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Level 7 of 13 · Technical analysis

Technical Analysis: Understanding Stock Charts

By the end you will: understand stock charts.

Technical analysis studies price charts and trading volume to judge where buyers and sellers are active. It is a tool for timing and risk control, not a crystal ball. Important: no chart pattern or indicator can predict the future with certainty. They show probabilities, and they fail often. Every chart in this level is an illustration with made-up prices. Open the Reliance chart to practise on real data.

Start with 7.1: What is technical analysis?
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Charts and candles

  1. 7.1What is technical analysis?Technical analysis studies past price and volume to find trends, support and resistance levels, and patterns that may help with buy/sell…
  2. 7.2What is a stock chart?A stock chart plots price over time. The most common types are line charts (joining closing prices) and candlestick charts (showing open,…
  3. 7.3What is a candlestick?A candlestick shows one period’s open, high, low and close (OHLC). The thick part is the body (open to close); thin lines are wicks (high…
  4. 7.4What is a bullish candle?A bullish candle (usually green) closes higher than it opened. Buyers won that period.
  5. 7.5What is a bearish candle?A bearish candle (usually red) closes lower than it opened. Sellers won that period.
  6. 7.6What are candle wicks?Wicks (shadows) are the thin lines above and below the body, showing the highest and lowest prices.
  7. 7.7What is a time frame?The time frame is how much time each candle represents: 1 minute, 5 minutes, 1 day, 1 week, 1 month.

Support, resistance and trends

  1. 7.8What is support?Support is a price level where falling prices tend to stop, because buyers step in.
  2. 7.9What is resistance?Resistance is a price level where rising prices tend to stall, because sellers appear.
  3. 7.10What is a breakout?A breakout is when the price moves above resistance convincingly, ideally closing above it with high volume.
  4. 7.11What is a breakdown?A breakdown is when price falls below support convincingly.
  5. 7.12What is a trend?A trend is the general direction of price over time: up, down or sideways.
  6. 7.13What is an uptrend?An uptrend has higher highs and higher lows: each peak and each dip is above the previous one.
  7. 7.14What is a downtrend?A downtrend has lower highs and lower lows.
  8. 7.15What is a sideways market?A sideways (range-bound) market moves between support and resistance without a clear trend.

Indicators

Indicators are calculations on price and volume. They lag (they describe what already happened), so use them as helpers, not as signals on their own.

  1. 7.16What is a moving average?A moving average (MA) is the average closing price over the last N periods, recalculated each day, making a smooth line.
  2. 7.17What is the 50-day moving average?The 50-day MA (50 DMA) is the average close of the last 50 trading days (about 2.5 months), a medium-term trend guide.
  3. 7.18What is the 200-day moving average?The 200 DMA is the average close of the last 200 trading days (about 10 months), the classic long-term trend line.
  4. 7.19What is RSI?The Relative Strength Index (RSI) is a momentum indicator from 0 to 100 that compares recent gains with recent losses (usually over 14…
  5. 7.20What is MACD?MACD (Moving Average Convergence Divergence) is the 12-period EMA minus the 26-period EMA. A 9-period EMA of MACD is the signal line; the…
  6. 7.21What are Bollinger Bands?Bollinger Bands are three lines: a middle moving average (often 20-period) and bands 2 standard deviations above and below it.
  7. 7.22What is VWAP?VWAP (Volume Weighted Average Price) is the average price of the day weighted by volume, the "fair average price" traders paid today.
  8. 7.23What is volume analysis?Volume analysis studies trading volume to judge the strength behind price moves.

Chart patterns

Patterns are repeated shapes that reflect crowd psychology. They work sometimes, not always. Always combine them with a stop-loss.

  1. 7.24What are chart patterns?Chart patterns are recognisable shapes in price charts that may hint at continuation (trend continues) or reversal (trend changes).
  2. 7.25What is a double top?A double top is an "M" shape: price hits the same high twice and fails, then breaks below the dip between them (the neckline).
  3. 7.26What is a double bottom?A double bottom is a "W" shape: price hits the same low twice and holds, then breaks above the neckline.
  4. 7.27What is Head and Shoulders?Head and shoulders has three peaks: a left shoulder, a higher head, and a lower right shoulder. A break below the neckline (joining the…
  5. 7.28What is a triangle pattern?A triangle forms when price swings get smaller and converge between two trend lines. Ascending (flat top, rising lows) is usually bullish;…
  6. 7.29Technical indicators are not guaranteed predictionsEvery chart tool describes probabilities based on the past. None can tell you what will happen next.