Technical Analysis – Introduction

 

Stock markets across history often show striking similarities. For example, before the crashes of 1929 and 2008, indices were hitting record highs. When fear and greed took over, both markets collapsed sharply. These recurring behavioural patterns highlight why understanding market psychology is essential.

Technical analysis helps convert these emotions into measurable data so that investors can make informed decisions.

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What This Module Covers

This module introduces technical analysis, a method used to identify trading opportunities by studying how market participants behave through price charts.

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Why Technical Analysis? — A Simple Analogy

Imagine you’re travelling in a foreign country, unable to understand the language. You reach a food street with many vendors.

You have two choices:

Option 1 — Deep Investigation (Like Fundamental Analysis)

You examine each vendor:

• Ingredients
• Cooking method
• Taste-testing

This gives accurate insights but is time-consuming, tiring, and not scalable.

Option 2 — Observe the Crowd (Like Technical Analysis)

You simply watch which stall attracts the most customers.
Your assumption:
If many people trust a stall, the food is likely good.

This method is faster and works well for making decisions quickly.

This is the essence of technical analysis:
You observe market behaviour through price charts and patterns instead of studying company fundamentals.

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What Technical Analysts Believe (Core Assumptions)

1. Market discounts everything
   All available information—news, expectations, emotions—is already reflected in the price.

2. How matters more than why
   The focus is on how the price is moving instead of why it is moving.

3. Prices move in trends
   Once a direction is established, the price tends to continue along that trend until it reverses.

4. History repeats itself
   Human behaviour is consistent over time, so chart patterns tend to reoccur.

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Technical vs Fundamental Analysis

People often debate which method is “better,” but that’s unnecessary.
Both techniques serve different purposes:

• Fundamental analysis evaluates the business.
• Technical analysis evaluates price behaviour.

Many successful investors combine both.

As a beginner, your goal is to understand each approach and discover which one suits your trading or investing style.

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Key Takeaways

• Market crashes often follow similar behavioural patterns driven by fear and greed.
• Technical analysis studies market behaviour through price charts.
• It is based on assumptions like trend behaviour and repeated patterns.
• Technical and fundamental analyses are complementary tools.