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 the reasons a backtest can look better than the strategy.

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.

The shape of a single candle tells you the order of events within the period. A long lower wick means price traded well below the close at some point and buyers brought it back. That is information about the session, not a forecast for the next one.

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.

Adjusted prices matter. For shares, use prices adjusted for splits, bonus issues and dividends when you study history. An unadjusted chart shows a fake fall on the ex-date of a split.

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 is the only independent confirmation a price chart gives you, because price alone can move on very little trading.

A rough reading:

• A price rise on rising volume suggests broad participation.
• A price rise on falling volume suggests the move is being made by fewer participants.
• A breakout above resistance on high volume is more convincing than the same breakout on low volume.
• A large volume spike with little price change can mark a transfer of shares between large holders, and often appears near turning points.

Volume does not tell you direction. It tells you how many people were involved in the move that happened.

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. A 200-day SMA is watched because many participants watch it, which can make it matter; that is a self-fulfilling reason, not a mathematical one.

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 price and volume. They do not add information that is not already in the chart; they present it differently.

Relative Strength Index (RSI) 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 often called “overbought” and below 30 “oversold”. Those words are misleading. A strong uptrend can keep RSI above 70 for weeks, and an oversold reading in a downtrend can be followed by further falls. 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.

Backtesting and why it flatters

A backtest applies a rule to historical data and reports what would have happened. It is the right way to test an idea, and it is easy to make it lie.

• Look-ahead bias: using information that was not available at the time, such as a closing price to decide an intraday entry.
• Survivorship bias: testing only on companies that still exist, which removes the failures.
• Overfitting: trying many parameter sets and keeping the one that worked. With enough attempts, something always works on the past.
• Costs and slippage: ignoring brokerage, taxes, bid-ask spread and the price you would actually get.
• Regime dependence: a strategy tuned to a trending market fails in a range.

A backtest with a high return and no out-of-sample test is a story, not evidence. The useful discipline is to hold back a period of data, test on it once, and expect live results to be worse than the backtest.

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.