Technical Analysis Basics

A foundational guide to understanding technical analysis concepts used throughout the SQA::TAI library.

What is Technical Analysis?

Technical analysis is the study of historical price and volume data to forecast future price movements. Unlike fundamental analysis which examines company financials, technical analysis focuses solely on price action and market behavior.

Core Principles

1. Price Discounts Everything: All information is reflected in the price
2. Price Moves in Trends: Markets trend more often than they range
3. History Tends to Repeat: Human psychology creates repeating patterns

Basic Concepts

Price Data (OHLC)

Every trading period has four key prices:

open  = [50.0, 51.0, 52.0]  # Opening price
high  = [51.5, 52.5, 53.0]  # Highest price
low   = [49.5, 50.5, 51.5]  # Lowest price
close = [51.0, 52.0, 52.5]  # Closing price

Understanding OHLC: - Open: First traded price of the period - High: Highest price during the period - Low: Lowest price during the period - Close: Last traded price of the period (most important)

Candlesticks

Visual representation of OHLC data:

      High
       |
    |-----|    Body (Open to Close)
    |     |
    |-----|
       |
      Low

Candlestick Colors: - Bullish (Green/White): Close > Open (prices rose) - Bearish (Red/Black): Close < Open (prices fell)

Trends

Market direction over time:

Uptrend: Higher highs and higher lows

      /\    /\
     /  \  /  \
    /    \/    \

Downtrend: Lower highs and lower lows

\    /\    /
 \  /  \  /
  \/    \/

Sideways: No clear direction, ranging between support and resistance

Support and Resistance

Support: Price level where buying pressure overcomes selling pressure - Acts as a "floor" for prices - Price tends to bounce up from support

Resistance: Price level where selling pressure overcomes buying pressure - Acts as a "ceiling" for prices - Price tends to reverse down at resistance

Using SQA::TAI

Basic Indicator Usage

require 'sqa/tai'

# Load price data
close_prices = [44.34, 44.09, 44.15, 43.61, 44.33,
                44.83, 45.10, 45.42, 45.84, 46.08]

# Calculate a simple moving average
sma = SQA::TAI.sma(close_prices, period: 5)

puts "SMA: #{sma.last}"
# Output: SMA: 45.156

Working with Multiple Outputs

Some indicators return multiple arrays:

# Bollinger Bands returns 3 arrays
upper, middle, lower = SQA::TAI.bbands(close_prices, period: 20)

puts "Upper Band: #{upper.last}"
puts "Middle Band: #{middle.last}"
puts "Lower Band: #{lower.last}"

Handling Nil Values

Indicators need warmup periods:

prices = [10, 11, 12, 13, 14]
sma = SQA::TAI.sma(prices, period: 5)

# First 4 values will be nil (warmup period)
puts sma.inspect
# => [nil, nil, nil, nil, 12.0]

# Get only valid values
valid_sma = sma.compact
puts valid_sma.last  # Most recent valid value

Common Indicator Types

Trend Indicators

Identify market direction: - Moving Averages (SMA, EMA) - MACD - ADX

Momentum Indicators

Measure rate of price change: - RSI - Stochastic - CCI

Volatility Indicators

Measure price variation: - Bollinger Bands - ATR - Standard Deviation

Volume Indicators

Analyze trading volume: - OBV - A/D Line - Money Flow Index

Essential Technical Analysis Concepts

Moving Averages

Average price over a period, smoothing out noise:

# 20-period Simple Moving Average
sma_20 = SQA::TAI.sma(close, period: 20)

# Price above MA = uptrend
# Price below MA = downtrend

Crossovers

When two indicators cross, signaling potential trades:

# Golden Cross (bullish)
sma_50 = SQA::TAI.sma(close, period: 50)
sma_200 = SQA::TAI.sma(close, period: 200)

if sma_50.last > sma_200.last && sma_50[-2] <= sma_200[-2]
  puts "Golden Cross - Bullish signal"
end

Overbought/Oversold

When price has moved too far, too fast:

rsi = SQA::TAI.rsi(close, period: 14)

if rsi.last > 70
  puts "Overbought - potential reversal down"
elsif rsi.last < 30
  puts "Oversold - potential reversal up"
end

Divergence

When price and indicator disagree:

# Bearish divergence
if close.last > close[-10] && rsi.last < rsi[-10]
  puts "Bearish divergence - price up, RSI down"
  puts "Potential trend reversal"
end

Trading Strategy Basics

Entry Signals

Combine multiple indicators:

# Trend + Momentum + Pattern
ema_20 = SQA::TAI.ema(close, period: 20)
rsi = SQA::TAI.rsi(close, period: 14)
macd, signal, hist = SQA::TAI.macd(close)

# All aligned for long entry
if close.last > ema_20.last &&    # Uptrend
   rsi.last > 50 && rsi.last < 70 &&  # Strong but not overbought
   macd.last > signal.last          # MACD bullish
  puts "Strong buy setup"
end

Risk Management

Always use stop losses:

entry_price = close.last
atr = SQA::TAI.atr(high, low, close, period: 14)

# Stop loss 2 ATR below entry
stop_loss = entry_price - (2 * atr.last)

# Target 3 ATR above entry (1:1.5 risk:reward)
take_profit = entry_price + (3 * atr.last)

puts "Entry: $#{entry_price.round(2)}"
puts "Stop: $#{stop_loss.round(2)}"
puts "Target: $#{take_profit.round(2)}"

Position Sizing

Risk only 1-2% per trade:

account_size = 10000
risk_per_trade = 0.02  # 2%
risk_amount = account_size * risk_per_trade

stop_distance = entry_price - stop_loss
shares = (risk_amount / stop_distance).floor

puts "Position size: #{shares} shares"
puts "Risk: $#{risk_amount}"

Best Practices

1. Use Multiple Timeframes

Analyze larger timeframe first: - Daily chart: Identify overall trend - 4-hour chart: Find entry points - 1-hour chart: Fine-tune timing

2. Confirm Signals

Don't act on single indicator: - Trend confirmation (moving averages) - Momentum confirmation (RSI, MACD) - Volume confirmation (OBV, volume) - Pattern confirmation (candlesticks)

3. Manage Risk

Every trade should have: - Predetermined stop loss - Position size calculated on risk - Take profit target - Risk/reward ratio of 1:2 or better

4. Keep a Trading Journal

Track: - Entry and exit prices - Indicators used - Why you entered the trade - What went right/wrong - Lessons learned

Common Mistakes to Avoid

1. Overtrading: Not every signal is worth trading
2. No Stop Loss: Always protect your capital
3. Fighting the Trend: Trade with the trend, not against it
4. Overleveraging: Risk too much on single trades
5. Indicator Overload: Too many indicators create confusion
6. Ignoring Volume: Volume validates price movements
7. Emotional Trading: Stick to your system

Timeframes

Different timeframes for different styles:

Timeframe	Trading Style	Hold Time
1-5 min	Scalping	Minutes
15-60 min	Day Trading	Hours
4-hour, Daily	Swing Trading	Days to weeks
Weekly, Monthly	Position Trading	Months to years

Getting Started

1. Learn the Basics

• Read Getting Started Guide
• Understand Pattern Recognition
• Study Indicator Categories

2. Practice

• Use historical data for backtesting
• Paper trade before using real money
• Start with simple strategies

3. Build Your System

• Choose 2-3 complementary indicators
• Define clear entry and exit rules
• Test on different market conditions
• Track performance

Resources

Documentation

• Indicator Reference
• API Documentation
• Pattern Recognition Guide

Learning Path

1. Beginner: SMA, RSI, MACD, basic candlesticks
2. Intermediate: Bollinger Bands, Stochastic, ADX, pattern combinations
3. Advanced: Cycle analysis, multi-timeframe strategies, custom systems

Example: Complete Analysis

require 'sqa/tai'

# Load data
open, high, low, close, volume = load_market_data('AAPL')

# Trend Analysis
sma_20 = SQA::TAI.sma(close, period: 20)
sma_50 = SQA::TAI.sma(close, period: 50)
trend = close.last > sma_50.last ? "Uptrend" : "Downtrend"

# Momentum
rsi = SQA::TAI.rsi(close, period: 14)
macd, signal, hist = SQA::TAI.macd(close)

# Volatility
atr = SQA::TAI.atr(high, low, close, period: 14)
upper, middle, lower = SQA::TAI.bbands(close, period: 20)

# Volume
obv = SQA::TAI.obv(close, volume)

puts "Technical Analysis Summary"
puts "=" * 50
puts "Trend: #{trend}"
puts "Price: $#{close.last.round(2)}"
puts "SMA(20): $#{sma_20.last.round(2)}"
puts "SMA(50): $#{sma_50.last.round(2)}"
puts "RSI(14): #{rsi.last.round(2)}"
puts "MACD: #{macd.last.round(2)}"
puts "ATR(14): $#{atr.last.round(2)}"
puts "BB Position: #{((close.last - lower.last) / (upper.last - lower.last) * 100).round(0)}%"

# Trading Decision
if trend == "Uptrend" &&
   rsi.last > 40 && rsi.last < 70 &&
   macd.last > signal.last &&
   obv.last > obv[-5]
  puts "\nSignal: STRONG BUY"
  puts "Confluence of trend, momentum, and volume"
end

Next Steps

• Quick Start Guide
• Pattern Recognition
• Browse All Indicators
• View Code Examples