Module 17: Reading the Footprints - Technical Analysis
If Fundamental Analysis is the "story" of the company, Technical Analysis (TA) is the "map" of human psychology. TA is the study of historical market data—primarily Price and Volume—to predict future price movements. Where algorithmic and retail traders collide, understanding these footprints is vital for timing your entries and exits.
1. The Three Pillars of Technical Analysis
The entire field rests on three core assumptions:
- The Market Discounts Everything: All information (earnings, news, sentiment) is already reflected in the stock price. You do not need to read the balance sheet; you only need to read the chart.
- Price Moves in Trends: Prices move in distinct waves (upward, downward, sideways). The goal is to identify a trend early and ride it.
- History Repeats Itself: Because human emotions (Fear and Greed) have not changed, market patterns repeat perpetually.
2. The Language of the Chart: Candlesticks
Professionals use Candlestick Charts because they narrate the "battle" between buyers (Bulls) and sellers (Bears). Each candle displays four data points:
- Open: The starting price.
- Close: The final price.
- High: The peak price during that period.
- Low: The bottom price.
- Green (Bullish): Close > Open. Buyers won the session.
- Red (Bearish): Close < Open. Sellers were in control.
3. Key Indicators
- Moving Averages (MA): Smooths out price data. The 200-day MA is the "Grandmother" of indicators; if an S&P 500 stock trades above it, the macro trend is healthy.
- Relative Strength Index (RSI): A momentum oscillator ranging from 0 to 100. >70 signals Overbought; <30 signals Oversold.
Self-Assessment Quiz
- What does the "Market Discounts Everything" assumption imply about breaking news?
- In a single Candlestick, what creates a "Green" bullish candle?