Technical Analysis

How to read a price chart: candles, trend, support and resistance, volume, moving averages and indicators, and what technical analysis honestly cannot do.

Technical analysis is the study of price and volume, usually on a chart, to describe what the market has done and what it is doing now. It is a language for reading behaviour that has already happened. It is not a method for knowing what happens next.

That distinction matters because the subject is often sold as prediction. A chart pattern is a description of a repeated shape, not a promise. The honest version of technical analysis says: this is what the price has done, this is where buyers and sellers have previously reacted, and this is a level where the behaviour may change. It does not say “buy here”.

This lesson covers the chart itself, trend, support and resistance, volume, moving averages, two common indicators, patterns, and how to test a chart idea rather than trust it.

Reading a price chart

A price chart plots price against time. Each period, whether a day, an hour or a minute, is summarised by four numbers: open, high, low and close (OHLC).

A candlestick draws those four numbers as one shape:

• the body is the range between the open and the close;
• the wick or shadow is the range beyond the body, up to the high and down to the low;
• a body filled or coloured one way usually means the close was above the open, the other way means it was below.

A candlestick shows the opening price, highest price, lowest price and closing price for a period. It does not reveal the sequence of price movements between the open and close. A long lower wick means the low was well below both the open and the close, but it does not tell you whether the low came before or after the high, or in what order the other prices were reached. Different intraperiod price paths can produce identical candles. Recovering the actual path needs finer-resolution market data than the candle itself.

Timeframes change the meaning. A daily candle summarises a day of decisions. A five-minute candle summarises five minutes. A pattern that looks important on a weekly chart can be noise on a one-minute chart, and the reverse. Most beginner confusion comes from mixing timeframes without saying which one is being read.

Corporate actions matter when studying history. A stock split changes the number of shares and the quoted price mechanically, and a bonus issue does the same, so an unadjusted series shows a discontinuity that is not a real fall. Cash dividends are a separate question: whether to adjust for them depends on whether the analysis is about the traded price or the total return to an investor. An adjusted-price series and a total-return series are not necessarily the same thing. Backtests should use data and corporate-action treatments that match the instruments and execution assumptions being modelled, rather than assuming one series is correct for every purpose.

Trend

The most basic description of a chart is its trend.

• An uptrend is a sequence of higher highs and higher lows.
• A downtrend is a sequence of lower highs and lower lows.
• A range is price oscillating between a ceiling and a floor without making a clear sequence.

That definition is deliberately mechanical, because “trend” is otherwise a matter of opinion. If you cannot point to the higher highs and higher lows, you are describing a feeling.

Trend is timeframe-dependent. A stock can be in an uptrend on the weekly chart and a downtrend on the daily chart at the same time. Neither is wrong. They answer different questions.

Support and resistance

Support is a price area where buying has previously been strong enough to stop a fall. Resistance is an area where selling has previously been strong enough to stop a rise.

Two things are worth pinning down.

First, these are areas, not exact prices. A support level drawn at ₹100 is really a zone around ₹98 to ₹102. Treating it as a precise line produces false precision and false signals.

Second, a level is evidence of past behaviour, not a physical law. Support breaks. When it does, the same level often becomes resistance, because the buyers who bought there are now holding a loss and may sell when price returns to their entry. That flip is a useful description, not a guarantee.

The most useful levels are usually ones with several touches over a long period, or ones that coincide with a round number, a previous high or low, or a gap in the chart.

Volume

Volume is the number of shares or contracts traded in the period. It provides information about trading activity alongside price. A move accompanied by unusually high volume indicates greater activity during that period, but it does not establish whether the move will continue or reverse.

A rough reading:

• A price rise on rising volume indicates more trading activity during the advance.
• A price rise on falling volume indicates less activity during the advance.
• A breakout above resistance on high volume shows that the break happened with more trading than usual. It does not prove the break will hold.
• A large volume spike with little price change indicates heavy trading without a large net move. That can accompany a transfer of shares between large holders, but the volume figure alone does not identify who was on each side.

Volume measures how many shares or contracts were traded, not the number of individual traders. A single large participant can account for a large share of the day’s volume, and standard volume bars do not reveal the motives of buyers and sellers or predict future direction. Volume is also different from open interest, which counts outstanding contracts rather than trades in a period; the futures and options lessons explain open interest in context.

Moving averages

A moving average smooths price by averaging the last N periods.

• A simple moving average (SMA) gives each of the N periods equal weight.
• An exponential moving average (EMA) gives more weight to recent periods, so it turns faster.

The common settings, 20, 50, 100 and 200 periods, are conventions, not discoveries. The 200-day moving average is widely followed, and its importance may partly reflect how traders and institutions use it. No particular lookback period guarantees a meaningful market reaction, and a level that mattered in one market or period need not matter in another.

Moving averages are lagging. They are computed from past prices, so they turn after the price has turned. That is not a defect; it is what smoothing does. A moving average describes the average price over the window and gives a mechanical way to define trend:

• price above a rising average suggests an uptrend;
• price below a falling average suggests a downtrend;
• a flat average suggests a range.

A crossover of a faster average above a slower one is often presented as a buy signal. It is really a description that short-term prices have moved above longer-term prices. In a range, crossovers occur repeatedly and produce losses when used as signals.

Two common indicators

Indicators are arithmetic on market data. A price-derived indicator transforms historical price information rather than creating new market information. Indicators that use volume, open interest, order flow, volatility estimates or other inputs may incorporate observations beyond price, but their signals still require evaluation. A familiar indicator is not proof of a trading edge.

Relative Strength Index (RSI) is a momentum oscillator. It compares the size of recent gains to recent losses over a window, usually 14 periods, and scales the result to 0 to 100. Readings above 70 are conventionally described as “overbought” and below 30 as “oversold”. Those thresholds are conventions, not guarantees. Overbought does not necessarily mean overvalued, and oversold does not necessarily mean undervalued. A strong trend can keep RSI at an extreme for weeks, and an extreme reading can be followed by further movement in the same direction. RSI describes the speed and size of recent moves, not a turning point.

Moving Average Convergence Divergence (MACD) subtracts a slower EMA from a faster one (commonly 26 and 12 periods) and plots the difference, with a 9-period EMA of that difference as a signal line. A crossing of the two lines describes a change in the relationship between short and long averages. It lags, like every moving-average measure.

Both indicators are widely used and widely misread. The useful question is not “what is the indicator saying” but “what is it measuring, and on which timeframe”.

Chart patterns

Patterns are named shapes that recur on charts: head and shoulders, double tops and bottoms, triangles, flags, pennants, and ranges.

A head and shoulders is three peaks with the middle one highest, often read as a reversal of an uptrend. A double top is two peaks at a similar level. A triangle is a converging range. A flag is a short consolidation after a sharp move.

The honest position on patterns is this: they describe a shape that has appeared before, and some of them have been followed by a move in a particular direction more often than by chance in some studies. The base rates are not stable across markets, periods and timeframes, and the eye is good at finding a pattern after the move. A pattern is a hypothesis to test, not a signal to trade.

Test a chart idea, do not trust it

A pattern or indicator rule is a hypothesis. Testing it on history is the right next step, and it is easy to make the test flatter the idea: look-ahead bias, survivorship bias, overfitting, ignored costs and a strategy tuned to one market regime can all turn a weak rule into a strong backtest. A high return with no out-of-sample test is a story, not evidence.

The full treatment of those biases, and how to evaluate a strategy properly, is in Trading Strategies. This lesson keeps to the chart: a pattern is worth testing, not worth believing.

Two frameworks, not two sides

Fundamental and technical analysis answer different questions. They are not mutually exclusive, and many investors and traders use both.

Neither framework guarantees profitable decisions. Fundamental analysis explains the business side, and Trading Strategies explains how either set of inputs becomes a tested strategy.

What technical analysis cannot do

It cannot tell you what will happen next. It cannot tell you whether a company is sound; that is fundamental analysis. It cannot remove the risk of a gap, a news event or a liquidity hole. And it cannot turn a random market into a predictable one.

What it can do is give you a consistent way to describe price, define a trend, place a stop at a level that means something, and notice when the behaviour you expected has not happened. Used that way, it is a risk-management tool as much as an analytical one.

Risk management and position sizing explains how a chart level becomes a position size. Trading strategies sets out how technical, fundamental and quantitative inputs combine in a written plan.