Technical analysis: how can you predict stock prices using charts? 3 basic indicators

Investing and the financial world are often full of emotion and uncertainty. But how do you make rational decisions based on facts, not emotions? Investors have several main approaches to market analysis. One of them, fundamental analysis, focuses on a company's intrinsic value, examining financial statements, the quality of management and industry outlook. Second, technical analysis, takes a completely different direction. It almost completely ignores the background of the company and focuses on just one thing: studying market movements on graphs.

Technical analysis is a methodical approach that helps investors and traders to analyse and forecast the direction of prices, mainly by studying historical market data: Price from and capacity. While it does not provide absolute truth, it helps to understand what is happening beneath the surface - the collective behaviour of market participants. This article is the first part of our two-part series on analytical techniques, and dives into the world of technical analysis, exploring its principles, tools and how investors can successfully integrate it into their strategies.

The three pillars of technical analysis

Technical analysis is based on three main postulates that have developed over a long history.

The market takes everything into account. Technical analysts believe that all the relevant information - a company's performance, economic trends, even rumours and emotions - is already reflected in the price of a financial instrument. This means there is no need to look for 'hidden' information; everything you need to know is already on the chart.
Prices move in trends. Market prices do not move randomly, but rather directionally. The trend can be bullish, langev (bearish) or lateral (sideways) movement. The aim of technical analysis is to identify these trends and act accordingly.
History repeats itself. Human psychology and behaviour in the market tend to repeat themselves. The emotions of fear and greed are timeless. As a result, certain patterns in the graph that have occurred in the past tend to repeat themselves in the future. This gives technical analysis predictive power, as similar patterns indicate similar market behaviour.

Graphs and patterns: the visual language of the market

Types of graphs:

Technical analysis is based on reading charts. Stock prices can be displayed on different types of charts, each with its own advantages and disadvantages. The most common are:

Line graphs: These are the simplest graphs that connect closing prices with a line. The line graphs give a good overview of price movement trends, but do not show the magnitude of price movements.
Cycle diagrams: These charts show the opening, closing, high and low prices for each period (e.g. day, week, month). The candlestick charts provide a more detailed overview of price movements and help to identify important patterns.
Bar charts: These graphs show the opening, closing, highest and lowest prices for each period using vertical lines. The bar charts are similar to the candlestick charts, but they are a little more difficult to read.

Although there are different types of charts, the most popular in Europe are the following candle diagrams (candlestick charts), invented by Japanese rice traders as early as the 17th century.

Reading the candlestick charts gives an instant visual picture of the market struggle between buyers and sellers. A long green candle indicates strong buying pressure, a long red candle strong selling pressure. Certain candlestick-shaped patterns, such as a "hammer" or "star" (doji), can indicate potential trend changes.

In addition to individual candles, analysts are also looking at the graphical patterns, which are larger visual formations and give an indication of market sustainability or turning points. Some classic examples:

Head and shoulders (Head and Shoulders): This pattern often indicates the end of an upward trend and a reversal into a downward trend. It forms three peaks, with the average being the highest.
Double Bottom: This is a sign of a possible trend change, where the price has repeatedly fallen to the same level but is unable to go lower. This suggests strength in buyers.
Flags and Triangles: These patterns often indicate a continuation of the trend after a short break.

Technical indicators: data-driven analysis

Although graph patterns are subjective, technical indicators provide mathematical calculations that help to interpret data more objectively. There are hundreds of these indicators, but for the beginner, a few important ones will suffice.

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Moving Averages (MDAs)

Moving averages smooth the price data, creating a clearer picture of the direction of the trend. The most common are 50-day and 200-day moving average. Their crossing (the so-called "golden cross" or "death cross") can be a strong signal of a potential trend change.

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Relative Strength Index (RSI)

RSI is a momentum indicator that measures the speed and change of price movements. Its value ranges from 0 to 100. If the RSI is above 70, the financial instrument is considered to be a redundant (overbought) and a price correction is expected. If it is below 30, it is downgraded (oversold) situation, which may indicate a potential price increase.

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MACD (Moving Average Convergence Divergence)

MACD is another momentum indicator that shows the relationship between two moving averages. It helps to identify the direction and strength of a trend. Crossovers of MACD lines are often used as buy or sell signals.

Technical analysis in practice

We are now familiar with the principles and tools of technical analysis. But how do you put it all into practice? How can you integrate technical analysis into your investment strategy and make more informed decisions?

Here are some tips:

Define your investment objectives and risk tolerance. Before you start using technical analysis, it is important to know what you want to achieve. Is your goal short-term profit or long-term investment? What is your risk tolerance? Answering these questions will help you choose the right strategies and tools.
Choose the charts and indicators that suit you. Different charts and indicators are suitable for different objectives and investment styles. For example, candlestick charts and fast-reacting indicators are better suited for short-term trading, while line charts and slower-reacting indicators are better suited for long-term investing.
Learn to identify patterns. Identifying patterns is an important part of technical analysis. Learn about the most common patterns and practice identifying them in charts. Remember that patterns are not always accurate and should be interpreted in conjunction with other indicators.
Combine technical analysis with fundamental analysis. Technical analysis should not be the only factor in investment decisions. Combine it with fundamental analysis, which looks at the financial performance and economic situation of a company. This will give you a more complete picture of the investment.
Monitor risks and manage your positions. Technical analysis can help to assess risks, but it does not eliminate them completely. Monitor your investments and be prepared for losses. Use stop-losses and other risk management tools to protect your capital.
Practice and learn from experience. Technical analysis requires practice and experience. Start small and learn from your mistakes. Over time, you'll gain a better understanding of charts and indicators and be able to make more informed investment decisions.
Use reliable sources. There is a lot of information on the internet about technical analysis, but not all sources are reliable. Use reliable websites, books and courses to learn technical analysis.

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Technical analysis is not just a tool for traders, but can also be used successfully by long-term investors. For example, if you have found an attractive European company (e.g. a German car manufacturer or a French luxury brand), you can use technical analysis to find best moment Share for purchase. If a company is in a strong downtrend, technical analysis can help you find the support level where the price has bounced in the past and only enter a trade when you see signs of a trend reversal.

Technical analysis is also useful hedging risk. Many sophisticated investors use stop-loss (stop-loss orders) to limit potential losses. The level at which a stop-loss is set is often determined by technical analysis, for example below a recent support level. This is particularly important in volatile markets where prices can change rapidly.

For example, at the beginning of 2022, when global markets started to fall, a technical analysis based on the Strategy to help investors. Those who followed the decline of the 200-day moving average were able to sell assets before the market crashed hard, or at least refrain from buying during the decline. This shows that technical analysis doesn't have to give accurate predictions, but can help you adapt to market behaviour and not "swim against the tide".

Examples and case studies

Technical analysis may seem complicated and abstract, but it is actually just a tool that helps us predict stock prices using charts. To understand it better, let's look at some examples and case studies.

Example 1: Using a moving average to identify a trend

Let's say we look at a graph of Company 1 shares. We can see that the price has risen in recent months. Will this trend continue? We can use the moving average to determine this. If the price is above the moving average, this is a signal of an upward trend. If the price falls below the moving average, it may indicate a reversal of the trend.

Example 2: Head and shoulders pattern detection

Let's now look at the Company 2 share chart. We can see that the price has formed a "head and shoulders" pattern. This is a classic trend reversal pattern. When the price falls below the "neck" line, it is a signal to sell.

Case study: Paul Tudor Jones and the 1987 stock market crash

Paul Tudor Jones is one of the best-known investors who has successfully used technical analysis. In 1987 he predicted a stock market crash based on charts and market psychology. He made millions of dollars by shorting stocks during the crash.

Important note: These examples are illustrative and are not intended as investment recommendations. Technical analysis is not an exact science and there is always room for error. Be sure to do your own research and consult a financial advisor before making any investment decisions.

Limitations and criticisms: technical analysis is not prediction

While technical analysis is a powerful tool, it is also important to understand its limitations. Many critics argue that it is a "self-fulfilling prophecy" - if enough traders believe in certain graph patterns and act accordingly, those patterns become reality. But this does not make the tool any less valuable; on the contrary, it underlines the fact that technical analysis is a mirror to the collective psychology of market participants.

Technical analysis is also not useful in extreme market situations, such as unexpected news (e.g. bankruptcy). Patterns then lose their predictive power as the market is driven by fundamental events. This is why many successful investors use both methods of analysis. As we will see in another article fundamental analysis decide what to buy, and technical analysis helps you decide when to buy or sell.

Summary from

Technical analysis is a skill that anyone can learn and incorporate into their investment strategy. It provides a structured framework for analysing market data and helps to make more rational, unemotional decisions. To start, it is worth focusing on understanding charts and key indicators before diving into the world of more complex patterns.

Key points to remember:

Technical analysis is based on the assumption that history repeats itself and market psychology influences price.
Charts and indicators are the main tools of technical analysis.
Identifying patterns helps predict future price movements.
Technical analysis should be combined with fundamental analysis.
Hedging risk is important when investing.

In the world of investing, there is no one right answer. The most successful strategies combine several approaches. Technical analysis, however, gives you a valuable extra component - the ability to read the "body language" of the market. It's not magic, it's systematic data analysis that gives you a better understanding of market psychology and potential moves. Learn, practice and integrate this knowledge into your journey to becoming a knowledgeable investor.