By Brian Shannon, written with Kyna Kosling (@KayKlingson).

First published on December 6, 2025.

Price charts help you visualize the unfolding supply and demand dynamics of the markets.

The charts allow you to understand the collective reasoning of participants so you can prepare your trading plan objectively. They help you listen to the message of the market, rather than impose your beliefs on it.

If you can read those dynamics correctly through effective technical analysis, you stand to profit.

What makes technical analysis ‘effective’?

Studies of technical analysis often start with pattern recognition—cup and handles, flags, triangles, double bottoms, head and shoulders, and many more.

My goal isn’t to teach you to recognize these textbook patterns. They contain value, of course, but understanding what drives these patterns is far more important:

• ⚓ Why do these patterns play out in a certain, expected way?
• ⚓ What do they tell you about the likely actions of other participants?
• ⚓ How might you capitalize on this market psychology (‘crowd behavior’)?

An awareness of such market tendencies will, without question, benefit you—but you can’t view patterns as certainties. Patterns can fail outright. Patterns can morph into other patterns, with potentially the opposite expectation of the original pattern.

Don’t view patterns as GPS coordinates, pinpointing the market’s exact next move, but more like smoke signals—easy to become distorted by changing conditions. (Remember: Flexibility beats rigid rules!)

You need a back-up plan: Risk management.

No one can be certain about the market’s next move. Patterns don’t always play out as expected.

However, by preparing for all scenarios, including if your original trade plan is proven wrong, you can make your decisions based on objective analysis rather than emotion.

Reactive, emotional decisions (as opposed to emotions themselves) are the enemy. That makes preparing an unemotional plan essential, accounting for both your primary thesis and your back-up plan, so you won’t end up reacting to the market, but can anticipate it.

The markets don’t have a roadmap. However, if you can identify the possible scenarios, then manage your risk properly, you can achieve greater gains than those who stubbornly hold on to their beliefs about what the market ‘should’ do.

Technical analysis is about probabilities, not prophecy.

Probabilities are just that: Uncertain.

In the market, no one wins all the time. In fact, some of the best traders lose more often than they win, but still make great returns on their capital. I, too, have had months where my win rate was as low as 35%, but still netted a profit.

The only way you can make that math work and become profitable is to have bigger winning trades than losing trades. The mantra to ‘cut losers quickly and let winners run’ exists for good reason.

High win rates are attractive, and getting stopped out of trades for which you had high hopes is frustrating, but only price pays. Lose your opinion, not your money.

That’s why risk management isn’t just your back-up plan, but the cornerstone to how professionals approach the markets. You can’t afford to repeatedly take big risks in the market—it’s simply too difficult to come back from large losses.

No approach is foolproof—nor does it need to be to achieve consistent success in the markets.

Successful traders:

• ⚓ Implement their plan with discipline.
• ⚓ Control risk throughout the trade, from entry to exit.
• ⚓ Place trades with the potential for large rewards, and size up on high-conviction trade setups.

This means you need a plan based on a reasonable expectation of the possible reward relative to the perceived risk—something I teach Alphatrends subscribers every day.

This is where technical analysis offers immense value.

Technical analysis allows you to assess your risk–reward before entering a trade.

Because price charts allow you to understand the collective reasoning of participants, you can assess risk–reward of your trade ideas, then put your money to work in the most favorable opportunities.

However, objective analysis is essential. Otherwise, you may end up with a ‘garbage in, garbage out’ situation, where your theoretical risk–reward is just that—a theory based on flawed analysis, and therefore useless.

The best way to establish a realistic risk-to-reward ratio is to answer three questions:

• 1⃣ Where has the stock come from?
• 2⃣ Where does the stock have the potential to go?
• 3⃣ Does that potential reward (based on question 2) justify the risk (based on question 1)?

To learn specific strategies for using multiple timeframes to maximize your risk–reward, check out “6 Ways You Can Trade With Multiple Timeframes.”

The key idea, however, is simple: You’re trying to understand what motivates other market participants to act. Where is a large number of participants likely to make buy or sell decisions? Those represent potential areas of large sources of demand and supply (i.e. support and resistance).

Technical analysis provides more than just a way of analyzing market action:

Technical analysis can provide a complete foundation for all your trading decisions.

Looking at a stock’s underlying fundamentals or story may help you with stock selection, but it doesn’t help you time your financial decisions.

And time is the very thing you’re looking to leverage as a trader.

You want to enter a stock as it shows momentum (either higher or lower), stay in the stock as long as it continues to move in the anticipated direction, then exit the stock—hopefully at a profit—once the momentum ebbs.

Technical analysis provides you with a tool to:

• ⚓ Gauge the collective psychology of all participants.
• ⚓ Assess the risk against the potential reward.
• ⚓ Time your entries and exits better.

However, any analysis tool is only as good as the person using it—and technical analysis is no exception.

To master it, you must start with a strong foundation: An understanding of market structure and the 6 Pillars of Price Action.