In the previous lesson you met fundamental analysis: the idea that a company's intrinsic value comes from its earnings and assets, and why that value can differ from the market price. Technical analysis looks at the market from a completely different angle. Instead of asking "what is this share worth?", it asks "how has this share's price behaved up to today?". In this lesson you will get to know that view through its three basic tools, and learn why you should treat it as a tool for description, not a machine for prophecy.
What you will learn
The definition of technical analysis and how it differs from fundamental analysis; the meaning of trend and trendline; support and resistance levels; the moving average and its descriptive use; a hypothetical numerical example tying the three tools together; the specifics of Iran's market (price limit, base volume, adjusted data, and the legal warning on selling signals); and finally, the most common misconceptions.
Definitions
Technical analysis is the study of the past behaviour of price and trading volume on a chart, on the working assumption that the collective behaviour of buyers and sellers forms patterns that can be described. Note this carefully: technical analysis is about "describing what has happened", not guaranteeing "what will happen".
Candlestick chart. The most common way to display price. Each candle shows four numbers for one time interval: the open, the close, the high, and the low. The candle's colour only tells you whether the close was above or below the open.
Timeframe. This is the length of time each candle represents: one day, one hour, or one week. A pattern on the daily chart may not appear at all on the hourly chart, so you must always know which timeframe you are looking at.
Trend: the dominant direction of price
Trend is the overall direction of price movement over a period. It has three states: an uptrend (successively higher highs and higher lows), a downtrend (successively lower highs and lows), and a sideways or ranging trend (horizontal movement with no clear direction). A trendline is a line the analyst draws along the successive lows of a rising move, or the successive highs of a falling move, to summarise that direction visually.
The key point: a trend is a description of the past. The fact that price has been rising until yesterday creates no law of nature that it will keep rising tomorrow. A trend only tells you which way the balance of supply and demand has tilted so far.
Support and resistance: repeating floors and ceilings
Support is a price zone where, in the past, buyers have repeatedly become active nearby and halted a decline. Resistance is the opposite: a zone where sellers have repeatedly become dominant nearby and halted a rise. These two concepts simply say "a particular behaviour has been seen near these zones before", not that "it will certainly repeat".
Why do these zones carry psychological weight? Because market participants see them and make decisions based on them, which can make the behaviour somewhat self-fulfilling. But the moment too many traders bet on a single level at once, that very level can break quickly. So support and resistance are not exact, definitive lines; they are approximate zones.
Moving average: smoothing the noise
A simple moving average is the average of the closing prices of recent days, advancing by one step each day. For example, the 20-day moving average calculates, on each day, the average close of the previous twenty days. The job of this tool is to "smooth" the small fluctuations and show the medium-term direction; a short-term average (say 20-day) sits closer to today's price and is more volatile, while a long-term average (say 100-day) is slower and smoother.
Some analysts watch the crossover of two averages (a short-term average passing through a long-term one) and call it a "signal". But it is more accurate to say the crossover merely describes how the relationship between the two averages has changed. A moving average is inherently "lagging", because it is built from past data; it therefore reacts later than the price itself and cannot guarantee the future.
A worked example (hypothetical)
Suppose a hypothetical share, "A", has fluctuated between 1,000 and 1,200 tomans for several weeks. Each time the price reached around 1,000 tomans, buyers stepped in and the decline stopped; so 1,000 tomans has been a support zone. Each time near 1,200 tomans sellers became dominant; so 1,200 tomans has been a resistance zone. The share's 20-day moving average is around 1,100 tomans, that is, the middle of this channel.
Now, if the price reaches 1,050 tomans, technical analysis does not say "it will certainly bounce back up". It only says: "demand has been seen near this zone until today, and the overall trend has been sideways". This is a description, not a promise. All of these numbers are hypothetical and are shown purely to illustrate how to read the three tools.
In Iran's market
Several features of the Tehran Stock Exchange make reading a chart different, and there is one important legal point:
- The price limit (daily fluctuation band). Each symbol's price can only move up or down by a set percentage per day. This constraint means moves sometimes happen step by step over several days rather than in a single jump, forming a "buy queue" or "sell queue", a phenomenon not seen in markets without a price limit. (We explain this concept more fully in the lesson Tehran Stock Exchange from scratch.)
- Closing price and base volume. Tehran Stock Exchange charts are usually drawn from the "closing price", not the last trade. The closing price is a volume-weighted average of the day's trades, and the "base volume" (the minimum volume that must trade for the closing price to register the full daily change) affects it. So you should know which price the chart you are viewing shows.
- Adjusted data. When a company raises capital or pays a dividend, the share price is formally reduced without any real loss of value. An "adjusted" chart corrects these artificial jumps; an unadjusted chart can make support, resistance, and trend look misleading.
- The legal warning on selling signals. This is the most important point. Providing services such as investment advisory and portfolio management in Iran requires a licence from the Securities and Exchange Organization. Under clause 1 of Article 49 of the Securities Market Law (approved in late 2005, Azar 1384), anyone who, without observing this law, engages in activities that require a licence, or presents themselves under such titles, commits a crime; the penalty is one to six months of imprisonment, or a fine of one to three times the profit gained or loss avoided, or both. The Securities and Exchange Organization has repeatedly stated that "signal selling", that is, selling buy/sell recommendations as a business and without a licence, is an instance of this unlicensed activity. Learning technical analysis for your own personal decisions is free; selling signals to others without a licence is a legal offence.
Common mistakes
- Treating technical analysis as prophecy. The most common error is to see lines and averages as magic that predicts the future. These tools only describe the past and none of them guarantee what comes next.
- Overfitting to the past. If you draw so many lines and indicators that every past move is "justified", you have usually found nothing but noise. A pattern that only explains the past well does not necessarily work in the future.
- Ignoring liquidity and fundamentals. In a low-volume symbol, a single small trade can shift the chart; a pattern you see on such a symbol may be meaningless. Technical analysis does not replace fundamental analysis, it complements it.
- Trusting signal sellers. This is risky both legally and as an investment; someone who sells you a certain future for price is selling something that does not exist.
Summary
Technical analysis means reading the past behaviour of price with tools such as trend, support and resistance, and moving averages. All three are tools of description, not prediction; their best use is to help organise observation, not to claim knowledge of the future. In Iran's market, also account for the price limit, the closing price, and data adjustment, and know that selling signals without a licence is a crime under Article 49. Technical analysis gives its best result when used alongside fundamental analysis (the previous lesson), not in place of it. To review all the lessons, visit the Sahmino Academy hub.
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