Technical Analysis
ES: Análisis Técnico PT: Análise Técnica
The study of price and volume to make decisions: what it assumes, what it can and cannot do, and how to use it without slipping into magical thinking.
The three assumptions it rests on
Technical analysis starts from three explicit premises. First: price discounts everything — any relevant information, whether fundamental, macro or sentiment, eventually shows up in price, so studying price is an indirect way of studying everything else. Second: price moves in trends that tend to persist longer than pure randomness would predict. Third: history repeats, because patterns of collective behaviour — fear, greed, capitulation — are stable over time even as the participants change. It is worth being honest about their status: these are working assumptions, not proven laws, and their validity is partial and depends on the market and the horizon.
The tools and what each family is for
The toolkit falls into four families answering different questions. Trend indicators — moving averages, MACD, ADX — answer "is there direction and how strong is it?". Oscillators — RSI, stochastic — answer "is the move extended relative to its recent range?". Volatility indicators — Bollinger Bands, ATR — answer "how much is it moving and what distance is normal?". And volume indicators — VWAP, volume profile, accumulation — answer "is there real participation behind this move?". On top of these sit the visual structures: support and resistance, chart patterns and candlestick patterns. The most common error is stacking indicators from the same family, which say the same thing with a different face and produce a false sense of confirmation.
What it can actually do
With magical expectations set aside, technical analysis contributes four concrete and valuable things. Identifying the regime: distinguishing whether an asset is trending or ranging completely changes which strategy makes sense, and that diagnosis is probably its most useful contribution. Defining operational levels: where to place the stop, where to take profits, which strike to choose; even if the prediction fails, having objective levels prevents deciding in the emotion of the moment. Managing risk: ATR allows sizing a position by the asset’s actual volatility rather than an arbitrary figure. And imposing time discipline: rules dictating when to enter and exit reduce impulsive trading, which is the largest source of retail capital destruction.
What it cannot do
It does not predict the future, and any presentation suggesting otherwise is selling something. Patterns have hit rates that rarely exceed 60–70% under the best conditions, and many rigorous studies place them considerably lower. Nor does it work equally across horizons: evidence that signals carry information is weaker the shorter the timeframe, which is precisely where they are most used. And it carries two serious methodological problems: overfitting — tuning parameters until the system works perfectly on the past and fails the moment it goes live — and partial self-fulfilment, which makes some levels work only because many people are watching them, until they stop working when flows change.
How it combines with options
In options trading, technical analysis plays a different and considerably more defensible role than in pure directional trading: it defines the range, not the direction. Selling an iron condor requires a view on where price will not be, and there support and resistance levels, ATR width and trend regime are direct inputs into strike selection. The most robust combination in practice is two-layered: IV Rank decides which type of structure makes sense — buying or selling premium — and technical analysis decides where to place the strikes within that structure. Using it the other way round — letting a moving average crossover decide whether to buy expensive volatility — is the ordering that costs the most money.