Technical Analysis — Foundations

01Foundations of Technical Analysis

What technical analysis assumes, the raw material it works on, the different lenses you can put on the same price — and how each foundation concept translates into an actual trading decision.

What it is — and the three premises

Technical analysis (TA) is the study of price and volume to estimate the probability of the next move. It does not value a business; it reads the behaviour of the people trading it. Three classic assumptions:

Price discounts everything. All known fundamentals, expectations, and emotion are already expressed in price, so the chart alone is sufficient to study.
Price moves in trends. A move in motion is more likely to continue than reverse — until structure says otherwise.
History rhymes. Crowd behaviour repeats, so recurring patterns carry statistical (not guaranteed) information.

How this changes your trading

Premise 1 — you don't need to out-research the news; you need to read the reaction to it. Trade what price does, not what you think it should do.
Premise 2 — your default trade is continuation, not reversal. Statistically, joining a trend beats calling its top.
Premise 3 — patterns are probabilities with failure rates. Every setup needs a stop, because "usually" is not "always."

Technical vs fundamental vs quantitative

Dimension	Technical	Fundamental	Quantitative
Question	When to buy / sell?	What is it worth?	What has an edge, statistically?
Inputs	Price, volume, time	Earnings, rates, macro	Data + tested rules
Horizon	Minutes – months	Months – years	Any, if it backtests
Blind spot	Regime shifts, news shocks	Timing, sentiment	Overfitting, regime change

Anatomy of a candlestick

Throughout this handbook, hollow = bullish (close above open) and filled = bearish. The body is the open-to-close range; wicks mark rejected extremes.

How to read any single candle

Long body = conviction. Small body = indecision.
Long lower wick = sellers pushed down and failed — bullish information at support.
Close location is the verdict. Always wait for the candle to close before acting — an intrabar signal can vanish.

Timeframes and trader styles

Style	Holding period	Primary TF	Trades / week
Scalper	Seconds–minutes	M1–M5	Dozens+
Day trader	Intraday, flat by close	M5–M15	Several / day
Swing trader	Days–weeks	H4–Daily	1–5
Position trader	Weeks–months	Daily–Weekly	< 1

How to pick your timeframe stack

Choose the style your life allows: if you can't watch the screen, you are a swing trader, not a scalper.
Rule of thumb: bias TF → 4–6× your setup TF, setup TF → 4–6× your trigger TF (e.g. Daily → H4 → M15).
Trade where liquidity is: FX moves in London, New York, and their overlap. Avoid dead-session chop.

Gaps

A gap is empty space where price jumped between sessions. Common gaps (inside ranges) fill quickly; breakaway gaps launch a trend; runaway gaps occur mid-trend; exhaustion gaps appear near the end.

How to trade gaps

Common gap (range, normal volume): fade it — stop beyond the gap's far edge.
Breakaway gap (out of a base, high volume): do not fade. Buy the first pullback; the gap top often acts as support.
Runaway gap: trend is healthy — hold with-trend; it often marks the halfway point.
Exhaustion gap (late in trend, climactic volume, quickly filled): exit longs; a close back through is a reversal trigger.

Rule of thumb Never let a lower timeframe override a higher one. A M15 buy signal inside a Daily downtrend is a counter-trend trade — treat it as such, or skip it.

02Market Structure & Trend

Before any indicator, learn to read structure from price itself: the sequence of swing highs and lows that defines who is in control — and the specific entries each structural event offers.

The three states of a market

An uptrend prints higher highs (HH) and higher lows (HL); a downtrend lower highs (LH) and lower lows (LL); a range oscillates between horizontal boundaries. Markets range ~70% of the time.

The playbook per state

Uptrend — long only. Buy pullbacks to higher lows / support. Invalidation: the last HL breaks.
Downtrend — short only. Sell rallies into lower highs / resistance. Invalidation: the last LH breaks.
Range — fade the edges. Buy support, sell resistance, stop just beyond the boundary. Stop range-trading the moment a boundary breaks with conviction.
Unclear / transitioning — no trade. "I can't name the state" is itself a signal: stand aside.

Structure breaks: BOS & CHoCH

BOS (Break of Structure) — price breaks the prior swing with the trend. CHoCH (Change of Character) — price breaks the most recent swing against the trend: the first objective warning of reversal.

How to trade structure breaks

BOS — continuation entry. Wait for the pullback to the broken swing level; enter on a confirming candle. Stop below the pullback low; target the next structural level.
CHoCH — defence first, offence later. Tighten stops / take partials. Only trade the new direction after the market confirms it: a lower high forms, then breaks the new low (first BOS of the new trend).
Failed break — fade it. If price breaks a swing and immediately closes back inside, the trapped traders are fuel — trade back toward the other side.

Liquidity, equal highs/lows & premium/discount

Stops cluster beyond obvious swing highs/lows. Price is often drawn to equal highs/lows, sweeps the resting liquidity, then reverses. Within any leg, the upper half is a premium (better to sell) and the lower half a discount (better to buy), split at the 50% equilibrium.

How to trade liquidity

Sweep-and-reclaim entry: when price pokes beyond an obvious high/low and closes back inside, enter in the reclaim direction. Stop just beyond the sweep wick; target the liquidity at the opposite side.
Don't park stops at the obvious level. Place them beyond the zone plus an ATR buffer.
Premium/discount filter: in an uptrend, only execute longs in the lower half of the current leg (discount).

03Support & Resistance

The levels where supply and demand have flipped before — and are likely to react again. Everything else (Fib, pivots, round numbers) is a way of locating these.

Role reversal

Once broken, support becomes resistance and resistance becomes support — participants trapped at the level defend it on the retest.

Price is rejected twice, breaks above the ceiling, then holds the same level as support (red dot) before continuing. The retest of a flipped level is one of the highest-quality entries in price action.

The break-and-retest playbook

Qualify the level: at least two prior rejections, visible on your setup TF or higher.
Qualify the break: a full candle close beyond the level, ideally on above-average volume.
Entry: (a) limit order at the level on retest, or (b) wait for a bullish rejection candle at the retest, enter on its break.
Stop: beyond the zone's far edge plus a buffer (~0.5×ATR). If the flip is real, price should not trade back through.
Target: the next opposing level; require ≥ 1:2 R:R.

Pivot points — formula

P = (High + Low + Close) / 3 // prior day for intraday trading
R1 = (2 × P) − Low S1 = (2 × P) − High
R2 = P + (High − Low) S2 = P − (High − Low)
R3 = High + 2×(P − Low) S3 = Low − 2×(High − P)

How to trade pivots (intraday)

Bias: opening above P = long bias; below P = short bias. Trade pullbacks to P in the bias direction.
Range day: fade R1/S1 with a reversal candle, target P.
Trend day: do not fade. Buy pullbacks; expect the day to reach R2–R3.
Confluence rule: a pivot alone is a B-grade reason. Pivot + horizontal level + VWAP = tradeable.

Supply & demand zones

Mark the origin of a sharp move — the small base from which price exploded. Drop-base-rally (demand) and rally-base-drop (supply) are the key reversal patterns. Fresh, un-retested zones are strongest.

How to trade supply/demand zones

Mark the zone from the base's open-to-extreme, not the whole move.
First touch only: limit at the zone's near edge, stop beyond its far edge. By the third touch, treat the zone as spent.
Demand the impulse: only trade zones that produced a fast, one-directional departure with range expansion.

04Trendlines, Channels & Geometry

Diagonal support and resistance, and the geometric tools that frame a move — with three entry models: the bounce, the break-retest, and the channel fade.

Trendlines & channels

A valid trendline needs at least two touches and is confirmed by a third. In an uptrend, connect higher lows (rising support). A channel adds a parallel line on the opposite side.

Higher lows ride a rising channel. The lower line is load-bearing — the bounces are entries, and a decisive close below it is the first sign the trend is ending.

Three trendline entry models

The bounce (3rd touch+): wait for a bullish rejection candle at the line — enter on its break. Stop below the candle's low. Target the channel's upper boundary or prior high.
The break-and-retest: after a confirmed close through a mature trendline, trade the retest of the line from the other side. "Steeper is weaker."
The channel fade: trade from boundary to boundary — but only with the slope in a trending channel.

Andrews' Pitchfork

Drawn from three pivots (a major swing and the next two). Price gravitates to the median line and reacts at the outer tines. In an up-fork: buy reactions at the lower tine, target the median. A confirmed close through the lower tine ends the fork.

05Price Action: Candlestick Patterns

The market's most granular language. Single, double, and triple-candle formations that signal exhaustion, rejection, or a shift in control.

Single-candle patterns

Doji — open ≈ close, indecision. Hammer — long lower wick after a decline (bullish). Shooting star — long upper wick after a rally (bearish). Marubozu — full body, no wick, one-sided conviction.

The pin bar — a small body with a dominant wick of 2× the body — is the workhorse rejection signal. The hanging man is a hammer shape after a rally (bearish); the inverted hammer is a shooting-star shape after a decline (bullish).

How to trade the pin bar

Context first: the pin must form at a level with its wick rejecting the level, and ideally with the higher-TF trend.
Entry A — break of the nose: stop-order 1 tick beyond the body side. Stop: beyond the wick's tip.
Entry B — the 50% retrace: limit at the pin's midpoint. Better price, lower fill rate. Stop: beyond the wick.
Quality checks: wick ≥ 2× body; close back inside the level; bar range above average.

Two-candle patterns

An engulfing candle fully covers the prior body in the opposite direction — control has changed hands. The harami is its inverse (small candle inside the prior body). The inside bar (all inside the prior bar's range) signals compression before a breakout.

How to trade the engulfing & inside bar

Engulfing entry: at a level + with trend, enter on the break of the engulfing candle's extreme. Stop beyond the pattern's opposite extreme.
Inside bar (with trend): bracket the mother bar with stop-orders; enter on the break in the trend direction. Stop: opposite side of the mother bar. Works best on Daily/H4.
Harami / doji after a strong run: not an entry — take partials, tighten stops, and wait for direction.

Three-candle patterns

Morning star — big down, small indecision, big up: a bottom. Evening star — its mirror: a top. Three white soldiers / three black crows signal decisive momentum.

Candlestick execution reference

Pattern	Bias	Entry	Stop
Hammer / pin bar	Bullish	Break of high, or 50% limit	Below wick tip
Shooting star	Bearish	Break of low, or 50% limit	Above wick tip
Bullish engulfing	Bullish	Break of engulfing high / its close	Below pattern low
Bearish engulfing	Bearish	Break of engulfing low / its close	Above pattern high
Morning star	Bullish	Close / break of 3rd candle	Below star's low
Evening star	Bearish	Close / break of 3rd candle	Above star's high
Inside bar	With trend	Break of mother bar (trend side)	Other side of mother bar

The one rule that matters A candlestick pattern in the middle of nowhere is noise. The same pattern at a tested level, in line with the higher-timeframe trend, is a signal. Location > pattern.

06Chart Patterns

Larger formations split into reversal (trend ending) and continuation (trend pausing) — each with its measured-move target and exact entry/stop placement.

Reversal — Head & Shoulders

Three peaks — a higher head between two lower shoulders — failing at a common neckline. The inverse H&S is the same shape flipped, marking a bottom.

How to trade H&S

Entry A: confirmed close below the neckline. Entry B (preferred): retest of the broken neckline from below.
Stop: above the right shoulder (aggressive) or above the head (conservative).
Target: head-to-neckline distance projected from the break. Take partials at first support.
Quality tells: declining volume across the three peaks, rising volume on the break.

Reversal — Double & Triple Tops/Bottoms

How to trade the double bottom

Entry: break of the neckline (the middle peak), or its retest. Aggressive: long at the second low if it sweeps the first and reclaims with a reversal candle.
Stop: below the lows. Target: pattern height projected above the neckline.
Tell: second low on lower volume + momentum divergence is the strongest version.

Continuation — Triangles

Ascending (flat top, rising lows) leans bullish; descending bearish; symmetrical breaks with the prevailing trend.

How to trade triangles

Entry: a close through the flat side on rising volume; or the retest of the broken line.
Stop: inside the triangle, beyond the most recent swing within it.
Target: the triangle's widest height projected from the breakout point.
Timing rule: best breaks occur between half and three-quarters of the way to the apex.

Continuation — Flags & Pennants

A sharp move (the pole) then tight consolidation drifting against it — resolving in the original direction.

How to trade the bull flag

Qualify: impulsive pole with range expansion, then a shallow drift retracing < 50% of the pole on shrinking volume.
Entry: break of the flag's upper line. Stop: below the flag's low.
Target: pole length projected from the breakout. Partial at 1:2, trail the rest.

Pattern execution reference

Pattern	Type	Entry	Stop	Target
Head & shoulders	Reversal	Neckline break / retest	Above right shoulder	Head–neckline projected
Double top / bottom	Reversal	Neckline break / sweep-reclaim	Beyond the twin extremes	Pattern height projected
Triangle	Continuation	Line break + volume / retest	Inside, beyond last swing	Widest height projected
Flag / pennant	Continuation	Break of consolidation	Beyond flag's far edge	Pole length projected
Rising / falling wedge	Reversal	Break against the slope	Beyond last swing inside	Wedge origin
Cup & handle	Continuation	Handle breakout	Below handle low	Cup depth projected

07Indicators — Trend

For each indicator: the formula, how the number is actually computed, the long/short signals it generates, and how to trade it.

Leading vs lagging Lagging indicators (MAs, MACD, ADX) confirm trends but react late. Leading ones (RSI, Stochastic) anticipate turns but give more false signals. You want one of each at most — stacking five momentum oscillators just multiplies the same signal.

Moving Averages — SMA, EMA, WMA, HMA

SMA(n) = (C₁ + C₂ + … + Cₙ) / n // equal weight to every bar

k = 2 / (n + 1) // EMA smoothing factor; n=20 → k ≈ 0.095
EMA_t = (Close_t − EMA_prev) × k + EMA_prev // seed: first EMA = SMA(n)

WMA(n) = Σ(Cᵢ × wᵢ) / Σwᵢ, w = n, n−1, …, 1 // linear weights
HMA(n) = WMA( 2×WMA(n/2) − WMA(n), √n ) // Hull: near-zero lag

The golden cross (fast MA over slow) signals a bullish trend; the death cross is its bearish twin. Common pairs: 20/50, 50/200.

How to trade moving averages

Use them as filters, not triggers. Crossovers lag badly. Let the cross define the regime; enter on a pullback.
The EMA20 pullback (trend entry): in an established trend above EMA20 & EMA50, wait for a retrace into EMA20; demand a rejection candle; enter on its break. Stop below the swing low / EMA50.
Slope beats position. A flat MA means no trend regardless of which side price sits.
The 200 on the Daily is the regime line: above = buy dips; below = sell rallies.

MACD

MACD line = EMA(12) − EMA(26)
Signal = EMA(9) of MACD line
Histogram = MACD line − Signal // histogram peaks = acceleration; leads the MACD cross

How to trade MACD

Filter by the higher TF: take only crossovers that agree with the Daily/H4 trend.
The strongest setup: price pulls back to a level in an uptrend → histogram bottoms and ticks up → MACD crosses up. Stacks location + momentum turn.
Histogram as exit timer: first histogram peak-and-shrink = take partials (leads the MACD cross by several bars).
In ranges: MACD whipsaws when EMAs flatten. Require ADX > 20–25 before trusting crossovers.

ADX / DMI — trend strength

How to trade ADX

It's a filter, not a trigger. Only take MA/MACD/breakout signals when ADX > 20–25 and rising. This single filter removes most whipsaw losses.
High ADX is not "overbought." ADX 45 says the trend is strong — never fade strength because the number is big.
The turn that matters: ADX rolling over from a high while price makes a marginal new extreme = last legs. Tighten to breakeven+.

Ichimoku Kinko Hyo

Tenkan (9) = (HH9 + LL9) / 2
Kijun (26) = (HH26 + LL26) / 2
Senkou Span A = (Tenkan + Kijun) / 2 → plotted 26 bars ahead
Senkou Span B = (HH52 + LL52) / 2 → plotted 26 bars ahead
Chikou (lagging) = Close, plotted 26 bars back
// Kumo (cloud) = area between Span A and Span B

How to trade Ichimoku

Trade only full alignment: price above cloud + Tenkan > Kijun + Chikou clear of price.
Kijun is your trailing stop in an Ichimoku trend trade.
Thin cloud = cheap to cross: expect breakouts through thin Kumo; respect thick Kumo as real S/R.

Parabolic SAR

SAR_next = SAR + AF × (EP − SAR)
// AF starts at 0.02, +0.02 each new EP, capped at 0.20
// EP = extreme point of the current trend (highest high in an uptrend)

How to trade SAR

Best use: the exit. Enter on your own setup; trail the position at the SAR dot.
As an entry: only take flips when ADX > 25 and in the higher-TF direction; ignore flips inside ranges.

08Indicators — Momentum

Oscillators that measure the speed of price. They shine at exhaustion and divergence — but in strong trends they stay pinned, so the rules below are trend-adjusted, not naive overbought/oversold.

RSI — Relative Strength Index

gain_t = max(C_t − C_prev, 0) loss_t = max(C_prev − C_t, 0)
AvgGain = Wilder14(gain) AvgLoss = Wilder14(loss)
RS = AvgGain / AvgLoss
RSI = 100 − 100 / (1 + RS)

The classic bands: 70 overbought, 30 oversold, 50 the bull/bear divider. In strong trends RSI stays stretched — that is strength, not a sell signal.

How to trade RSI

Re-band by regime: in an uptrend use 40/80 (buy dips to 40–50, expect tops near 80). The naive 30/70 fade only works inside ranges.
Divergence is the A-signal: price makes a new extreme, RSI doesn't, at a level, with a reversal candle. Stop beyond the extreme; target the prior swing.
The 50 line is a trend health check: pullbacks in healthy uptrends hold above ~40–45. A deep cut through 40 warns the trend is changing character.

Stochastic oscillator

%K = 100 × (C − LL14) / (HH14 − LL14) // where the close sits in the 14-bar range
%D = SMA3(%K)

How to trade Stochastic

One-directional use: in an uptrend take only the oversold crosses (buy signals) and ignore every overbought cross.
Use slow stochastic (14,3,3); best in ranges and rhythmic pullback trends.

The wider family — formulas at a glance

CCI = (TP − SMA20(TP)) / (0.015 × MeanDev20(TP)), TP = (H+L+C)/3
Williams %R = −100 × (HH14 − C) / (HH14 − LL14)
ROC = 100 × (C − C_n) / C_n Momentum = C − C_n
StochRSI = (RSI − minRSI_n) / (maxRSI_n − minRSI_n)

Pick one Every oscillator above measures the same underlying thing. Running three momentum tools is one signal counted three times. Choose one (RSI is the sane default), learn its personality across regimes, and stop.

09Indicators — Volatility & Volume

Two families that answer "how much is price moving?" and "who is behind the move?" — the context that decides whether a breakout is real, where the stop belongs, and how large the position should be.

Bollinger Bands

Middle = SMA20(Close)
Upper / Lower = Middle ± 2 × σ₂₀ // σ = standard deviation of the last 20 closes
%B = (C − Lower) / (Upper − Lower)
Bandwidth = (Upper − Lower) / Middle // the squeeze metric

How to trade Bollinger Bands

Squeeze breakout: after a multi-week bandwidth low, enter on the first close outside a band with above-average volume. Stop at the middle band. False-break tell: immediate close back inside — exit, consider reversing.
Range reversion: only when the middle band is flat — fade band touches that print a rejection candle, target the middle.
Regime test: flat middle + regular touches both sides = range rules; sloped middle + one-sided band rides = trend rules.

ATR — the trader's ruler

TR = max(H−L, |H−C_prev|, |L−C_prev|)
ATR = Wilder14(TR)

How to use ATR (everyone should)

Stops: structure level ± 1–1.5×ATR buffer. Stops tighter than ~1×ATR are inside the noise.
Position sizing: Size = Risk$ ÷ (ATR-multiple stop × value-per-point). When ATR doubles, the same dollar risk buys half the size — automatically volatility-normalised.
Trailing — the chandelier exit: trail at highest high − 3×ATR for longs.
Regime filter: ATR spiking to 2× its average = news/panic — widen stops and halve size.

Volume — the conviction behind the move

OBV: OBV += V if C > C_prev; OBV −= V if C < C_prev
MFM = ((C−L) − (H−C)) / (H−L) // money-flow multiplier, −1…+1
A/D = Σ(MFM × V) CMF = Σ20(MFM×V) / Σ20(V)

How to trade volume

Breakout rule: require volume ≥ 1.5–2× its 20-bar average on the breakout bar. Below that, treat the break as suspect.
Climax: extreme volume spike after an extended trend with a huge bar and a weak close = exhaustion.
OBV divergence: price grinds to new highs while OBV flattens — participation is leaving; tighten stops.
Pullback quality: healthy trend pullbacks come on shrinking volume; expanding volume on a pullback is distribution in disguise.

VWAP — the institutional benchmark

VWAP = Σ(TP × V) / ΣV from the session open, TP = (H+L+C)/3

How to trade VWAP (intraday)

Bias line: price holding above a rising VWAP = long bias. Trade pullbacks to VWAP in the bias direction with a PA trigger.
First pullback after an open drive into VWAP is the classic day-trade entry.
Reversion fade: on rotational days, price stretched to the 2σ band tends to revert to VWAP.

10Fibonacci & Harmonic Patterns

A ratio toolkit for locating where a pullback ends and an extension reaches — and the geometric patterns built entirely from those ratios.

Retracements & the golden pocket

Retracement levels: 23.6% · 38.2% · 50% · 61.8% · 78.6%
Extensions: 127.2% · 161.8% · 261.8%
// ratios from the Fibonacci sequence: each ÷ next ≈ 0.618; φ ≈ 1.618

Price pulls back into the golden pocket, finds support, and resumes. Fib is strongest where it overlaps a horizontal level, trendline, or MA. Extensions project targets beyond the move.

The golden-pocket playbook

Filter: higher-TF uptrend, fresh impulse leg up.
Wait for the retrace into 50–61.8% and demand at least one other factor (flip level, trendline, EMA, pivot).
Trigger: a bullish rejection/engulfing candle inside the pocket.
Stop: below the 78.6% level or the swing low. A retrace beyond 78.6% says the "pullback" is a reversal.
Targets: TP1 = impulse high (partial); TP2 = 127.2%; TP3 = 161.8%. Move stop to breakeven at TP1.

Harmonic patterns

Precise five-point (XABCD) structures whose legs must hit specific Fib ratios. When the ratios align, the D point is a high-probability reversal zone (the PRZ). They demand exact measurement.

Pattern	B retrace (of XA)	D completion
Gartley	61.8%	78.6% of XA
Bat	38.2–50%	88.6% of XA
Butterfly	78.6%	127–161.8% of XA
Crab	38.2–61.8%	161.8% of XA
Cypher	38.2–61.8%	78.6% of XC

How to trade the PRZ (D-point)

Don't front-run. Let price reach the PRZ and print a reversal candle.
Stop: beyond X (retracement patterns) or beyond 113% of XA (extension patterns).
Targets: TP1 = 38.2% retrace of the AD leg; TP2 = 61.8% of AD. Move to breakeven at TP1.
Best version: a PRZ that lands on independent confluence (horizontal level, prior POC).

Don't trade ratios alone A Fib level or PRZ is a candidate zone, not a signal. It earns a trade only when price reacts there and another factor agrees.

Part II: Advanced Playbooks covers confluence, Elliott Wave, Wyckoff, smart money & order flow, multi-timeframe analysis, risk & execution, backtesting, psychology, and a complete workflow.

Read Part II: Advanced Playbooks →

Foundations & Core Tools.