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Technical analysis is one of the most popular tools used by traders to determine when to open or close a position. Recap the most important aspects of the technical analysis course and refresh your understanding about charting, patterns and technical indicators, as well as risk and trade management.


What is technical analysis?

Technical analysis involves utilising historical data to predict the probability of a future price move. Various metrics, such as price data and trade volumes, are typically used to make these predictions.

Price charts are used by technical analysts to analyse how a price has moved previously, and to try and determine which direction it might move in the future. There are a range of different chart types available, including:

  • Line charts
  • Bar charts
  • Candlestick charts
  • Point & figure charts

What are technical analysis patterns?

Technical analysts look out for chart patterns, which are shapes that form as price data is recorded on a price chart. These patterns can potentially indicate which direction price might move in the future.

  • Uptrend – formed when price action makes higher highs and higher lows
  • Downtrend – formed when price action makes lower highs and lower lows

Some technical analysts keep an eye out for specific candlestick patterns that might suggest which way an asset’s price will move.

What are technical indicators?

Technical indicators are trading tools that use mathematical and statistical formulae to analyse historical price chart data and provide traders with a view on current market conditions.

For example, a moving average will calculate the mean value of an asset’s price over a given period of time. Alternatively, an oscillator will establish the extent to which an asset’s current price is trading within its “normal” range.

With regards to a trading strategy, technical indicators – and general technical analysis – can be used to point out the probable direction of an asset’s price. Remember, however, do not just use indicators to confirm your natural bias!

Risk management

Technical analysis indicators can analyse historical market data to identify points at which traders should exit a position. This could be the point at which price rebounds, enabling traders to recoup some of their losses, or the point at which the strategy is considered to have “failed”.

Some of the most widely used risk management tools or techniques include:

  • Stop-losses
  • Position sizing
  • Risk-reward ratio

Trade management

Technical analysis can also be used to gauge the market once a trade has been opened. Depending on support and resistance levels, among other factors, technical analysis can help a trader to determine the level at which they want to adjust a position, perhaps through buying or selling, or setting a stop-loss or take profit order.

There are a range of technical analysis factors that can impact a trading strategy. For example, price charts can offer an insight into the current conditions of any market, potentially providing an indication of how the situation is due to change over time.

When trading, it is important to find a market that suits your risk tolerance in terms of price volatility and risk-reward potential.

The trade process

Technical analysis forms part of the trade process, which usually looks like the following:

  1. Fundamental analysis
  2. Technical analysis
  3. Management
  4. Review


Once you have confidence in the direction that an asset’s price might be heading, technical analysis can be used to optimise trade entry and exit points, while price patterns and charting can help to track your position’s progress.

Now that you have completed the technical analysis course, consider taking another look at some of the course materials, testing your knowledge or starting to trade using technical analysis on eToro.

GREAT JOB!

Test yourself on what you have learned

Take a Quiz!

QUESTION 1 OUT OF

Technical analysis can be applied to any asset class, true or false?

True
False

Correct!

Incorrect!

Typically speaking, technical analysis is best suited to which timeframe?

Shorter timeframes
Longer timeframes

Correct!

Incorrect!

What are the correct names given to the points on a chart at which price struggles to break below or above?

Support and resistance
Support and ceiling
Floor and ceiling
Floor and resistance

Correct!

Incorrect!

What is a trendline?

A line drawn at the point that technical analysts expect an asset’s price to hit in the future
A line drawn onto a chart, connecting a minimum of three points together and indicating the potential direction that an asset’s price might move in

Correct!

Incorrect!

A head and shoulders pattern is similar to a triple top pattern, but with what key difference?

The central price spike is higher than the surrounding two spikes
The central price spike is lower than the surrounding two spikes
The three price spikes all occur the exact same distance apart

Correct!

Incorrect!

A Bollinger Band has two additional lines (or bands) that sit above and below what?

An oscillator
The Relative Strength Index (RSI)
A simple moving average (SMA)

Correct!

Incorrect!

Day traders are more likely to use a 20-day simple moving average, rather than a 1-hour simple moving average, true or false?

True
False

Correct!

Incorrect!

What does a retest strategy involve?

Waiting for price to return to the point at which it broke out
Investing at the exact moment a price breaks out
Waiting for price to follow a trend for a significant period of time

Correct!

Incorrect!

Which of the following can help to remove the emotion from trading?

Opening a smaller number of large trades
Only trading a single financial instrument
Opening several positions with smaller amounts of capital

Correct!

Incorrect!

What is the difference between a trailing stop-loss and a regular stop-loss?

A trailing stop-loss will track moves in profit making trades
A trailing stop-loss will close a position at a particular time of day
A trailing stop-loss cannot be removed once it has been set

Correct!

Incorrect!

Technical indicators can be used to determine trade entry and exit points, true or false?

True
False

Correct!

Incorrect!

What could an increase in trading activity signal?

That the price is guaranteed to go up
That the price is guaranteed to go down
That something in the market has changed

Correct!

Incorrect!

Which Index is often used to measure market sentiment?

The VIX Volatility Index
The WIX Volatility Index
The NIX Volatility Index

Correct!

Incorrect!

The forex market typically sees lower volatility during periods when multiple exchanges are open at the same time, true or false?

True
False

Correct!

Incorrect!

Which of the following forms part of the “technical analysis” section of the trade process?

Economic cycles
Trade entry points
Market conditions
Strategy improvement

Correct!

Incorrect!

You can do better.
Not Bad, ready for more
Great score! Well done.
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It looks like you haven’t yet mastered these topics. Revisit the course, paying attention to bolded sentences, tips, and highlights. These key points will help solidify your understanding. Keep at it, and you’ll see progress in no time. Good luck!
You’re on the right track! Consider trying another course to consolidate your knowledge, paying attention to bolded sentences, tips, and highlights. Understanding key points will help solidify your knowledge. Keep going, you’re almost there!
Congratulations on your high score! You’ve grasped these topics well. Keep up the great work by exploring another course in the eToro Academy. Well done!”
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