Technical analysis explained
Technical analysis studies price charts to judge what is likely to happen next. It rests on one idea: everything known about a market is already in the price, and people tend to react to the same levels and patterns again and again.
- Technical analysis reads price behaviour. It gives you levels and probabilities, not certainty.
- Start with trend, then support and resistance, before adding patterns or indicators.
- Check more than one time frame, and always decide where you are wrong before you enter.
The idea behind it
Technical analysts do not ask why a currency is moving. They ask what price is doing and where it has reacted before. Three assumptions sit underneath: price reflects all available information, price moves in trends more often than not, and human behaviour repeats, so similar situations tend to produce similar reactions.
None of these is a law. Use technical analysis to organise what you see and to define your risk. It will not tell you what happens next.
Trend: the first thing to read
An uptrend is a series of higher highs and higher lows. A downtrend is lower highs and lower lows. A range is price bouncing between two levels. Work out which of the three you are in before anything else, because the same signal means different things in each.
- Trade with the trend when you can: pullbacks in an uptrend are buying areas, rallies in a downtrend are selling areas.
- A trend is weakening when it stops making new highs (or lows) and breaks the last swing in the other direction.
Support and resistance
Support is a price area where buyers have stepped in before. Resistance is where sellers have. The more times a level has held, and the more clearly it shows on the chart, the more traders watch it. When a level breaks, it often flips role: old resistance becomes new support.
Candlesticks
Each candle shows the open, high, low and close for a period. The body is the open-to-close range, and the thin wicks show how far price travelled beyond it. Long wicks show rejection: price went there and was pushed back.
| Pattern | What it looks like | What traders read into it |
|---|---|---|
| Doji | Open and close almost equal | Indecision. Matters most after a strong move. |
| Pin bar / hammer | Small body, long wick on one side | Rejection of a level, a possible turn. |
| Engulfing | A body that covers the whole previous body | A shift of control from sellers to buyers, or the reverse. |
A candle pattern in the middle of nowhere means little. The same pattern at a clear support or resistance level, in the direction of the trend, carries much more weight.
Chart patterns
- Double top and double bottom: price fails twice at the same level and turns.
- Head and shoulders: three peaks with the middle one highest, often read as a trend reversal when the neckline breaks.
- Triangles and flags: price compresses, then usually continues in the original direction.
Patterns are subjective: two traders can draw the same chart differently. Use them to see where a trade would be proven wrong.
Time frames
Look at a higher time frame to see the main trend and key levels, then drop to a lower one to time the entry. A buy setup on the 15-minute chart that runs straight into a major daily resistance level is a weaker trade than one with room to move. Our indicators guide shows how to add momentum and volatility tools on top.
Where it falls short
- It ignores scheduled news. A perfect chart setup can be run over by a rate decision, so check the calendar.
- Hindsight makes patterns look obvious. Judge a method on trades taken in real time, not on a chart you have already seen.
- Small samples mislead. A method needs dozens of trades to show whether it has an edge.
Practise on real prices in the iVentureFX Sim, or take on a prop-style challenge with guard rails.
Fundamental analysis in forex
Trading with leverage
This article is for education and is not financial advice. Rules and figures from third parties change; check them at the source. Trading leveraged products carries a high risk of loss.