What are the core concepts of technical analysis I need to know for CFA Level I?

Question

AcadiFi · Accepted Answer

Technical analysis gets a relatively small weight on CFA Level I, but it does appear regularly. Here are the core concepts you absolutely need to know.

## Foundational Principles

Technical analysis rests on three assumptions:
1. **Market prices reflect all available information** (weak-form efficient markets would reject this)
2. **Prices move in trends** — once established, a trend is more likely to continue than reverse
3. **History repeats** — patterns of price behavior recur because human psychology is consistent

## Support and Resistance

**Support** = price level where buying interest is strong enough to prevent further decline.
**Resistance** = price level where selling pressure is strong enough to prevent further advance.

When a support level is broken, it often becomes resistance (and vice versa). This is called a **polarity reversal**.

## Key Chart Patterns

**Reversal Patterns** (signal trend change):
- Head and Shoulders: three peaks, middle one highest. Neckline break confirms reversal.
- Double Top / Double Bottom: two peaks or troughs at roughly the same level.

**Continuation Patterns** (signal trend pause):
- Triangles (ascending, descending, symmetrical)
- Flags and Pennants

## Moving Averages

- **Simple Moving Average (SMA):** Equal weight to all observations in the window
- **Exponential Moving Average (EMA):** More weight to recent prices
- **Golden Cross:** Short-term MA crosses above long-term MA (bullish)
- **Death Cross:** Short-term MA crosses below long-term MA (bearish)

## Common Indicators

| Indicator | Type | Signal |
|---|---|---|
| RSI (Relative Strength Index) | Momentum | >70 overbought, <30 oversold |
| MACD | Trend/Momentum | Signal line crossover |
| Bollinger Bands | Volatility | Price touching bands suggests extreme |
| On-Balance Volume | Volume | Confirms price trend direction |

## CFA Exam Perspective

The CFA Institute includes technical analysis to ensure candidates understand it, but the curriculum also emphasizes its limitations — particularly the challenge of **data snooping** (finding patterns that are random) and the fact that technical analysis **cannot work in a weak-form efficient market** (where all past price data is already reflected in current prices).

**Exam tip:** Expect 1-2 questions. Focus on definitions (support, resistance, chart patterns, moving average crossovers) rather than deep application.

For more quant study material, explore our CFA Level I course.

What are the core concepts of technical analysis I need to know for CFA Level I?

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