averages and indicators, to anticipate price movements. It is mainly used by traders. It is subjective and fallible and ignores business fundamentals, so many investors combine it with fundamental analysis or rely primarily on fundamentals for long-term decisions.