What best describes technical analysis? Technical analysis is a method used by traders and investors to analyze price charts and market statistics—primarily past price and volume data—in order to predict future price movements of stocks, commodities, or other tradable assets. It is based on the principle that market trends, once established, are likely to continue, and that price movements often follow recognizable patterns. Unlike fundamental analysis, which looks at a company’s financial health, technical analysis focuses solely on “what” is happening in the market rather than “why.”

If you want to understand how to do technical analysis of stocks effectively, you need to begin with its foundational concepts and assumptions. Once you grasp these basics, you can apply technical analysis to any financial market that provides time-series price data—including the Pakistan Stock Exchange (PSX), forex, or commodities.

What are the 4 Basics of Technical Analysis?

Technical analysis is governed by four core assumptions, and understanding these is essential for anyone learning the subject.

• Market Discounts Everything
  

  This principle states that all information—economic, political, news-based, and even investor sentiment—is already reflected in a stock’s price. Therefore, a technical analyst doesn't need to interpret external factors; instead, they interpret how the market has already reacted to those factors through price charts.

• Prices Move in Trends
  

  This assumption suggests that prices follow trends and do not move randomly. Trends can be upward (bullish), downward (bearish), or sideways (consolidation). The aim of technical analysis is to identify these trends early and ride them until evidence suggests they have reversed.

• History Repeats Itself
  

  Investor psychology leads to repeated behavior in financial markets. As a result, price patterns (like head and shoulders, double tops, triangles, etc.) repeat over time. By recognizing these patterns, traders attempt to forecast future price action.

• The “How” is More Important Than the “Why”
  

  Instead of analyzing why something is happening (like earnings or macroeconomic changes), technical analysts focus on how prices are behaving. This pragmatic view helps traders react to market trends rather than predict causes.

How Do I Start Learning Technical Analysis?

If you're new to trading and wondering how do I start learning technical analysis?, here’s a step-by-step path you can follow:

• Understand Price Charts
  

  The foundation of technical analysis lies in reading charts. Start with the basic types:

  • Line charts
  • Bar charts
  • Candlestick charts (most widely used)

  Charts provide visual insights into how prices move over time. Candlestick charts, in particular, show open, high, low, and close (OHLC) prices for a given time period and are key to recognizing trading signals.

• Learn to Read OHLC Data
  

  Rather than monitoring every tick in the market, traders summarize daily market action using OHLC:

  • Open: First traded price of the day.
  • High: Highest price reached.
  • Low: Lowest price during the day.
  • Close: Final traded price of the day.

  Of these, the closing price is most significant because it reflects end-of-day sentiment and helps guide the next day’s expectations.

• Study Moving Averages
  

  Moving averages help smooth price data to identify trends. The Simple Moving Average (SMA) and Exponential Moving Average (EMA) are two commonly used types. They help reduce market noise and show whether prices are trending upward or downward.

• Use Momentum Indicators
  

  Momentum indicators offer insight into the strength of price movements. Some commonly used ones include:

  • MACD (Moving Average Convergence Divergence)
  • Relative Strength Index (RSI)
  • Aroon
  • Accumulation/Distribution Line

  These tools can serve as leading indicators (predicting possible moves) or lagging indicators (confirming ongoing trends).

What is the 90% Rule in Stocks?

A frequently cited principle among seasoned traders is the “90% rule” in stock trading, which states:

“90% of trading volume comes from 10% of the stocks.”

This underscores the idea that the majority of market activity is concentrated in a small number of highly liquid, actively traded stocks. For technical analysts, this has two major implications:

• Focus your analysis on high-volume stocks where patterns are more reliable.
• Avoid illiquid stocks where price movements may be erratic and difficult to interpret.

Another interpretation of the 90% rule is psychological:

“90% of traders lose money because they don't follow risk management or emotional discipline.”

Thus, combining technical knowledge with strict discipline is critical to success.

Technical Indicators at a Glance

Let’s summarize some key technical tools used by analysts:

Application Across Markets

A powerful feature of technical analysis is that it's universal. As long as you have access to time-series price data, you can apply it to:

• Stocks (e.g., listed on PSX)
• Commodities (e.g., traded on PMEX)
• Forex pairs
• Cryptocurrencies
• Indices (e.g., KSE-100 Index)

This makes it an invaluable tool for retail traders in Pakistan looking to diversify across markets.

Quick Recap

• What are the 4 basics of technical analysis?
  • Market discounts everything
  • Price moves in trends
  • History repeats itself
  • The “how” matters more than the “why”
• How do I start learning technical analysis?
  • Learn to read charts
  • Understand OHLC
  • Study moving averages
  • Use momentum indicators
• What is the 90% rule in stocks?
  • Most trading volume is concentrated in a few stocks
  • Focus on liquid instruments and practice emotional discipline
• What best describes technical analysis?
  

  A price- and volume-based method of forecasting future market behavior using historical data.

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