How to Read Technical Charts?

We get into the nuBefore ances of stock chart analysis, you must be clear about how to read stock charts. Remember, stock charts are not just about prices but volumes, trends, and breakouts too. If you consider the technical chart analysis of Indian stock markets, you need to build a step-by-step approach to evaluating stocks technically.

Technical chart analysis of Indian stocks begins with price and volumes and goes to advanced patterns. This section is about reading stock charts and we will show in brief how to read technical charts. Of course, this is not something you can learn in one day, because reading stock charts is a complex business. Let us just get a bird’s eye view of how to read technical charts.

technical charts analysis?

Stock chart analysis gets trends from prices but gets confirmation from volumes. Stock chart analysis without volumes can give you dangerously half-baked results. That is when it comes to reading stock charts, you begin with the volume's story. Volumes are the number of shares traded and the trends of volume show you how many shares have been traded at what time brackets. That is a critical input.

In reading stock charts, let us understand why volumes are considered critical inputs by technical analysts. In stock chart analysis, days with higher buying volumes are indicated with blue bars and days with greater selling volume are indicated with red bars. Why are volumes so important in reading stock charts? The reason is that large volumes are associated with institutional traders like portfolios managers,passive funds, pension funds, etc. Stock chart analysis uses volumes as a proxy for what well-informed institutions are doing.

Since reading stock charts begins with volume analysis, let us look at some rudimentary volume patterns

  • High volume trading on bullish days: In stock chart analysis, this is a bullish pattern that stock price will continue to trend upwards.

  • Low volume trading on bearish days: Interestingly, this is also a bullish indication in stock chart analysis. It shows that the fall in the stock or the market lacks conviction.

  • High volumes on a bearish day: This is considered to be a bearish indicator as stock chart analysis will tell you that major institutional traders are aggressively selling the stock.

  • Low Volume Trading on a bullish day: This is again a bearish indicator, which does not reflect hardcore bearishness but shows a lack of conviction in the up move

When you do stock chart analysis, this is the basic analysis that will give you an idea of whether the price pattern is supported by volumes are not and whether the signal is one of affirmation action or lack of action.

One of the most important applications of stock chart analysis using an online trading app is to identify trends and reversals. There is hardly any technical analyst in the world who does not use moving averages extensively as part of his or her stock chart analysis. Let us spend a moment.

Moving averages are nothing but a time series-based average. For example, a 5-day moving average is the average of the last five days. For every subsequent day, you just skip the day by 1 and keep rolling it over. From the perspective of stock chart analysis, you need to understand the basic rules of 20-day, 50-day, and 200-day moving averages.

Let us see how these different averages interplay to give technical signals for your stock chart analysis.

  • Traders will be bullish on a stock as long as the stock price remains above the 200-day moving average.

  • However, the bearish traders who are short-selling a stock want to see the stock price stay below the 200-day moving average. It is a kind of trend confirmation for them.

  • If the price chart crosses from below the 200-day moving average and goes above, then in stock chart analysis this is interpreted as a bullish market reversal and vice versa.

  • An important aspect in stock chart analysis is the Golden Cross. This happens when the 50-day moving average crosses from below to above the 200-day moving average. In stock chart analysis, the Golden Cross is a substantially bullish signal.

  • Talking of Golden Cross, there is also something called the Death Cross in stock chart analysis. It happens when the 50-day moving average crosses from above to below the 200-day moving average. It is normally a very strong bearish signal.

The trend is one thing in stock chart analysis and then there is momentum. It is like the ignition and the accelerator of your car, in the same order. Let us look at finer aspects of trends.

Here are a few questions you must ask about a trend in stock chart analysis

  • How long has the trend been in place? Any stock cannot be in an uptrend or downtrend forever. More stocks break this rule of normality, the more you must look for reversals.

  • Is the trend well defined for the stock? Some stocks move in slow, well-defined trends, while others are more volatile. Accordingly, you must give weightage to the trend.

  • Trend reversals or trends running out of steam are best captured by momentum indicators in the realm of stock chart analysis.

How to read all-important supports and resistances

Stock chart analysis is incomplete if we don’t find support and resistance of a stock. This focus on support and resistance levels is very helpful in stocks that trade within a defined trading range over long periods. It is easier to buy around support and sell around resistance levels.

One basic application of supports and resistances is to identify a range to trade. The other application is to identify breakouts, which can earn bigger profits in a shorter time frame if analyzed properly. Price breakouts can happen above the resistance with volumes or below the support with volumes. In either case, it offers a huge window of opportunity to trade.

Different types of stock charts

Charts are figurative depictions of price and volume patterns. Here are some popular technical analysis charts.

  1. Line charts have stock price or trading volume on the y-axis and time period on the x-axis. Normally, line charts show price chart in the screen above and volume chart on the screen below. Line charts use closing stock price so they are not very dynamic.
  2. Bar charts are in vogue because they are data rich. Apart from close price, they also capture open, low, high and close price. This feature makes bar charts a lot richer in content and analytical value.
  3. Japanese Candlestick charts are user-friendly depiction of bar charts. A candlestick chart is made up of rectangular blocks with lines coming out on both sides. The line at upper end is the day’s highest trading price and at the lower end is the lowest trading price.
  4. Finally, there is PFC or point and figure charts, which were very popular in the past, but have been gradually overtaken by the inexorable force of technology. PFC chart displays volatility of stock price over a period of time. 

What is technical analysis?

What if I told you not to spend hours doing fundamental analysis to determine the intrinsic value of the stock. Instead, I ask you to just look at charts since the price of the stock captures everything. Technical analysis believes that the market is all-knowing and best informed. If you are a short-term trader or intraday trader, technical analysis is inevitable.

Technical analysis is the study of chart patterns, graphs, and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. The important assumption in technical analysis is that stock prices have their unique price and volume trend. Prices will eventually gravitate towards this trend. The message is that if you study chart patterns properly, you can decipher the next price move of the stock. Any worthwhile data of any value gets reflected in the stock’s price and in the stock chart too. Hence technical analysis sees merit in just studying chart patterns to gauge market trends.

Intraday trading tips and strategies?

In intraday trading, there are some basic dos and don’ts you can follow to improve performance. For example, stick to stocks that are liquid and have low spreads. Don’t put all your money in 1 or 2 positions as you can burn yourself. Never trade without a stop loss and a profit target. Think through your trade and don’t spend too much time once the trade is executed. Respect stop loss and target discipline. That also means you must keep churning money and booking profits at regular intervals. Finally, avoid averaging when you go wrong

Frequently Asked Questions Expand All

It is a time series based average of price where the tenure of averaging is defined. Then each day, the moving average skips one day and calculates the moving average. This is dynamic and captures trends better.

The Relative Strength Index or RSI, as it is better known, is a momentum oscillator that measures the speed and change of price movements. RSI is in the range of 0 to 100 and normally oversold (buy) signals are given at 30 RSI and overbought (sell) signals at 70 RSI.

You can get technical charts through any paid technical package subscription or even you broker on online trading platform will give you basic charting capabilities.