Trading glossary
Technical analysis
By the PatternX team · Published
Definition
Technical analysis is the study of past price and volume, usually on charts, to judge the likely direction, strength and risk of future price moves, rather than to estimate what an asset is fundamentally worth.
How it works
Technical analysis rests on three working assumptions: price already reflects most of what the market knows, prices tend to move in trends, and crowd behavior leaves repeating footprints. Analysts then work with three families of tools:
- Price structure: support and resistance, trendlines and chart patterns.
- Indicators: formulas applied to price or volume, such as moving averages, the Relative Strength Index (RSI) or Average True Range.
- Participation: whether trading volume supports a move or fades into it.
Fundamental analysis asks what an asset is worth. Technical analysis asks what price is doing, where a trade idea would be invalidated, and how much to risk. Many traders combine the two on different time horizons.
Why it matters
Its main practical value is discipline. A technical setup states the entry, the exit if wrong and a target before money is committed, which is what makes position sizing possible. It also travels across markets: the same breakout logic applies to a stock, an ETF, a currency pair or a crypto perpetual, because it only needs price and volume. Its limits are just as real. Signals are probabilistic, the same chart can be read in different ways, and rules that fit past data can stop working.
Example
For example, suppose a stock trades at $102, above a rising 50-day moving average at $98, with its last swing low at $99 and its last swing high at $105. A technical plan might read: buy if price moves above $105, place the stop under $99, and size the position so the $6-per-share risk equals 1% of the account. On a $30,000 account that is $300 of risk, or 50 shares. Nothing in the plan forecasts earnings; it defines the trade.
Common mistakes
- Stacking similar indicators. Five indicators computed from the same closing prices are not five independent opinions.
- Hindsight fitting. Lines drawn after the fact always look convincing; rules written in advance are the honest test.
- Ignoring costs and liquidity. A clean chart in a thin market can still be expensive to trade.
How PatternX uses it
PatternX automates one well-defined part of technical analysis: finding 20 chart patterns in OHLCV candles with fixed rules, then filtering and grading each setup. The PatternX Score blends pattern geometry and breakout strength with indicator-style inputs: volume against its 20-bar average, trend alignment on the 20- and 50-period EMAs, and ATR-based volatility. It also weighs market data such as liquidity, spread and order-book imbalance. The technical analysis hub covers automation in more depth.