The Different Technical Analysis Tools Used in Stock Trading

Technical analysis is a crucial area of study for any equity trader looking to gain valuable insights into market movements and make informed investment decisions. While professionals utilise many complex quantitative models and techniques, this article will provide an overview of some of the most commonly used and straightforward technical analysis tools that new and experienced traders can use to supplement their fundamental analysis.

By learning to identify critical trends and patterns using moving averages, support and resistance levels, and momentum indicators, readers can better evaluate the strengths and weaknesses of potential stock investments based on charts. A research approach that combines technical and fundamental analysis helps traders spot opportunities and avoid pitfalls. You can read more about this topic at Saxo broker Dubai.

Candlestick charts

Candlestick charts, one of the most popular and widely used tools in technical analysis, are an excellent way to visualise market movements over a specific period. They display the open, high, low, and close prices for each interval, typically from one day to several weeks or months.

Each “candle” represents a trading session where buyers and sellers settle on a price. The candle’s body is coloured (green or red) based on whether it closed higher or lower than the opening price, with upper and lower “wicks” showing the high and low prices, respectively. Candlestick charts allow traders to quickly identify trends and market sentiment, making them an invaluable tool for stock analysis.

Moving averages

Moving averages (MAs) are a commonly used tool for identifying trends in market data. They calculate the average price of an asset over a specified period, such as 50 or 200 days, and plot this value on a chart. By smoothing out price fluctuations, MAs can help traders see the bigger picture and determine whether a stock is in an uptrend or downtrend.

Different moving averages, such as simple moving averages (SMA) and exponential moving averages (EMA), have varying degrees of sensitivity to price changes. While an SMA gives equal weight to all data points, an EMA places more emphasis on recent prices, making it more responsive to current market trends.

Bollinger Bands

Bollinger Bands are a technical indicator that measures volatility in the market and is based on moving averages. They consist of three lines – an upper band, a lower band, and a middle line – calculated by adding or subtracting two standard deviations from the MA.

When prices move outside the bands, it signals high or low volatility levels, indicating potential buying or selling opportunities. Traders also use Bollinger Bands to identify overbought and oversold conditions, where the price may be due for a reversal.


The Moving Average Convergence Divergence (MACD) is a popular momentum indicator that compares two moving averages of the same asset. It involves subtracting a 26-day EMA from a 12-day EMA to produce a line on a chart called the MACD line. A signal line, usually calculated as the nine-period EMA of the MACD line, is then plotted on top of the MACD line.

When the MACD crosses above the signal line, it is considered a bullish indicator, whereas a bearish signal occurs when the MACD falls below the signal line. Traders use this indicator to identify changes in momentum and potential divergence between price and volume trends, which may indicate an upcoming trend reversal.


The Relative Strength Index (RSI) is another popular indicator used to measure the speed and change of price movements. It compares the magnitude of gains and losses over a specified period, typically 14 days, and plots this value on a scale ranging from 0 to 100.

A reading above 70 signals an overbought condition, while a reading below 30 indicates an oversold condition. Traders use this indicator to look for potential entry and exit points and identify divergences between price and RSI trends that may indicate a shift in the market sentiment.

Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that compares the current closing price to its price range over a specified period. It consists of two lines – %K and %D – plotted on a scale from 0 to 100, with readings above 80 representing an overbought condition and below 20 indicating oversold conditions.

Traders use the Stochastic Oscillator to identify potential buying and selling opportunities and confirm entry or exit points suggested by other indicators. It is also helpful for spotting divergences between price and momentum trends.

Volume analysis

In addition to price, traders pay close attention to trading volume, which measures the number of shares or contracts traded during a specified period. An increase in trading volume often accompanies large price movements, providing valuable insights into market sentiment and potential trend changes.

By analysing volume patterns and trends over time, traders can gauge the strength of a breakout or reversal and make more informed investment decisions. It can also help identify potential support and resistance levels depending on where significant volumes were previously traded.