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The Basics of Technical Analysis in Day Trading

Jason BondJason Bond ·

Day-trading is simply impossible without technical analysis. This is why you should learn to handle it like you handle your smartphone. But, what’s the technical analysis all about? First of all, you should know that there are two main pylons of analyzing the markets: technical analysis and fundamental analysis, so knowing the first one is only half of the job. Yet, for a day-trader, it’s almost 70-80% of it.

Technical analysis can be defined as the prediction of the stock price based on analyzing the past price performance by using different tools like the chart, indicators, time-frames, and so on. Yet, what can the past movements tell us about the future? Well, it seems the price doesn’t move randomly. This is why technical analysis comes with these 3 basic principles:

  • The market considers everything – the current price already reflects all the factors, such as the supply and demand, the battle between the bulls and bears, the company performance, and so on. Since technical analysts don’t believe the current price can miss something, they form their future expectations and present impressions exclusively based on it.

  • The price moves in a certain direction – technical analysts don’t believe in accidental coincidences and random movements. They say the price has a certain medium-term or long-term tendency that you should catch. Even if there are moments when the price doesn’t trend, it will eventually find a certain direction and will follow it.

  • The history repeats itself – if the price doesn’t move randomly, then where do its movement principles come from? Well, from the past. The technical analysts believe that the past conditions influence the present and there are specific rules and principles that shape the price movements. Sometimes you would see chart patterns that repeat themselves, which makes us think the technical analysts are right.

The great thing about technical analysis is that it uses the same principles and rules no matter what price you analyze – stocks, indexes, currency pairs, commodities, and so on. As a day-trader, technical analysis is very important, but it doesn’t mean it has different principles for swing traders.

Here are the main tools that you should operate with as a technical analyst:

Chart – the chart is not only the space on which you conduct the analysis; it comprises a lot of information. It has the time-frames, indicators, price action on it, but whenever we refer to the chart, we mean the chart type, and there are three of them:

  1. Line chart – it indicates only the close price of a stock in a given period (based on the time-frame you choose). We will use the Amazon share price as an example:

  1. Bar chart – with a more complex approach, the bar chart will show you the high price (upper side of the bar), low price (lower point of the bar), close price (right dash of the vertical bar) and the opening price (left dash of the vertical bar) of a given period.

  1. Candlestick chart – this chart type is the most popular one because it comprises the same info as the bar chart (high, low, open, close), but is more convenient visually.

Time-frames – The time-frame is defined by the periods on the chart. In other words, it is about the time included in one bar or in one candle. For example, in the picture above, each candle represents a day since the chosen time-frame is D1. The most popular timeframes among day-traders are: M1 – 1 minute, M5 – 5 minutes, M15 – 15 minutes, M30 – 30 minutes, H1 – 1 hour, and rarely H4 – 4 hours.

Indicators – the indicators are some of the basic technical analysis tools, and for a day-trader they are indispensable. They show only the past performance of a price, but you can easier anticipate the future. The indicators can give you hints about the general trend, overbought or oversold levels, the power of bulls and bears, momentum, volume, and more. However, you should learn to read them.

The most popular and important indicators are the moving averages (MAs – in fact many trend indicators are made of MAs), MACD, Bollinger Bands, Stochastic, Relative Strength Index (RSI), Volume, Parabolic SAR, and more. Sophisticated traders can even customize the indicators based on their specific needs.

The goal of your technical analysis is to find or assess the following:

  • Find the price trends and the resistance/support levels;

  • Assess the strength of the current trend;

  • Assess the maturity or phase of the trend; Find the overbought – oversold levels;

  • Determine the profit to risk ratio of a potential trade;

  • Find the entry levels;

In conclusion, technical analysis is at the heart of day-trading, and now that you know the basic principles of it, you should get ready to apply these with every stock that you trade.


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