Chart Construction

The X-axis on a chart plots the periods for which prices are plotted and the Y-axis plots the value or the price of the share. This could range from a few hours to a few years. This means that prices can be plotted based on the prices that range from hours to years. Thus we could have minute charts as well as hourly, daily, weekly, monthly, quarterly, yearly charts based on the above data.

Short Term Traders trade on the basis of daily charts as they are more interested in the immediate movement in the stock prices, whereas Medium term to Long term Traders are more dependent on weekly / monthly charts as they want more returns for which they are prepared to wait for a longer duration.

There are 3 types of charts which are commonly used by chartists. These are

1. Line charts: The closing prices are plotted on the graph and are joined to form a line.
2. Bar Charts: The Bar uses open / high / low / close for the session.
3. Candlestick Charts: Also use open / high / low / close for the session.

The 4 quotes that are used to construct a Bar Chart or a Candlestick chart are in the order of Open / High / Low / Close

Line Chart

In a Bar chart the open is indicated by a small hash (- ) which is drawn on the left side of the Bar and the close by another hash on the right side of the bar.



In a Candlestick chart the real body i.e. the 2 ends of the body, show the opening and the closing price for the given period. The lines at the top and bottom of the real body are called the shadows and they denote the high and the low for that session. The rectangle is called as the real body of the candle and it denotes the open and the close. The colour of the body denotes the open and the close of that session. If the open to close is on the higher side i.e. it is a bullish candle and vice versa if the close is lower than the open it is a bearish candle. Generally the colors used to denote bullish candles are white, green or blue and the bearish candles are red or black.

TECHNO - FUNDA - The Best Approach

Ideally one should use a combination of both Fundamental Analysis as well as Technical Analysis to decide on an Investment strategy. Fundamental Analysis should be used to spot stocks which have a potential to rise and Technical Analysis should be used to determine the timing i.e. the entry and exit levels. 

Limitations of Technical Analysis

·         If not backed by proper study of Fundamentals, TA cannot distinguish between small moves and big moves as well as Stocks that move on support of masses and stocks that are manipulated by a few individuals or groups or so called Operators.

·         Many a times Stop-Losses based on Technical Analysis get triggered in choppy market conditions and the price moves back to its original level or as expected. 

Advantages of Technical Analysis:

·         It is independent of any news or occurrence of events as any of these are reflected in the stock price.

·        Most of the Fundamental information such as announcement of Results or any other which affects the price of a share reaches a common Investor the last but an Investor following TA can get early signals based on price movements though he may not know the exact nature of information.

·         Since TA is based on Mass Psychology which can change and is fluctuating at times, Technical Analysis recommends use of Stop-losses which if strictly implemented can save Traders and Investors from a much bigger loss in the future.

History, Philosophy, Basic Tenets of Technical Analysis

Technical Analysis is a study of the past price action to predict the future price Trends. This means that the price of a share tells us as to how the share is going to move in the future and any reasons, let it be Fundamental or Technical, that could lead to a rise or a fall in the share prices is reflected in the price of that share. To give a simple example if a company is going to post excellent results, this will be reflected in the share price with a good rise which will be on account of insider buying. Similarly the opposite of this also is true. What we saw above was a fundamental factor responsible for the movement in the share prices. Besides these Fundamental factors there are Technical Factors viz. the Laws of Demand & Supply which also could lead to sharp movements in the share prices. These factors work on Mass Psychology and are closely linked to the Human Mind. Under a given set of circumstances all minds tend to work in the same direction. The theories of Technical Analysis are based on this concept and hence the share price movements can be predicted more often than not based on these theories.

Hence Technical Analysis is a subject which can successfully identify the beginning of a sharp rise or fall in the share prices. However, it is incorrect to say that Technical Analysis can predict or forecast all the moves correctly, as at certain times the markets itself are undecided.

Though Technical Analysis is being practiced in the West as well as some Asian countries like Japan for more than past 100 to 150 years, it has become popular in India only in the last 15 to 20 years.

To sum it up Technical Analysis:

·         A study of price charts along with volumes.

·         Is based on the law of Demand and Supply.

·         Works best in stocks that have a mass following.

·         Depicts the mindset of masses i.e. mass psychology.

The basic difference between Technical Analysis and Fundamental Analysis is that FA tries to find reasons for a stock to move up or down and based on the reasons predicts the price movements whereas TA is not concerned with the reasons and it believes that the way a stock price moves currently tells you where it is heading for in the future.

The Volume & its Significance

To this point, we've only discussed the price of a security. While price is the primary item of concern in technical analysis, volume is also extremely important.

What is Volume?

Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. Higher the volume, more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.

Why Volume is Important

Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story.

Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal.

Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end. When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume.

Volume and Chart Patterns

The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened.

Volume Precedes Price

Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.

Now that we have a better understanding of some of the important factors of technical analysis, we can move on to charts, which help to identify trading opportunities in prices movements.


One of the most important concepts in technical analysis is that of trend. A trend is really nothing more than the general direction in which a security or market is headed. In any given chart, we probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.

Figure is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend each successive low must not fall below the previous lowest point or the trend is deemed a reversal.

There are three types of trend:

Uptrend: When each successive peak and trough is higher, it's referred to as an upward trend.

Downtrends: When each successive peaks and troughs are getting lower, it's referred to as an upward trend.

Sideways/Horizontal Trends: When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. We can even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. In any case, the market can really only trend in these three ways: up, down or nowhere.


A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals

As we see in Figure an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.

Trend Lengths

Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a nearterm trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends.

When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend.


A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance. The upper trendline connects a series of highs, while the lower trendline connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.

Figure 6 illustrates a descending channel on a stock chart; the upper trendline has been placed on the highs and the lower trendline is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue.

Short-term and Longer-term trends


Broadly three time horizons:


The Importance of Trend

It is important to be able to understand and identify trends so that you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders.

Support and Resistance

We often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).

As we see in Figure, support is the price level through which a stock or market seldom falls (illustrated by the
blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the red arrows).

Why does it happen?

These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trendlines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established.

Round Numbers and Support and Resistance

One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions.

Role Reversal

Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance

In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels. This is most often seen when a stock is trading in a generally sideways manner as the price moves through successive peaks and troughs, testing resistance and support.

The Importance of Support and Resistance

Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level.

Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend has accelerated, not reversed. This means that the price appreciation is
expected to be faster than it was in the channel.

Fundamental v/s Technical Analysis

Technical analysis and fundamental analysis are the two different thought in the financial markets. Technical analysis looks at the price movement of a security and uses historical data to predict its future price movements. Fundamental analysis, on the other hand, looks at EIC (Economical, Industry and Company) factors known as fundamentals.

Basic differences:

1. Charts vs. Financial Statements

By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's intrinsic value. While Technical traders, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price.

2. Time Horizon

Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.

3. Trading Versus Investing

In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment

Basic Assumptions in Technical Analysis

1. The Market Discounts Everything: Technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company- including fundamental factors Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately.

2. Price Moves in Trends: In technical analysis, price movements are believed to follow trends. Technical analysts believe that once a trend gets established, price movements are more likely to be in the same  direction.

3. History Tends To Repeat Itself: Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

What is Technical analysis?

Technical Analysis is the study of Demand and Supply in a Market in an attempt to determine
what direction, or trend, price will continue in the future. Simply put, technical analysis is the
study of prices, with charts being the primary tool.