Technical Analysis is it a science or an art? How traders try to read charts

Technical Analysis is a method of predicting price movements of assets based on historical data about prices and trading volumes. Unlike fundamental analysis, which studies news and economic indicators, technical analysis is a pure focus on how charts move to forecast future movements.

How does technical analysis actually work?

The basic idea is simple: if we know how prices behaved in the past, we can assume how they will behave in the future. Technical Analysis is a tool for reading market sentiment through the lens of supply and demand.

When we see support and resistance levels, we see places where traders have historically bought or sold assets. Technical Analysis is not guessing — it is an attempt to find patterns in the chaos of the market.

Key Tools for Analysis

Traders use several proven indicators:

Moving Averages (MA) are the simplest way to see the trend. The Simple Moving Average (SMA) calculates the average price over a period, while the Exponential Moving Average (EMA) gives more weight to recent data. When the short-term line crosses the long-term line from below — this is a “golden cross,” a bullish signal. A crossover from above to below — is a “death cross,” a bearish signal.

RSI (Relative Strength Index) is an oscillator ranging from 0 to 100. When the RSI is above 70, the asset is considered overbought (potential for a decline). When below 30, it is considered oversold (potential for an increase).

MACD (Convergence/Divergence of Moving Averages) – monitors momentum. When the MACD line crosses the signal line from below, it is a bullish signal. A crossover from above to below is a bearish signal.

Bollinger Bands are two “corridors” around the moving average that indicate volatility. When the price touches the upper line — overbought, the lower line — oversold.

History: how it all began

Technical Analysis is not an invention of the modern world. The first forms appeared in the 17th century in Amsterdam and the 18th century in Japan. However, the modern version comes from Charles Dow, the founder of the Wall Street Journal. He noticed that markets move in trends that can be analyzed and segmented. His work transformed into Dow's theory, which laid the foundation for everything we know about technical analysis today.

In the past, traders used to draw charts manually. Now computers do this for millions of people simultaneously, making Technical Analysis an accessible tool for everyone.

Trading Signals: Accuracy and Errors

Indicators help us identify entry and exit points. But there is a big catch — they often generate false signals, especially on short timeframes or in low liquidity markets.

Why? Because Technical Analysis is the most powerful in high-volume trading and during stable markets. In small markets, the manipulation of a single large transaction can destroy all signals. During sudden crisis events, when emotions explode, indicators often cannot react in time.

It is important to allow for mistakes. The best traders combine Technical Analysis with risk management and other methods of analysis to avoid losing everything on a single mistake.

Criticism: does it really work?

Many skeptics say that Technical Analysis is just a “self-fulfilling prophecy” — it “works” because everyone uses it, and therefore everyone makes the same moves. Why wouldn't that be true?

First of all, every trader has their own tactics. One uses RSI and MACD, another only uses support and resistance levels, the third uses something else. This means that Technical Analysis is not one universal recipe.

Secondly, during wild volatility or under the influence of unpredictable events, indicators often fail. Subjectivity also plays a role — two analysts may interpret the same chart differently.

Nevertheless, many professional traders consider technical analysis to be a valuable skill, especially in combination with fundamental analysis.

Technical Analysis vs Fundamental: Which to Choose

Technical Analysis — better for short-term trades. It helps capture optimal entry and exit moments over days or weeks.

Fundamental Analysis — for long-term investments. It evaluates the true value of an asset based on financial statements and economic factors.

The smartest investors combine both methods. They use fundamental analysis to choose what to invest in, while Technical Analysis is a tool for selecting the entry point.

Summary

Technical Analysis is a practical skill, not an exact science. When you study charts, support and resistance levels, moving averages, and RSI, you gain a language to communicate with the market. However, this language can sometimes be misleading, especially in unpredictable markets.

Do not rely solely on Technical Analysis — combine it with risk management, fundamental analysis, and common sense. Any trading deal carries risk, and your task is to minimize losses when you are wrong and maximize profits when you are right.