The beginner’s guide to share trading technical analysis

What is share trading technical analysis?

Share trading technical analysis is the name given to a type of investing strategy that analyses trading data (price action) as a way to work out when the best time to buy and sell a stock may be.

Along with fundamental analysis, technical analysis is one of the two major analytical approaches to trading the stock market.

It uses things like price charts, historical prices, trading volumes and other trading data to try and make predictions about where a stock's price will go in future.

Not everyone believes technical analysis works – in fact it's a hotly debated topic among investors.

Either way, it's remained a popular approach amongst both day traders and long-term investors for centuries.

Does technical analysis trading work?

It's fair to say that opinion is divided over whether technical analysis is an effective method for trading the stock market or a form of investing pseudoscience.

A 2016 study found that hedge funds that used share trading technical analysis performed better than nonusers during periods of high sentiment.¹ Another meta study found that a slim majority of 95 studies showed technical analysis led to positive trading results.²

But whether this translates to success for everyday traders is a different matter. While many professional traders use technical analysis every day to help make profitable trades, others may see little benefit (or even lose money).

Ultimately, it may be that share trading technical analysis is only as successful as the person using it.

1. Start with a price chart

Share trading technical analysis always begins with a price chart. There are many different types of charts used by analysts, but their goal is always to map out price trends.

One of the most common charts you'll come across is the candlestick chart, named after the red and green coloured vertical bars.

The bars show the stock's opening and closing prices for the period you're viewing – often a single day. Green means the price went up and red means the price went down. The short lines called the "wicks" that appear at the top and bottom of the rectangle show the highest and lowest price ranges for that period.

Candlestick charts are useful because they show how volatile a stock's price has been over time.

Source: TradingView

2. Understand support and resistance

Just like any other product, the demand for stocks fluctuates depending on prices. For example, when a stock's price is low, it becomes more attractive and demand for the stock goes up. When a stock price becomes too expensive, buyers will start to drop off and some people will see an opportunity to sell.

Share trading technical analysis tries to predict these demand patterns using "support" and "resistance" trend lines on the chart.

A support line indicates the lower price range where buying typically starts to pick up. A resistance line shows the higher price range where traders are expected to start selling.

Such trend lines are made by connecting prices – you just need to figure out which prices you want to connect that will help to inform you. Typically, traders connect low price points or high price points together. If the support or resistance lines stand the test of time, the more reliable it is deemed to be in the future.

Source: ASX.com.au

There are a few ways to construct your support and resistance lines, and the most well-known method is through "moving averages" (see below).

3. Look at trading volumes

Trade volume is the number of buy or sell trades that are made for a stock or commodity over a given time. This typically sits at the bottom of a price chart as light grey columns or lines.

Volume is used alongside prices to determine whether a prolonged trend or a reversal is about to occur. As a general rule, higher volumes of trading are more likely to result in a prolonged price trend, either upwards or downwards.

When volume rises with prices, you might expect a long bull run. If prices are falling while volumes are going up, it indicates a prolonged correction.

However, if prices hit a new peak as volume drops, it could be a sign that the stock is losing its zeal and a sharp reversal is about to occur.

4. Identify uptrends and downtrends

The key question you're trying to answer in share trading technical analysis is whether a stock's price is trending upwards, downwards or sideways. To work this out, traders use resistance points to map out trendlines.

At a basic level, a downward sloping line indicates there are more sellers than buyers and the correction might be a prolonged one. Some traders will take this as a sign to sell before prices dip further.

An upward sloping line means the opposite – and you might want to consider holding onto your stock for a longer period.

These lines are also used to determine the points where prices start to meet resistance and could reverse. If prices fall below this trend level, you might expect a panic sell to occur as it indicates a "black swan" event has occurred.

For example, the image below shows a trendline for the S&P/ASX200 index over several decades, leading up to the Covid crash of March 2020.

Source: ImpliedVolatility

This trendline indicates that in early 2020, prices could reverse at around the 5,550 mark.

Of course, the ASX200 did fall below this point in March that year and panic selling occurred as a result.

This trendline will have subsequently lost its validity and numerous new trendlines will have been made to accommodate the new market conditions.

5. Learn popular trading patterns

If you've looked at enough trading charts, you might start to notice the same formations occurring again and again. Many of these formations are given specific names and can be used to predict the upcoming price action of a certain stock.

For example, an "ascending triangle" pattern is when the price is moving upwards within a triangular shape. If the price "breaks out" of the top of the triangle, this is often taken as a sign that the price will go up over the short term. If the price breaks out of the bottom of the triangle, it may be taken as a sign that the price is about to drop.

An ascending triangle pattern, Source: TradingView

There are dozens of chart patterns that traders used to chart potential price movement, and recognising which pattern should be used at which time is one of the key skills required of technical traders. It's also worth keeping in mind that trading patterns can't predict the future and are "invalidated" all the time.

6. Track moving averages

The moving average indicates the average price of a stock over a period of time – often weeks or months. This gives you a better idea of how the stock has been performing over longer time frames and it's commonly used to find support and resistance lines.

On a price chart, you'll often see the symbol MA followed by a number, e.g. MA200. This means the moving average shown on the chart is over a 200-day period.

There are two main ways to look at an average stock price. You can look at the simple moving average (SMA) or the exponential moving average (EMA). Both SMA and EMA average the stock's price over a specific period of time, but EMA weighs recent prices as more important than those further in the past.

These averages are used to create support and resistance lines (see point 4). For example, if a stock's price can't close the day above the moving average line, it indicates a resistance point – this is the level where more people are starting to sell than buy.

If a stock's price can't close below the moving average, we find a support point – the level where more people are beginning to buy than to sell.

Another popular way to construct support and resistance points is through Bollinger Bands. Bollinger Bands are typically 2-deviations above and below a moving average. On a chart, this appears as three lines - the moving average line and the 2 Bollinger bands above and below the moving average.

When prices regularly touch the upper Bollinger, it suggests an asset is overbought. Conversely, when prices regularly touch the lower Bollinger, it indicates the asset may be oversold.

Tesla stock Bollinger Bands example

Once you map out your support and resistance lines, trend indicators also start to appear. When stock prices fall outside of these lines, it could be a sign that a new trend is starting, such as a bull market or a correction.

7. Relative Strength Index (RSI)

Relative Strength Index is a popular indicator to work out whether a stock or other asset is overbought or oversold. It's typically shown as a line graph and might sit just below the price chart.

RSI is measured over a 14-day period on a scale of 0-100, with 0 being the most undersold value and 100 the most overbought. It's calculated using the asset's average gains and losses – usually over a 14-day period.

As a general rule, the 70 mark is where a stock or asset is considered to be overbought, while 30 is the level where it's thought to be undersold.

8. Practice, practice, practice

Before jumping headfirst into your new life as a trader, you should test your knowledge without risking your hard-earned cash. Try and predict a stock's price action using the indicators and tools mentioned above to find the ones that work for you, and then put your analysis to the test.

You can do this by using a site like TradingView to analyse a stock's price chart, decide the price at which you'd make a hypothetical trade and then track how your trade would have performed.

Better yet, quite a few trading platforms offer demo accounts that let you practice trading with fake money but still give you access to the platform's trading tools and charting features.

VIDEO: What is share trading technical analysis?

5:15

Share trading technical analysis is a measure of human nature

Behind all the numbers, there are people making both rational and irrational trading decisions. So how can you predict what people are going to do next?

The basis of share trading technical analysis is that stock prices tend to move in patterns that are either cyclical or based on trends.

While you can't know what investors are going to do next, we do know most of the time people respond to certain events in the same way.

For example, if a stock price rallies sharply over several days or weeks, we can expect that some people will want to cash in their profits.

This is why we often see prices dip sharply after a boom, such as after a major IPO.

Understanding how humans are likely to act in the macro sense is the key to technical analysis.

Which trading platforms offer share trading technical analysis charts?

TradingView is perhaps the most well-known share trading technical analysis platform out there and you'll see many social forums referencing TradingView charts. But there are also many online brokers that offer advanced technical analysis charts alongside your physical trading.

While some of these actually partner with TradingView to supply the charts, it helps to have your trading strategy, portfolio and order history all in the one spot.

Some online trading platforms that offer advanced charting features in Australia include:

• IG
• eToro
• Tiger Brokers
• CMC Invest
• Bell Direct
• Capital 19
• CommSec
• Interactive Brokers
• Marketech
• Moomoo
• Totality
• Phillip Capital

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Frequently asked questions

• What are Bollinger Bands in technical analysis

  Bollinger Bands are indicators that are used to find resistance points on a price chart. Typically, Bollinger lines are 2 deviations above and below a 2-Day moving average. When prices regularly hit the upper Bollinger, it suggest the asset is overbought, and the reverse when prices hit the lower Bollinger.

• What is a pivot point in share trading technical analysis?

  In share trading technical analysis, a pivot point is a key indicator used by traders to gauge overall market trends. It's essentially the average of the high, low, and closing prices from the previous day. This helps investors predict support or resistance levels, providing crucial insight into market movement and potential shifts.

• How do I select stocks using share trading technical analysis?

  Share trading technical analysis is about finding price trends of specific assets including stocks, rather than finding new stocks. However you could apply technical analysis to any stock that you're interested in to help inform whether you believe the stock's price is a good buying opportunity. First, you'll need to understand how technical analysis works.

• How do you combine fundamental and technical analysis?

  Combining fundamental and technical analysis gives you a holistic view of your investment choices. Fundamental analysis helps you understand a company's intrinsic value by examining financial statements, industry position, and macroeconomic factors. On the other hand, technical analysis uses price movements and patterns to predict future trends. A typical use case would be to use fundamental analysis to identify companies that are poised for growth and then use technical analysis to identify optimal entry and exit points for your investment.

• How do I learn technical analysis?

  Start with online courses from reputable providers or read in-depth books like "Technical Analysis of the Financial Markets" by John J. Murphy. Try free resources like Investopedia for fundamental concepts. Once familiar with basics like candlestick charts, moving averages, and indicators, put your knowledge into practice with paper trading. Attend webinars, join trading communities, and follow experienced traders to continually improve. Remember, it takes time and persistence to become proficient.

Written by

Kylie Purcell

Investments Analyst

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Kylie Purcell is an experienced investments analyst and finance journalist with over a decade of expertise in a wide range of financial products, including online trading platforms, robo-advisors, stocks, ETFs and cryptocurrencies. She is a sought-after commentator and regularly shares her insights on the AFR, Yahoo Finance, The Motley Fool, SBS and News.com.au. Kylie hosts the Investment Finder video series and actively contributes to the investment community as a judge and panellist. She holds a Master of Arts in International Journalism, a Graduate Diploma in Economics, and ASIC-recognised certifications in securities and managed investments. See full bio

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