Technical Analysis Basics: Support, Resistance & Indicators Explained
Beginner's guide to forex technical analysis: candlestick charts, support and resistance, trend lines, and the three most-used indicators (RSI, MACD, moving averages).
What is technical analysis?
Technical analysis is the practice of studying historical price charts to forecast future price direction. It rests on three assumptions:
- Market action discounts everything — all known information is already reflected in price
- Prices move in trends — uptrends continue more often than they reverse
- History repeats itself — the same patterns recur because the same human emotions drive markets
This contrasts with fundamental analysis, which studies macro data (rates, GDP, inflation) to forecast prices.
Most successful retail traders use both — fundamentals to identify direction, technicals to time entries and exits.
Reading candlestick charts
A candlestick represents price action over one time period (1 minute, 1 hour, 1 day, etc.). Each candle shows four prices:
- Open — price at the start of the period
- High — highest price during the period
- Low — lowest price during the period
- Close — price at the end of the period
Bullish candle (close > open): typically green or white, signals buyers in control. Bearish candle (close < open): typically red or black, signals sellers in control.
The body shows the open-to-close range. The wicks (or “shadows”) show the high and low.
Key candlestick patterns
| Pattern | Description | Signal |
|---|---|---|
| Doji | Open = close (cross shape) | Indecision, potential reversal |
| Hammer | Small body at top, long lower wick | Bullish reversal at support |
| Shooting star | Small body at bottom, long upper wick | Bearish reversal at resistance |
| Engulfing | Body fully covers previous candle | Strong directional signal |
| Pin bar | Wick 2x body length | Rejection of price level |
Don’t memorize all 50+ candlestick patterns. The five above cover 80% of high-probability setups.
Support and resistance
Support is a price level where buying interest historically overcomes selling pressure. Price tends to bounce up from support.
Resistance is the opposite: a level where selling overcomes buying. Price tends to stall and reverse down at resistance.
How to identify support and resistance
- Switch to the 4-hour or daily chart
- Mark horizontal lines at prices where the pair has reversed at least twice
- The more times a level held, the stronger it is
- Round numbers (1.1000, 1.2000) are often natural psychological levels
How traders use them
- Buy near support, sell near resistance for range-bound strategies
- Breakouts (close beyond a level) often signal trend continuation
- A broken resistance often becomes new support (and vice versa) — called “level flip”
Trend lines and channels
A trend line connects two or more consecutive lows (uptrend) or highs (downtrend). It identifies the direction and slope of the trend.
- Uptrend: higher highs + higher lows
- Downtrend: lower highs + lower lows
- Range: horizontal high/low boundaries
A channel is two parallel trend lines forming a price corridor. Trading the channel boundaries is a common strategy.
Rule: A trend line is more reliable when:
- It has at least 3 touches without breaking
- The angle is between 30 and 60 degrees (too steep = unsustainable)
- It aligns with longer-timeframe trend
The three most-used indicators
1. Relative Strength Index (RSI)
What it measures: Momentum (the speed of price changes) on a scale of 0–100.
Default settings: 14-period.
How to interpret:
- Above 70 → overbought, potential reversal down
- Below 30 → oversold, potential reversal up
- Bullish divergence — price makes lower low but RSI makes higher low → strong reversal signal
- Bearish divergence — price makes higher high but RSI makes lower high → reversal warning
2. Moving Average Convergence Divergence (MACD)
What it measures: Difference between two moving averages (12 EMA and 26 EMA), plus a 9-period signal line.
How to interpret:
- MACD crosses above signal line → bullish
- MACD crosses below signal line → bearish
- MACD above zero → trend is up; below zero → trend is down
- Histogram expanding → momentum increasing
3. Moving averages (MA / EMA)
What it measures: Average price over X periods.
Most-used settings: 20-period, 50-period, 200-period exponential moving averages (EMA).
How to interpret:
- Price above 200 EMA → long-term uptrend; below → downtrend
- 20 EMA crosses 50 EMA upward → short-term bullish signal
- 20 EMA crosses 50 EMA downward → short-term bearish signal
- Moving averages act as dynamic support/resistance during trends
Common mistakes beginners make
- Adding too many indicators — start with 1–2. Conflicting signals lead to paralysis
- Trading lower timeframes too soon — noise dominates 1-minute and 5-minute charts
- Ignoring the higher-timeframe trend — the 4-hour trend matters more than the 5-minute signal
- Forcing trades — if your setup doesn’t appear, don’t trade. Patience is edge.
- Trading without a journal — record every trade. Without journaling you can’t improve.
What to read next
- Forex strategies for beginners — apply these basics to real setups
- Understanding leverage and margin — sizing matters
- Best time to trade forex — when these signals work best
Where to practice
Open a demo account at a regulated broker — every broker we review offers one. Practice for at least 30 days before deploying live capital. See our broker match quiz for the right starting broker.