If fundamental analysis tells us what to buy, and sentiment analysis helps us understand why the market is moving, technical analysis tells us when to act.
It’s all about timing your trades, minimizing risk, and maximizing reward.
Think about it: Have you ever seen a stock bounce off the same level multiple times? Or noticed a big price surge after a particular candle formation?
These aren’t random events—they’re patterns formed by collective trader psychology.
Learning to read them gives you a serious edge.
1. How does price action reveal market psychology?
Price action is the rawest form of market data. Every candle on the chart tells a story of buyers and sellers battling it out. If a stock keeps bouncing off a certain level, that tells us buyers see it as a bargain and are stepping in. If it keeps struggling to break through a ceiling, it means sellers are offloading their positions.
Think about a stock that’s been rising steadily, then suddenly forms a large red candle. That shift in price action could indicate sellers are stepping in aggressively. Likewise, if a stock has been falling but then prints a hammer candle at a key support level, it suggests buyers are regaining control.
The market is always giving us clues—it’s just a matter of learning how to read them.
Take a look at the US30 index as an example. We found resistance at the orange line, rejected, and when price retested the level (second orange arrow) we formed a bearish engulfing candle, which set off a 2 week sell off of the index.
2. Why is support and resistance so powerful in technical analysis?
Support and resistance levels act as invisible barriers on the chart. Support is a price level where buying pressure prevents the market from falling further. Resistance is the opposite—it’s where sellers step in and stop prices from climbing higher (previous example).
These levels aren’t just arbitrary lines; they represent key decision points where traders react.
The more times price respects a level, the stronger it becomes. And here’s an interesting twist: old resistance often becomes new support once broken. Picture a stock that keeps failing at $100 but finally breaks above it. When it pulls back, $100 now acts as a floor instead of a ceiling.
This is why traders always watch for retests—it’s often the best place to enter a trade.
3. How do candlestick and chart patterns help predict market moves?
Candlestick patterns are like the market’s language, giving us hints about where prices might go next. Take the bullish engulfing candle—it completely swallows the previous red candle, signaling buyers have taken control, and when paired with support, can often trigger a rally.
Then there are chart patterns, which form over longer periods. A double top signals a potential reversal downward (again thinking back to the example on US30). Triangles, flags, and head-and-shoulders patterns all give traders a roadmap to potential price movements.
These patterns work because traders worldwide are watching the same charts. Markets are driven by human behaviour, and when enough traders react to the same signals, they become self-fulfilling prophecies.
Bringing It All Together
Technical analysis isn’t about predicting the future with 100% accuracy—it’s about stacking the odds in your favour. By understanding price action, support and resistance, and key chart patterns, you give yourself a real edge.
The key is to keep it simple: identify strong levels, wait for confirmation, and enter trades with a solid plan. Combined with fundamental views and accounting for sentiment, technical analysis is a tool that can enhance returns for all traders.
Next time you’re about to enter a trade, ask yourself: Am I trading with the trend, or trying to fight it? The best trades happen when you align with the bigger picture. Let the charts guide you, and over time, you’ll sharpen your ability to spot high-probability setups.
Alternatively join my Pattern Profit Alerts community and start following our trade ideas. You’ll be amazed at how much you will learn about trading and how much you can gain in profits! Just go here for a 90 day trial.
Not a subscriber to Money Morning?
You can get free daily recommendations like these with Money Morning eletter. Just sign up here.
