Practical Guide: How to Use Technical Analysis in Your Trading

What you need to know upfront

Technical analysis is a fundamental tool for any trader looking to improve their decision-making. It is based on studying price and volume history to anticipate where the market will move. Unlike other methods that analyze financial reports and news, technical analysis simply states: “the price already reflects all the information, so let’s look at what the chart does.”

The reality is that many professional traders use combinations of technical indicators to identify where to enter and exit positions. However, it is not a crystal ball: these tools also generate false signals, especially if you are trading in short time frames or in markets with low liquidity.

A bit of history: From Amsterdam to today

The first attempts to predict prices using charts emerged in Amsterdam during the 17th century and in Japan in the 18th. But modern technical analysis has its roots in the work of Charles Dow, a financial journalist and founder of The Wall Street Journal.

Dow was one of the first to notice that markets move in identifiable and segmentable trends. His observation gave rise to Dow Theory, which laid the foundation for everything we know today about technical analysis. In its early days, everything was done by hand: tables, hand-drawn charts, manual calculations. Today, with technology, any trader can access professional tools from their mobile phone.

Why does (o work or should it work )?

The basic principle is simple: the price of an asset is a reflection of a constant battle between buyers and sellers. That battle is, in essence, fear versus greed. When the majority is afraid, they sell and prices drop. When greed takes control, they buy and prices rise.

Technical analysis tries to read this battle by looking at historical patterns. If thousands of traders notice that the price always bounces at a certain level (support), it will probably continue to do so. If they see that it cannot break through another level (resistance), it will likely remain a ceiling.

Important: Technical analysis works best in markets with high volume and abundant liquidity. In small or illiquid markets, a single large buyer or seller can distort everything, generating false signals.

The most popular indicators you should know

1. Moving Averages (MA): your trend compass

Moving averages are one of the most basic and effective tools. There are two main types:

• Simple Moving Average (SMA): It simply averages the price of the last X days. If the price is up, the trend is bullish; if it is down, bearish.
• Exponential Moving Average (EMA): They place more weight on recent prices, so they react more quickly to new changes.

A classic trick: watch when two moving averages cross (a short one and a long one). If the short one crosses above the long one, it’s a potential buy (golden cross). If it crosses downwards, it’s a potential sell (death cross).

2. RSI: The extreme detector

The Relative Strength Index (RSI) is an oscillator that measures whether an asset is “too hot” (overbought) or “too cold” (oversold), on a scale from 0 to 100.

• RSI above 70 = likely overbought (possible sale)
• RSI below 30 = probably oversold (possible buy)

But be careful: in very strong trends, the RSI can be “overbought” for a long time without the price dropping. Don't rely on this alone.

3. Bollinger Bands: Measuring Volatility

Bollinger Bands are two lines that surround a moving average. They expand when volatility increases and contract when it decreases. They are used to detect:

• Extreme movements (touching the outer bands is often overbought/oversold)
• Changes in volatility (wide bands vs. tight bands)

4. MACD: The momentum indicator

MACD compares two exponential moving averages and shows their relationship. It is especially useful for detecting changes in momentum:

• When the MACD line crosses above the signal line = bullish potential
• When crossing below = bearish potential
• The histogram shows you the strength of the movement

How to generate trading signals ( and why they fail )

Signals that seem good

Traders use these indicators to generate signals:

• Overbought/oversold: Extreme RSI suggests that the price could reverse
• Moving Average Crossovers: Changes in trend direction
• Divergences: When the price rises but the indicators do not, or vice versa

The problem: False signals

Here comes the tricky part: technical indicators create A LOT of noise, especially in short time frames (5 minutes, 15 minutes). An “overbought” RSI can mean it will go up more, not that it will fall.

In extreme volatility or during unforeseen events (regulatory announcements, hacks, geopolitical news), technical analysis simply does not work. The market ignores the charts and does its own thing.

That’s why the golden rule is: never trade solely with technical analysis. Confirm with other methods. And always, always, use stop loss.

Is technical analysis really reliable?

Here is the debate that has divided trading for decades:

Critics say:

• It is a self-fulfilling prophecy: it only works because many traders use the same indicators.
• It is very subjective: two traders can interpret the same chart completely differently.
• Failure under extreme conditions: high volatility, unexpected events, manipulation

The defenders respond:

• Every trader has their own style, so it's impossible for everyone to use exactly the same strategy.
• Millions of professional operations are based on technical analysis, something must be working.
• It is about probabilities, not certainties

The truth: Technical analysis is a useful tool, but it is not magic. It increases the odds, it does not guarantee.

Technical Analysis vs. Fundamental Analysis: Which One to Use?

It's not “one or the other”. It's “it depends on what you're looking for”:

Many professional traders use both: technical analysis for timing, fundamental analysis for selecting what to buy. It's the combination that works.

Common mistakes when using technical analysis

1. Believing it is an exact science: It is not. They are probabilities.
2. Operate very short time frames: The noise is at its maximum. Bots and high-frequency traders dominate there.
3. Ignore liquidity: In small markets, technical analysis is practically useless.
4. Not using risk management: No matter how good your signal is, without a stop loss you lose everything in an unexpected event.
5. Overloading with indicators: More indicators = more confusion. Less is more.

Conclusion: Use it well or don't use it at all

Technical analysis is a valuable tool when its limitations are understood. It works best in markets with volume, on moderate timeframes (4h+), and is always confirmed with other methods.

It is not the magic solution that some promise, but ignoring it completely is also a mistake. Most successful traders combine technical analysis for timing with fundamental analysis for direction. That is the balance that really works.

Remember: the market is a battle between fear and greed. The charts only show the result of that battle. Your job is to correctly interpret what will happen next.