Technical Analysis Guide

1. What Is Technical Analysis?

Technical analysis (TA) studies market price movements — through charts, patterns, and trading data like price and volume — to forecast future trends. Instead of a company's financial statements, TA studies how buyers and sellers interact in the market, using repeated patterns and signals to time trades.

Core Assumptions

• The market discounts everything — all available information is already reflected in the price.
• Prices move in trends — movement follows identifiable trends over time.
• History repeats itself — chart patterns recur because human behavior is consistent.

2. Technical vs. Fundamental Analysis

A useful way to frame the difference: fundamental analysis is tasting the food at each vendor yourself and judging quality directly; technical analysis is watching which vendor draws the biggest crowd and assuming the crowd knows best.

See the companion Fundamental Analysis guide for the FA side of this comparison.

3. Chart Analysis & Chart Types

Line Chart: connects only the closing price of each period into a simple continuous line — good for spotting major trends with minimal noise. Limitation: doesn't show intraday movement, highs/lows, or volatility.

Bar Chart: displays each period's open, high, low, and close (OHLC) as one vertical bar.

Candlestick Chart: the most widely used chart for reading market psychology. Candlestick analysis aims to reveal market sentiment (bullish or bearish), the relative strength of buyers vs. sellers, potential trend reversals or continuation, and ideal entry and exit points.

4. Key Reversal Chart Patterns

W Pattern (Double Bottom) — Bullish Reversal

Structure: two lows at similar levels, a neckline formed by the intermediate high, and a final breakout above the neckline.

Market psychology: the first bottom stops panic selling; the bounce shows tentative buyer interest; the second bottom fails to make a new low (weak sellers); breaking above the neckline means buyers have regained control.

M Pattern (Double Top) — Bearish Reversal

Structure: two highs at similar levels, a neckline formed by the intermediate low, and a breakdown that confirms the pattern.

Market psychology: the first top is profit-taking with buyers still active; the pullback shows seller presence; the second top fails as buyers try again and lose; the break below the neckline signals distribution and selling begins.

Head & Shoulders — Bearish Reversal

A powerful bearish reversal pattern: left shoulder → head → right shoulder, showing the shift from strong buyers to strong sellers.

Structure: three peaks (left shoulder, higher head, right shoulder) with a neckline connecting the reaction lows; the final breakdown completes the pattern.

Market psychology: the left shoulder is the first sign of weakness; the head is buyers' last push higher; the right shoulder is a weak rally as buyers lose strength; breaking the neckline starts bearish momentum.

5. Market Cycle Phases

Financial markets generally move through four repeating phases, driven by investor psychology, liquidity flow, and economic conditions.

1. Accumulation Phase: sentiment is pessimistic or neutral; volume is low but slowly rising; price stabilizes in a sideways range while smart money quietly builds positions ahead of renewed optimism.

2–3. Mark-Up & Distribution Phases: after accumulation, the mark-up phase is the broader bull run. In the distribution phase, institutions slowly sell into strength while retail investors stay highly optimistic — price forms a top or broad range, volatility rises without clear direction, and volume spikes near resistance as sentiment turns euphoric.

4. Mark-Down (Declining) Phase: a downtrend begins as supply exceeds demand and selling pressure builds — lower highs and lower lows dominate, with sharp corrections and panic-selling as sentiment shifts to fear.

Market Cycle Timing — Worldwide vs. NEPSE

6. Support & Resistance, Breakouts

Support: a price level where buying pressure is strong enough to stop further decline — price tends to bounce upward.

Resistance: a price level where selling pressure prevents further rise — price tends to reverse downward.

Real Breakout vs. Fake Breakout

7. Trend Analysis & Trendlines

A trend is the overall direction of price over time. Price can only move in three ways:

• Uptrend (bullish): Higher Highs (HH) + Higher Lows (HL) — each pullback finds demand; buyers confident, sellers weak.
• Downtrend (bearish): Lower Highs (LH) + Lower Lows (LL) — each rally finds supply; distribution phase, bearish sentiment.
• Sideways/range: Equal Highs (EH) and Equal Lows (EL) — no HH-HL or LH-LL structure; price oscillates.

Trendline Touchpoint Rules

A trendline connects higher lows (in an uptrend) or lower highs (in a downtrend), and is one of the most powerful — and most misused — tools in TA.

• Rule 1 — minimum 2 touchpoints to draw: only two touches are needed to draw the line.
• Rule 2 — minimum 3 touchpoints to confirm validity: Touch 1 identifies the swing, Touch 2 lets you draw the line, and Touch 3 confirms whether the market actually respects it.

8. Oscillators — RSI

An oscillator moves back and forth within a fixed range, showing overbought/oversold zones and whether momentum is strengthening or weakening. Oscillators work best in sideways/ranging markets, to confirm entries/exits, and to detect trend weakness or reversals.

RSI (Relative Strength Index)

A momentum oscillator (0–100, standard period = 14) that compares average gains vs. average losses: more gains push RSI up, more losses push it down.

Limitations: RSI can stay overbought for weeks in strong uptrends, or oversold for weeks in strong downtrends — it works best in sideways or weak-trend environments.

Trend RSI vs. Range RSI

• RSI between 30–70 → range: use overbought/oversold signals.
• RSI above 40 for weeks → uptrend: buy pullbacks, ignore overbought.
• RSI below 60 for weeks → downtrend: sell rallies, ignore oversold.
• RSI not touching 30 or 70 for a long stretch → strong trend: use continuation signals, not reversal signals.

RSI Divergence

Occurs when price and RSI move in opposite directions — price makes a new high/low but RSI fails to match it, revealing hidden buying/selling pressure before the trend actually reverses.

• Bullish divergence (downtrend/oversold): price makes a Lower Low, RSI makes a Higher Low → buyers gaining strength, a strong bottom signal. Best confirmed by RSI crossing above 30 with a bullish candle at support.
• Bearish divergence (uptrend/overbought): price makes a Higher High, RSI makes a Lower High → sellers gaining strength, momentum dying, potential top. Confirmed by RSI dropping below 70 with a bearish candle at resistance.

9. Moving Averages (SMA & EMA) and MACD

SMA — Simple Moving Average

Averages price over a fixed number of periods, with every candle weighted equally: smooth and slow-moving, best for identifying long-term trends and reducing noise for long-term holdings.

• 20 SMA → short-term trend
• 50 SMA → mid-term trend
• 200 SMA → long-term trend (bull/bear indicator)

MA as Dynamic Support/Resistance & Trend Identification

• Price above the MA → the MA acts as support; price below the MA → it acts as resistance.
• Uptrend: Price > 20 SMA > 50 SMA > 200 SMA, with EMA crossovers rising.
• Downtrend: Price < 20 SMA < 50 SMA < 200 SMA, with EMA crossovers falling.
• Sideways: MA lines flatten and price oscillates around them.

EMA — Exponential Moving Average

Weights recent prices more heavily, so it reacts faster than SMA and captures reversals earlier — preferred by traders for short-term moves.

• EMA always starts from an SMA base value.
• EMA reacts faster with a higher weighting factor — shorter EMAs (9, 12, 21) move fastest.
• EMA sits closer to price than SMA because recent prices carry more weight.

MACD (Moving Average Convergence Divergence)

A trend-following momentum indicator built from two EMAs (12-EMA and 26-EMA) that shows trend direction, momentum strength, and potential reversals.

• Bullish crossover: MACD line crosses above the signal line → buy signal / momentum shifting up.
• Bearish crossover: MACD line crosses below the signal line → sell signal / momentum shifting down.
• Zero-line cross (more powerful than a signal-line cross): MACD > 0 means 12-EMA > 26-EMA, a bullish/trending phase; MACD < 0 means the reverse, a bearish phase.
• Histogram: often the earliest signal — rising means strengthening momentum, falling means weakening momentum; a flip from negative to positive is an early bullish sign, and positive to negative is an early bearish sign.

10. Break of Structure (BOS) vs. Market Structure Shift (MSS/CHoCH)

A Break of Structure (BOS) occurs when price breaks and closes beyond a previous swing high or low, confirming continuation of the existing trend — an uptrend BOS breaks the prior swing high (continuation up); a downtrend BOS breaks the prior swing low (continuation down).

MSS (Market Structure Shift) — also called Change of Character (CHoCH) — is the opposite: it breaks structure against the existing trend, usually from a demand/supply zone, and is the first sign of a potential reversal.

11. Fibonacci Retracement

A tool that measures pullbacks during a trend, identifying zones where price is likely to bounce, reverse, or continue the trend — these zones are the retracement levels.

How to draw: in an uptrend, draw from the swing low to the swing high; in a downtrend, draw from the swing high to the swing low.

12. Dividends, Bonus Shares & Rights — Price Adjustments

A dividend is a portion of company profit distributed to shareholders. In NEPSE (face value Rs. 100), each action adjusts the share price mechanically on the book-close date.

Cash Dividend

Adjusted Price = Last Closing Price − Cash Dividend Amount.

Bonus Shares

Adjusted Price = Last Price ÷ (1 + Bonus%).

13. Dow Theory

Dow Theory is the foundation of all modern technical analysis — trend, support/resistance, breakouts, market structure, even smart-money concepts all trace back to it.

• The market discounts everything — all known information is already priced in.
• The market moves in trends.
• Trends have three phases: in an uptrend — accumulation (smart money buying, low volume), public participation (trend obvious, high volume), distribution (smart money exits while the public keeps buying). In a downtrend — distribution (smart money selling at the top), public participation (heavy selling), panic (capitulation bottom).
• A trend remains in force until a clear reversal happens — higher highs/higher lows stay valid until a major swing low breaks. This is the origin of BOS, CHoCH, and trendline breaks.
• Volume must confirm the trend.

14. Volume Confirmation

• A Higher High formed with strong volume = continuation; with weak volume = a false high / trap.
• Breakout with strong volume: genuine breakout, likely continuation — a pullback is often the best entry.
• Breakout with weak volume: fake breakout / bull trap, low conviction, price may return to range.
• NEPSE stocks often break out on news — without volume behind it, the breakout tends to fail.

15. Risk Management, Position Sizing & Trading Psychology

Before trend analysis, indicators, setups, or breakouts, risk management, position sizing, risk-reward, psychology, journaling, and discipline are the real foundation of profitable trading — the Golden Rule being protect capital. Most traders fail not from a bad strategy but from oversized positions, no stop-loss, emotion-driven trades, revenge trading, or no risk limit.

Position Sizing — the 2% Rule

Risk a maximum of 2% of total capital per trade. This lets you survive 20–40 losing trades in a row without emotional panic or revenge trading.

Risk-Reward Ratio (RRR)

Ideal RRR is 1:2 or 1:3 — if you risk Rs. 1,000, the reward target should be Rs. 2,000–3,000.

Trading Psychology — Fear, Greed & Ego

Most losses come from a lack of emotional control, not a lack of knowledge. Fear typically stems from not having a plan, oversized positions, entering late, or watching losses grow — leading to hesitation, premature exits, and missed entries. The fix: position sizing, plan-based trading, a small fixed risk per trade, and journaling to spot fear patterns.

Trading Journal & Trading Plan

A trading journal records entry, exit, stop-loss, target, RRR, result, market structure, and emotion for every trade — it improves confidence, consistency, discipline, and clarity while exposing repeating mistakes, overtrading, and emotional decisions.

A trading plan should answer: what setups will you trade, when will you enter, where is the stop-loss, what is the RRR, where will you exit, how will you control emotions, what is your daily max loss (2% of capital), and when will you stop trading for the day or week?