How To Do Technical Analysis for Trading
If you’re diving into the world of futures trading or starting to trade any other asset, you’ve probably heard the term “technical analysis” thrown around quite a bit and to be honest, it’s one of the most important aspects of being a successful trader or investor, so, learning how to do technical analysis the right way is crucial for anyone aiming to start trading.
This method can seem complex at first, but with the right knowledge and tools, it becomes an indispensable part of your trading toolkit. I always say that you need to find an asset and stick to it, for me that ONE asset is the E-mini S&P 500 Futures, so, most of the examples will be using this asset.
Let’s break down how you can effectively perform future technical analysis and level up your trading game.
What Is Technical Analysis?
Technical analysis involves studying price movements and trading volumes through historical data. For futures and any other asset trading, it’s crucial because it helps traders predict future price movements and make informed trading decisions.
Unlike fundamental analysis, which looks at economic indicators and financial statements, technical analysis focuses purely on price and volume data. This is particularly useful in futures trading, where market sentiment and short-term price movements are key.
The main goal here is to focus on identifying patterns and trends to predict future price movements.
History of Technical Analysis
The concept of analyzing market behavior isn’t new, but the history is a bit hard to follow. It’s said that ancient civilizations engaged in basic forms of market analysis, though not as sophisticated as today.
The first known technical analysis as we know it today (at least a bit) comes from the XVIII century in Japan. Here’s a bit of the known history:
The Rice Trade in Japan
One of the earliest documented uses of technical analysis comes from Japan in the 1700s era. A man called Homma Munehisa, which a Japanese rice trader, developed candlestick charting to predict rice prices, laying the foundation for modern technical analysis.
It all started with a primitive future market that emerged for rice back in 1710, the new system used some sort of coupons or contracts that promised to deliver the rice at a future time (sounds familiar, right?). From that market a secondary one was born, the coupon trading.
During his daily trades, he learned that the market was influenced by emotions, while the effects of supply and demand on the price persisted!
The Evolution in the Western WorldThe Dow Theory
Then, in the late 19th century, Charles Dow, co-founder of The Wall Street Journal, made significant contributions to technical analysis.
Dow believed that market prices reflected all available information and that analyzing them could reveal broader economic trends.
That’s how the Dow Theory was born, it is based on the idea that markets move in predictable patterns and trends. It emphasizes the importance of volume and price action.
The Development of Stock Charts
Fast forward to the early 20th century, the world saw the development of stock charts, providing a visual representation of market trends and helping big-time technical analysis.
After World War II, technical analysis gained a lot more popularity, and more traders adopted charting techniques to analyze markets.
Three Foundations of Technical Analysis in Trading
When it comes to the foundation of technical analysis there are some core foundations we need to grasp from the start: price trends, history repeating itself, the market condition, and sentiment.
I highly recommend that you start reading the Dow Theory, the Fountain of Gold as well as the Technical Analysis of the Financial Markets by John Murphy. This will surely give you a solid understanding of the market and the technical analysis.
Here’s a bit more about the foundations of technical analysis:
History Tends to Repeat Itself
Due to human behavior history tends to repeat itself and the markets are not an exception, that’s why you can find so many different cycles, and patterns that occur from time to time. Not only that, but that’s also one of the main reasons why you can find similar reactions to repeated environments in the market.
To put this simply, you need to think of this as an aggregate group not as an individual, over time traders have faced the same set of circumstances and most of us tend to react the same way.
Prices Trend
A price trending in a certain way is a direct reaction to the circumstances, to put it simply it’s the result of “history repeating itself” and vice-versa. The market is always trending, whether it’s up, down, or sideways but for a trader those trends must be easy to identify as well as actionable.
Identifying a trend is always the first thing to do when it comes to technical analysis, there are a ton of tools out there that can help you identify trends and their exhaustion.
Market Sentiment and Conditions
Trading is a very psychological thing, Dow and Munehisa said it a ton of years ago and this is the result of several aspects that lead to cycles and conditions.
Sentiment refers to the overall attitude of investors toward a particular market or asset. It’s the collective mood or feeling that drives buying and selling behaviors.
This sentiment can be bullish (optimistic) or bearish (pessimistic), heavily influencing market trends and price movements.
The Price of Futures is an Interpretation of Market Conditions
In recent years the efficient market hypothesis has gained a lot of popularity for many traders, it basically states that the prices of a futures contract reflect all of the info that traders know about the market, from empirical facts and rumors to news and economic reports.
This means that based on the EMH concept, all of the market data and the technical indicators we applied to that data can be taken as a reliable interpretation.
Thanks, NinjaTraders for pointing this out.
Basic Concepts of Technical Analysis
After learning the foundations of technical analysis you need to learn some of the basic concepts, and here I have listed the main ones and others you will find in a chart.
Charts
Charts are the foundation of technical analysis. They visually represent the price movements of futures over time.
There are three main types of price charts:
- Line Charts: Simple and easy to read, showing closing prices over a period.
- Bar Charts: More complex, showing opening, closing, high, and low prices.
- Candlestick Charts: Popular among traders for their detailed price action insights.
Price Action
Price action is the movement of a security’s price over time. It forms the basis for all technical analysis tools and techniques.
It’s the starting point for most analysis and price patterns.
Volume
Volume measures the number of shares or contracts traded in a security or market during a given period. It provides insights into the strength of a price movement.
Time Frames
Time frames are the periods over which price movements are analyzed. Traders can use different time frames, from minutes to months, depending on their trading style and goals.
Trends
Trends are the general direction in which a security’s price is moving. An uptrend is characterized by higher highs and higher lows, while a downtrend features lower highs and lower lows.
The third one is the sideways trend and the price here is usually channeling.
Trendlines
Trendlines are straight lines drawn on a chart to connect successive highs or lows in an uptrend or downtrend, helping to identify the trend direction.
Channels
Channels are formed by drawing parallel trendlines to connect the highs and lows of a trend, indicating potential areas of support and resistance.
Support and Resistance
Support and resistance levels are key price levels where security tends to reverse direction.
Support is the price level at which buying interest is strong enough to prevent the price from falling further. Resistance is the price level at which selling interest is strong enough to prevent the price from rising further.
Identifying support and resistance levels helps traders make informed decisions about entry and exit points, stop-loss levels, and price targets.
Taking your first step in technical analysis
Now is the time to take some action, the main question is how do I start? Well, the first step is picking an asset like the Emini and opening the chart to see what the price is doing, pick a higher time frame and start working from there.
You are seeing right now a ton of data, mainly the price action over time and the volume.
The next step is to use your knowledge and draw trendlines as well as support and resistance lines. Ask yourself this while watching the chart:
- Is the price trending down or up? or is the price channeling/sideways?
- Is there a strong area of resistance and support?
Remember you can scroll to zoom in or out.
Key Indicators for Futures Technical Analysis
Now you can start to explore indicators, but make sure you don’t overload your screen with them which can be harmful and is the main cause of analysis paralysis.
Use one at a time, and start exploring different uses. Here are some of the most popular:
- Moving Averages: Moving averages smooth out price data to identify the direction of the trend.
- Simple Moving Average (SMA): The SMA calculates the average price over a specific period, providing a clear indication of the trend direction.
- Exponential Moving Average (EMA): The EMA gives more weight to recent prices, making it more responsive to new information.
- Relative Strength Index (RSI): RSI measures the speed and change of price movements, helping identify overbought or oversold conditions.
- Moving Average Convergence Divergence (MACD): MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.
- Bollinger Bands: These are volatility bands placed above and below a moving average, useful for identifying overbought or oversold conditions.
Developing a Futures Trading Strategy
Is true that knowing some concepts and using a few indicators doesn’t make you a trader, and while I’m not completely into “strategies” you do need a solid trading plan and trading rules. For this, you need to apply what you have learned and find what works best for you.
Practice your trendlines, support, and resistance, and combine them with indicators as well as other concepts like price action patterns, reversal patterns, or entry and exit opportunities.
After that, you can move to:
- Backtesting Your Strategy: Testing your strategy on historical data is crucial to understand its effectiveness before applying it in real trades.
- Risk management Techniques: Risk management is vital to protect your capital. This includes setting stop-loss orders and managing your position sizes.
Using Trading Platforms for Technical Analysis
When it comes to choosing a trading platform you need to prioritize the data, real-time data is a must, a wide range of technical indicators, and customization options as well as other technical tools.
For starters pick one that lets you do paper trading on a demo account, so you can practice. Some of the most popular platforms are Ninja Trader, TradingView, and Thinkorswim. All of them offer robust tools for technical analysis.
Common Mistakes in Futures Technical Analysis
I have been trading for a long time and before trading futures for a living I did make a TON of mistakes, and some of the most common are these:
- Over-Reliance on Indicators: While indicators are useful, relying too heavily on them without considering market context can lead to poor trading decisions.
- Ignoring Fundamental Analysis: Even though technical analysis is powerful, ignoring fundamental factors like economic events can be detrimental.
- Lack of Risk Management: Failing to implement proper risk management strategies can quickly lead to significant losses.
How to Do Futures Technical Analysis:
Conclusion
Technical analysis is a powerful tool for futures trading, it helps us to make informed decisions based on price and volume data. By mastering the basic concepts and advanced techniques, and combining them with a good trading strategy and risk management, you can improve your trading success.
FAQs
Some of the most reliable indicators include moving averages, RSI, MACD, and Bollinger Bands.
Yes, technical analysis is particularly useful for short-term trading as it helps identify short-term price movements and trends.
To avoid common mistakes, don’t over-rely on indicators, incorporate fundamental analysis, and always implement risk management strategies.
While not necessary, combining both can give you a more comprehensive view of the market, helping your trading strategy.
Yes, technical analysis can be applied to various financial markets, including stocks, futures, forex, and cryptocurrencies.
Last Updated on July 28, 2026
