Technical analysis is the study of price movements and trading patterns to predict future market behavior. For ASX traders, mastering technical analysis can provide a significant edge in timing market entries and exits, identifying trends, and managing risk effectively.

What is Technical Analysis?

Technical analysis is based on three fundamental principles:

  1. Market action discounts everything: All known information is already reflected in the stock price
  2. Prices move in trends: Stock prices tend to move in identifiable directions
  3. History tends to repeat itself: Market psychology creates recurring patterns

Unlike fundamental analysis, which examines a company's financial health and business prospects, technical analysis focuses purely on price and volume data to make trading decisions.

Essential Chart Types

Line Charts

The simplest form of chart, connecting closing prices over time. Line charts are excellent for:

  • Identifying long-term trends
  • Spotting support and resistance levels
  • Analyzing price momentum

Bar Charts

Each bar represents a specific time period and shows four key pieces of information:

  • Open: The first traded price
  • High: The highest traded price
  • Low: The lowest traded price
  • Close: The last traded price

Candlestick Charts

Similar to bar charts but more visually intuitive. Candlesticks provide the same OHLC data but use colored "bodies" and "wicks" to show price action more clearly.

Candlestick Basics:

  • Green/White candles: Close higher than open (bullish)
  • Red/Black candles: Close lower than open (bearish)
  • Body: Distance between open and close
  • Wicks/Shadows: High and low extremes

Key Technical Indicators

Moving Averages

Moving averages smooth out price data to identify trends. The most common types are:

Simple Moving Average (SMA)

The average price over a specific number of periods. Popular timeframes include:

  • 20-day SMA: Short-term trend identification
  • 50-day SMA: Medium-term trend analysis
  • 200-day SMA: Long-term trend determination

Exponential Moving Average (EMA)

Gives more weight to recent prices, making it more responsive to current market conditions. EMAs are particularly useful for:

  • Entry and exit signals
  • Trend change identification
  • Support and resistance levels

Relative Strength Index (RSI)

RSI measures the speed and magnitude of price changes, oscillating between 0 and 100:

  • Above 70: Potentially overbought (sell signal)
  • Below 30: Potentially oversold (buy signal)
  • 50 level: Neutral momentum

MACD (Moving Average Convergence Divergence)

MACD shows the relationship between two moving averages and consists of:

  • MACD Line: 12-day EMA minus 26-day EMA
  • Signal Line: 9-day EMA of the MACD line
  • Histogram: Difference between MACD and signal lines

MACD Trading Signals:

  • Bullish crossover: MACD line crosses above signal line
  • Bearish crossover: MACD line crosses below signal line
  • Divergence: Price and MACD move in opposite directions

Bollinger Bands

Bollinger Bands consist of a middle band (20-day SMA) and upper/lower bands (2 standard deviations away). They help identify:

  • Overbought and oversold conditions
  • Volatility changes
  • Potential breakout points

Chart Patterns

Trend Continuation Patterns

These patterns suggest the current trend will continue:

Triangles

  • Ascending Triangle: Flat resistance with rising support (bullish)
  • Descending Triangle: Flat support with falling resistance (bearish)
  • Symmetrical Triangle: Converging trend lines (breakout direction indicates trend)

Flags and Pennants

Short-term consolidation patterns that typically precede trend continuation. They represent brief pauses in strong trending moves.

Reversal Patterns

These patterns suggest a trend change is imminent:

Head and Shoulders

  • Head and Shoulders Top: Three peaks with the middle being highest (bearish reversal)
  • Inverse Head and Shoulders: Three troughs with the middle being lowest (bullish reversal)

Double Tops and Bottoms

  • Double Top: Two peaks at similar levels (bearish reversal)
  • Double Bottom: Two troughs at similar levels (bullish reversal)

Support and Resistance

Understanding Support

Support is a price level where buying interest is strong enough to prevent further decline. Key characteristics:

  • Previous lows often become support levels
  • Moving averages can act as dynamic support
  • Psychological round numbers (e.g., $50, $100) often provide support

Understanding Resistance

Resistance is a price level where selling pressure prevents further advance. Key characteristics:

  • Previous highs often become resistance levels
  • Moving averages can act as dynamic resistance
  • Volume often increases near resistance levels

Role Reversal Principle:

When support is broken, it often becomes resistance. Conversely, when resistance is broken, it often becomes support. This is a fundamental concept in technical analysis.

Volume Analysis

Volume is a crucial confirmation tool in technical analysis:

Volume Principles

  • Trend confirmation: Rising prices with increasing volume confirm uptrends
  • Breakout validation: High volume on breakouts increases reliability
  • Divergence signals: Price increases with decreasing volume suggest weakness

Volume Indicators

  • On-Balance Volume (OBV): Cumulative volume indicator
  • Volume Rate of Change: Measures volume momentum
  • Accumulation/Distribution Line: Combines price and volume

ASX-Specific Considerations

Market Hours and Liquidity

The ASX operates during specific hours, affecting technical analysis:

  • Opening auction (10:00 AM): Often creates gaps and volatility
  • Lunch period (12:00-1:00 PM): Lower volume and reduced reliability
  • Closing auction (4:00 PM): High volume with potential reversals

Sector Rotation

ASX sectors often rotate based on economic cycles:

  • Resources: Sensitive to commodity prices and China demand
  • Financials: Respond to interest rate expectations
  • Technology: Growth-oriented with higher volatility

Currency Impact

The Australian dollar significantly affects ASX companies:

  • Exporters: Benefit from weaker AUD
  • Importers: Prefer stronger AUD
  • Resources: Often inversely correlated with AUD

Building a Technical Analysis Strategy

1. Choose Your Timeframe

  • Scalping: 1-5 minute charts for quick profits
  • Day Trading: 5-60 minute charts for intraday moves
  • Swing Trading: Daily charts for multi-day holds
  • Position Trading: Weekly/monthly charts for long-term trends

2. Select Your Indicators

Avoid indicator overload by focusing on 2-3 complementary indicators:

  • Trend indicators: Moving averages or MACD
  • Momentum indicators: RSI or Stochastic
  • Volume indicators: OBV or volume bars

3. Develop Entry and Exit Rules

Create specific, objective criteria for trades:

  • Entry signals: Specific indicator combinations
  • Stop losses: Risk management levels
  • Profit targets: Risk-reward ratios
  • Position sizing: Consistent risk per trade

Common Technical Analysis Mistakes

Avoid These Pitfalls:

  • Analysis paralysis: Using too many indicators
  • Ignoring fundamentals: Technical analysis works best with fundamental context
  • Poor risk management: Not using stop losses or proper position sizing
  • Curve fitting: Over-optimizing strategies to past data
  • Ignoring market context: Not considering overall market conditions

Advanced Technical Concepts

Fibonacci Retracements

Based on mathematical ratios, Fibonacci levels help identify potential support and resistance:

  • 23.6%: Shallow retracement in strong trends
  • 38.2%: Common retracement level
  • 50%: Psychological level (not a Fibonacci ratio)
  • 61.8%: Golden ratio, strong support/resistance
  • 78.6%: Deep retracement, potential trend change

Elliott Wave Theory

Proposes that markets move in predictable wave patterns:

  • Impulse waves: Five waves in the direction of the main trend
  • Corrective waves: Three waves against the main trend
  • Fractal nature: Patterns repeat at different time scales

Market Microstructure

Understanding order flow and market depth:

  • Bid-ask spreads: Liquidity indicators
  • Order book analysis: Supply and demand levels
  • Time and sales data: Real-time transaction analysis

Technology and Tools

Charting Platforms

Popular platforms for ASX technical analysis:

  • TradingView: Web-based with social features
  • MetaTrader: Professional platform with automation
  • Broker platforms: Integrated with trading accounts
  • Bloomberg Terminal: Professional-grade data and analysis

Data Requirements

  • Real-time data: Essential for active trading
  • Historical data: For backtesting and pattern recognition
  • Market depth: Order book information
  • News feeds: Fundamental context for technical signals

Combining Technical and Fundamental Analysis

The most successful traders often combine both approaches:

Top-Down Analysis

  1. Market analysis: Overall market trend and sentiment
  2. Sector analysis: Identify strong/weak sectors
  3. Stock selection: Choose fundamentally sound companies
  4. Technical timing: Use charts for entry/exit points

Risk Management Integration

  • Position sizing: Based on technical volatility
  • Stop losses: Placed at technical levels
  • Profit targets: Set using resistance levels
  • Portfolio correlation: Consider technical relationships

Getting Started with Technical Analysis

Begin your technical analysis journey with these steps:

  1. Learn the basics: Start with simple concepts and build complexity
  2. Paper trade: Practice without real money
  3. Keep a trading journal: Record decisions and outcomes
  4. Start simple: Use basic indicators before advanced techniques
  5. Focus on one market: Master ASX patterns before expanding
  6. Continuous learning: Markets evolve, so must your skills

Remember, technical analysis is both an art and a science. While indicators and patterns provide objective data, interpreting them requires experience and judgment. Start with the fundamentals, practice consistently, and develop your own style over time.