Technical Analysis Basics: Support, Resistance, Moving Averages, RSI and MACD

Charts covered in lines, indicators and colored candles can make technical analysis look like a secret language. The core ideas are actually straightforward. Technical analysis studies past price and volume to understand market psychology and possible price movements. This guide is educational, not investment advice.

The core assumptions

1. Price reflects available information.
2. Prices move in trends that tend to persist for a while.
3. History rhymes: similar crowd psychology produces similar patterns.

Where fundamental analysis asks what to buy, technical analysis focuses on when.

Candlestick charts

Each candle shows a period’s open, high, low and close. A green (or hollow) body means the close was above the open; red means it closed lower. Long wicks show where buyers or sellers pushed back during the period.

Trends

• Uptrend: higher highs and higher lows
• Downtrend: lower highs and lower lows
• Range: price bouncing between two levels

Trendlines connect higher lows in an uptrend or lower highs in a downtrend. “The trend is your friend” is a reminder that fighting a strong trend is risky.

Support and resistance

• Support: a level where buying has repeatedly stopped declines
• Resistance: a level where selling has repeatedly capped rallies

They often form at prior highs and lows or round numbers. A broken resistance level can become support, and vice versa.

Moving averages

• Simple moving average (SMA): average closing price over N periods
• Exponential moving average (EMA): weights recent prices more heavily

The 50-day and 200-day averages are widely watched. Price above the 200-day is often read as a long-term uptrend. A golden cross (50-day crossing above 200-day) and death cross (crossing below) are popular — but lagging — signals.

RSI (Relative Strength Index)

RSI measures momentum on a 0–100 scale, usually over 14 periods:

• Above 70: overbought
• Below 30: oversold

Strong trends can keep RSI at extremes for weeks. A divergence — price making a new high while RSI doesn’t — may hint that momentum is fading.

MACD

MACD is the difference between the 12- and 26-period EMAs, with a 9-period EMA “signal line.” MACD crossing above the signal line is read as bullish; crossing below as bearish. The histogram shows the gap between the two.

Volume

Volume confirms conviction. A breakout on heavy volume is generally considered more meaningful than one on light volume.

The limits of technical analysis

• No certainty: charts show probabilities, not guarantees.
• Subjectivity: two analysts can read the same chart differently.
• False signals: especially in sideways markets.
• Costs: frequent trading increases commissions, spreads and taxes.
• News shocks: unexpected events override any pattern.
• Evidence: studies generally show that most technical trading strategies underperform buy-and-hold after costs.

Risk management matters more

Whatever method you use:

• Risk only a small percentage of your capital on any trade.
• Decide your exit (stop-loss) before you enter.
• Avoid leverage — see what forex trading really involves.
• Keep trading money separate from long-term savings.

For long-term investors

Most long-term investors are better served by regular contributions, diversification and low costs than by trying to time the market. Explore live charts on our stock market page and build a core with index funds.

Conclusion

Technical analysis offers useful tools — candlesticks, trends, support and resistance, moving averages, RSI, MACD and volume — for reading price behavior. Used with humility and strict risk management, it can inform decisions; used as a crystal ball, it often leads to losses.