Technical analysis in trading: how to read charts and what the figures mean
Beginner traders and investors often hear about technical analysis, but do not always understand where to start studying it. Price charts sometimes seem mysterious: lines, candles, figures - all this can scare a beginner. In fact, technical analysis in trading allows you to see important patterns in price movements and helps to determine the best times to buy or sell assets. Let's look at this method in simple terms, what its features, types and tools are, and also consider examples of figures and indicators.
Technical analysis in simple terms
Technical analysis is a method of assessing the market based not on news or company reports, but on the study of price charts. Simply put, a technical analyst looks at the history of changes in the value of an asset (for example, a stock or currency) and tries to identify repetitions and trends. It is assumed that if in the past prices moved according to a certain pattern, then in the future, under similar circumstances, the market may behave similarly.
In trading, the technical approach means making decisions (to buy or sell) solely based on market data: transaction price, trading volume, dynamics for a selected period. Traders use special tools - charts and indicators to simplify the analysis of this data. Charts display price changes over time, and indicators are calculated based on price history and provide additional signals. Thus, technical analysis helps answer the question: “When to enter or exit a position?” - relying on signals from the market, and not intuition.
It is important to note that the technical approach is used in different segments of the financial market. It is used in the stock market for analyzing shares, on Forex for currency pairs, on commodity and cryptocurrency exchanges - wherever there is historical data on price movement. The method is universal: the basics remain the same, only the assets being analyzed change.
Historically, the principles of technical analysis were formed more than a hundred years ago. One of its founders is Charles Dow, a journalist whose ideas formed the basis for the further development of technical analysis methods. Today, technical analysis is the main tool of many traders and investors, allowing them to make decisions based on objective chart data rather than emotions.
Differences from Fundamental Analysis
There are two main approaches to market analysis: technical and fundamental. Fundamental analysis relies on studying the fundamentals and news. Investors with this approach look at a company's profits and revenues, the size of its debt, industry news, and the overall economic situation. Simply put, the fundamental method tries to determine what the fundamental (fair) value of a stock should be based on the state of the business and the economy. If the market price of a stock is much lower than the fair value, the investor considers the stock undervalued and buys it, and if it is higher, he or she can sell it.
Technical analysis, on the other hand, takes almost no account of news and reports. Instead, it takes market data itself - prices and trading volumes - and looks for repeating patterns. A technical analyst does not ask “why” a company has risen or fallen in price; he or she is more interested in “how” the price has moved and what this can suggest about the future.
The difference in approaches can be represented as follows: a fundamentalist looks at a business “from the inside” (company finances, the situation in the industry), and a technician – “from the outside” (the dynamics of the asset’s market price). For example, a fundamental analyst studies the company’s financial report and events when evaluating a stock, while a technical analyst opens a chart of this stock and analyzes its trends and figures on the chart.
Note that both approaches do not contradict each other, but rather complement each other. Fundamental analysis helps to understand what to buy, and technical analysis – when to buy or sell. Many experienced investors and traders combine methods: first, they select promising stocks for fundamental reasons, and then use technical analysis to look for a good moment to enter the market.
Each approach has its own strengths and weaknesses (we will consider them below). For example, fundamental analysis takes into account the deep fundamentals of a company, but may miss the market momentum. Technical analysis quickly reacts to price changes, but is based only on past data. Therefore, ideally, it is worth using both methods in combination to make more informed decisions.
Features of technical analysis
Technical analysis is based on several key principles. These basic ideas underlie the method and help us understand why traders trust price charts:
Everything is taken into account in the price. It is believed that all available factors have already been reflected in the current price of an asset: reports, news, economic conditions. The market (a group of traders and investors) has analyzed the fundamental data and incorporated them into the price through its actions. Thus, prices are not accidentally “too high” or “too low” – the market has already taken into account the known information. Therefore, a technical analyst does not need to study the company's indicators separately – it is enough to analyze the price chart itself. All fundamental market factors are already included in it.
The price moves in trends. One of the most important elements of technical analysis is the concept of a trend. A trend shows the general direction of the market or asset. It is assumed that the price movement tends to continue the existing trend until signs of its reversal appear. There are several types of trends:
Uptrend – a long-term increase in prices (each subsequent local maximum and minimum is higher than the previous ones). Simply put, the price of an asset is steadily growing.
Downtrend – a long-term decrease in prices (each maximum and minimum is lower than the previous ones). That is, the asset is gradually getting cheaper.
Sideways trend (flat, “sideways”) – the absence of a clear direction, when the price fluctuates in a narrow range. With sideways movement, there is no obvious growth or fall, the asset is traded at approximately the same level.
Each type of trend requires its own tactics. For example, in an uptrend, traders try to buy on pullbacks, in a downtrend – sell on corrections, and in a sideways – trade from the range boundaries. Having determined the current trend, market participants try to trade “with the trend”, that is, in the direction of the main price movement.
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History repeats itself. Another basis of technical analysis is the idea of the cyclical nature of the market. The psychology of traders and investors manifests itself in much the same way under similar circumstances, so typical figures (patterns) appear on the charts that precede certain market changes. Simply put, if the chart draws a familiar figure, then the same outcome that occurred in the past when this figure appeared is likely to repeat. Investors noticed this and began to use such repeating patterns as clues. An experienced trader, having seen a certain configuration of candles or lines on the chart, can assume further price behavior.
These features make technical analysis a convenient practical tool. However, it is important to remember: no forecasting method gives a 100% guarantee. Technical analysis operates with probabilities. It suggests where the asset is most likely to go, but there is always a chance that the market will behave differently. Therefore, a good specialist combines several signals and observes risk management, and does not blindly rely on one sign.
Types of technical analysis
Technical analysis methods are usually divided into two main types: graphical and indicator. Both are based on price data, but use different tools to find clues about future price movements.
Graphical
Graphical analysis involves searching for patterns directly on the price chart. The trader carefully studies the shape of the price curve and identifies characteristic images - technical analysis figures. Before significant price fluctuations, certain patterns (figures) are often formed on the chart, by which the upcoming movement can be recognized in advance. For example, a graphical analyst looks for shapes such as "triangle", "head and shoulders", "double bottom", etc. Each such figure has a certain meaning.
The value of the graphical method is that, having recognized the figure, the trader can predict the further direction of the trend. Simply put, if a known figure has formed on the chart, then further price movement will often draw this figure to the end and then follow the expected scenario (continued growth, downward reversal, etc.). Understanding this, a market participant tries to enter a deal in advance, even before the movement is complete, and earn on the expected price change.
Graphic technical analysis requires the skill of “reading” charts. At first, it can be difficult for beginners to notice clear lines or shapes on a seemingly chaotic price movement. However, with experience comes an understanding of the main patterns. In the following sections, we will consider specific examples of figures on the chart and their interpretation.
Indicator
Indicator analysis uses special mathematical indicators that are built on the basis of price (and sometimes trading volume). In this approach, the emphasis is not on the visual figures of the price chart, but on the readings of additional charts (indicator). Indicators can be displayed directly on the price chart (for example, as a line over it) or in a separate window in the form of an oscillogram. They are calculated using formulas that take into account past prices of the asset and help to identify hidden trends.
A simple example of an indicator tool is a moving average. This is a line on the chart that shows the average price of an asset over a certain period (say, 50 or 200 days). It smooths out fluctuations and allows you to understand the general trend: if the price chart is above its average, the trend is up, below it, the trend is down. Crossings of the price above its average can serve as signals of a change in trend.
Another example is the relative strength index (RSI). This indicator compares the magnitude of recent price increases and decreases and is displayed in the range from 0 to 100. RSI values \u200b\u200ballow you to assess the strength of the trend: during an uptrend, RSI usually stays above 50, during a downtrend, it is below 50. In addition, extreme values \u200b\u200bof the indicator may indicate that the market is overheated: if RSI rises above 70, the asset is considered “overbought” (a downward correction is possible), and if it falls below 30, it is “oversold” (an upward rebound is possible).
The good thing about indicator analysis is that it gives clearer formal signals. The investor does not need to guess whether he sees the right figure - it is enough to follow the indicator readings according to the given rules. However, it is also not worth overloading the chart with dozens of lines: usually 1-3 main indicators are enough to filter the market noise and get tips for entry or exit.
How charts are displayed
Before analyzing how the price moves, you need to understand how this information is displayed visually. The price chart can be displayed in several ways. Three types of charts are popular in trading:
Line chart. The simplest option, which displays a sequence of dots connected by a line. Usually, on such a chart, each dot is the closing price for the selected period (minute, hour, day, etc.). The line chart gives a general idea of the asset's dynamics, but does not show intraday fluctuations. Local minimums and maximums within the period remain hidden, only the final line of price changes is visible.
Bar chart. A bar is a vertical line that displays the price range for a period. Each bar has small horizontal risks: the opening price of the period is marked on the left, the closing price is marked on the right. The top of the bar shows the maximum, the bottom - the minimum for that period. Thus, a bar chart is more informative than a linear one: it shows not only the final price by the end of the interval, but also the price extremes within it, as well as the direction – whether the asset price has risen or fallen over the period (based on the position of the opening/closing risks).
Candlestick chart (Japanese candlesticks). Provides the same information as bars, but in a different, more visual format. A candlestick consists of a body and shadows (up and down). The body of the candlestick is drawn as a rectangle: its boundaries are the opening and closing prices of the period. Vertical shadow lines come out of the body and indicate the minimum and maximum price for the period. Usually, the body of the candlestick is painted in different colors: for example, green (or white) – if the price has risen over the period, and red (or black) – if it has fallen. Thanks to the color indication, it is immediately clear which periods were growing and which were declining.
Each type of chart has its own advantages. It is often more convenient for a beginner to start with a linear one – it is simple and not overloaded with details. But traders quickly switch to candlestick charts or bars, because they provide more information about the behavior of prices within a period.
How it helps analysis
More informative types of charts (bars and especially Japanese candlesticks) significantly simplify technical analysis. A candlestick chart allows you to see characteristic figures that might remain unnoticed on a line chart. For example, a sequence of several candles can form a trend reversal pattern, whereas on a line chart you would only see a smooth bend in the line and might not understand its meaning.
The main benefit of any chart is that it immediately shows the direction of the asset's movement. Looking through the trading history, we determine whether the price is currently in an uptrend, a downtrend, or a flat. For example, if a stock closes with growth (candles are mostly green) for several weeks, it is obvious that the uptrend is dominant. If the asset is marking time, and the chart is chaotically wobbling up and down within a narrow range, this is a sideways market.
In addition to trends, the chart clearly shows support and resistance levels. Support is a conditional price level below which the asset does not tend to fall, because there are people willing to buy (they support the market). Resistance is, on the contrary, a level above which the price rises with difficulty, because many people start selling (they resist growth). On the chart, these levels look like horizontal lines from which the price has bounced several times. Traders mark them and observe them: while the asset price remains between support and resistance, the trend is considered sideways. But a breakout (exit) of the price from this corridor often signals the beginning of a strong movement. When quotes confidently pass the resistance level or fall below the support, the market receives momentum - after all, there are no more “barriers” capable of holding the price. This can lead to a sharp acceleration of growth or decline.
Thus, the ability to read charts gives a trader an understanding of the overall picture: where the market is moving, where reversals or accelerations are possible. In combination with graphic figures and indicators (more on them below), this allows you to build a working trading strategy.
Examples of figures on the chart
How to read charts in practice? Let's look at several popular figures of technical analysis and what they mean for the future trend. These patterns are a kind of hints for a trader.
"Head and shoulders". One of the most famous reversal figures. It looks like three successively increasing price peaks: the first and third are slightly lower (shoulders), and the second is higher than all (head). Such a chart means that the uptrend is running out of steam: the asset has reached a maximum (the top of the "head"), after which it tried to go up again (the second shoulder), but could not update the maximum. The current peak is lower than the previous one, which signals a change in trend. After the formation of the "right shoulder", a downward reversal is expected - prices will begin to fall.
Double top (and double bottom). This figure also indicates a trend reversal. A double top is formed when the asset price reaches approximately the same maximum twice, but cannot break through this level and turns down. In essence, the market hits the “ceiling” twice and gives up, after which a downward movement begins. Double bottom is a mirror image: the price tests the minimum twice, but does not go lower, and eventually the trend changes to an upward one. After a double bottom, traders expect prices to rise, after a double top - a fall.
Triangle. A trend continuation figure (sometimes a reversal), characterized by a converging price range. On the chart, it looks like two converging lines: one is an inclined resistance line from above, the other is a support line from below. The price seems to be compressed, volatility falls. When these lines almost converge, there is usually a sharp exit of the price from the triangle. If the breakout occurs upward, it means that the upward trend has strengthened (the price will go higher). A breakout downward, accordingly, signals an increase in the downward movement. Traders often trade a breakout of a triangle, entering in the direction of the price exit.
"Hammer". This is already a figure from the category of candlestick patterns. “Hammer” is a small candle with a short body and a very long lower shadow (similar to a hammer). It usually appears at the end of a downward movement. “Hammer” shows that the price fell sharply during the period (long shadow down), but then rose and closed not far from the opening (small candle body). That is, sellers tried to push the market, but could not hold the price at the bottom - it was bought out by the closing. Such a pattern often signals an imminent price reversal upward. There is also an inverted hammer (long upper shadow) - it, on the contrary, can foretell a downward reversal after an upward trend.
“Doji”. Another candlestick pattern. The “doji” candle has an extremely small body (the opening and closing prices are almost equal), but can have long shadows above and below. Such a chart means uncertainty: the strength of buyers and sellers is equal, the price has returned to where it started over the period. Doji often appears before a trend change. For example, after a long rally, a series of doji candles may indicate that the upward momentum has dried up and a downward reversal is likely. Similarly, at the bottom of the market, doji signals a possible breakout to the upside.
Of course, there are many more technical analysis figures - there are "flag", "pennant", "wedge", "diamond", "crosses" (golden and dead), etc. We have considered only some of the most popular. It is important to remember that figures do not work 100% of the time, they should be used in the context of general analysis. Often, traders wait for a confirmation signal (for example, a breakout of an important level after the formation of the figure) before opening a deal.
Why do we need indicators
We have already mentioned indicators, now let's figure out why they are needed and how they help a trader. Indicators are important for assessing the current trend and filtering out market noise. They act as auxiliary indicators calculated based on the asset price. Simply put, indicators “process” historical prices according to a certain formula and show the result in a convenient form (line, histogram, oscillator).
The main task of indicators is to give signals or confirmations for making a deal. For example, many indicators help to recognize a change in trend in time. The moving averages mentioned above show the direction of market movement and generate signals at the intersection with each other or with the price itself. Let's remember the “golden cross” and the “death cross” - the intersection of the long and short average lines is an indicator signal for a potential market reversal (buy or sell).
Another important mission of indicators is to filter out false fluctuations and price breakouts. The market can be chaotic, and not every price move beyond a level means a real trend reversal. Indicators smooth out the data or set criteria that allow you to ignore minor fluctuations. This makes it easier for a trader to catch really significant changes.
Let's look at an example. The RSI indicator mentioned earlier not only indicates the direction (above or below 50), but also highlights extreme market conditions. When RSI goes into extreme value zones, this may indicate that the current trend is oversaturated: the market is too overheated (with a high RSI) or oversold (with a low RSI). At such moments, there is a high probability of a reverse price movement. Thus, the indicator gives a hint: be careful, a reversal or correction is possible soon.
Another example of an indicator signal is divergence. This is a discrepancy between the price chart and the indicator line (for example, an oscillator such as RSI or MACD). If prices update the maximum, and the indicator at this time shows a lower peak, it means that the upward momentum is weakening, and the trend may reverse downwards (bearish divergence). This situation warns the investor in advance, although the price chart itself may still continue to grow.
Thus, indicators are needed to confirm or refute the signals that we see on the chart itself. They make the analysis more objective. Many novice traders start with indicator analysis, because following formal rules (for example, “if the indicator crosses the level, we take action”) is psychologically easier. However, over time, it is important to learn to combine both approaches: to see both figures on the charts and to use indicators for reliability. This increases the accuracy of forecasts.
Pros and cons of technical analysis
Like any method, technical analysis has its strengths and limitations. Let's consider the main pros and cons of this approach to market analysis.
Pros of technical analysis:
Visibility and accessibility of data. Charts and indicators are available to everyone in real time. Any novice investor can open a chart of an asset of interest and immediately see the price history. You don’t need deep knowledge of accounting or economics to get started — you just need to understand how to read a chart.
Universality of methods. Technical analysis is suitable for any markets and assets: stocks, currencies, cryptocurrencies, raw materials. The methods remain the same — only the indicator parameters change to suit the specifics of the market. In addition, technical analysis works on different timeframes (time intervals): from minute charts for intraday trading to monthly ones for long-term investors. This means that traders of any style will find a use for it.
Help in determining timing. Fundamental data can tell you what to buy, but they hardly tell you when. Technical analysis specializes in finding entry and exit points. It gives signals (through figures or indicators) by which an investor determines whether the moment is right for a deal. For example, a signal in the form of a breakout of a resistance level or an intersection of moving averages can indicate a favorable moment to enter. Thus, technical analysis provides more accurate timing.
Emotional neutrality. Following charts disciplines. Having clear entry and exit criteria, a trader is less susceptible to emotions and rumors. Decisions are made based on predetermined rules (for example, “I’ll buy when the price leaves the triangle upward”), and not under the influence of fear or greed. This systematic approach is the basis of successful trading.
However, technical analysis also has its drawbacks:
Technical analysis relies on past price behavior, so there is no guarantee that the signal received will work exactly as it did before. Signals can be false. For example, the chart formed a beautiful “head and shoulders” figure with a hint of a fall, the trader sold the asset, and the market took and went up, breaking all expectations. This also happens. Therefore, experience and the ability to additionally check signals are important (for example, wait for confirmation or use several indicators at once).
In addition, the market is constantly changing. Previously successful models may stop working if the nature of trading changes (for example, new participants or algorithms come). Technical analysis is always a little late, because it reacts to price movements that have already occurred. In a rapidly changing environment, the signal may not have time to warn in time, or, on the contrary, be late - then the trader enters too late, when the movement has already passed.
It is also important to understand the limitations of technical analysis: it does not take into account unique events outside the charts. A sudden news release, force majeure, a statement from a regulator – all of this can move prices sharply, and no pre-drawn chart pattern will withstand. Therefore, relying only on technical analysis can be risky.
Finally, beginners need time to learn how to interpret charts correctly. There is a degree of subjectivity: one person sees a flag figure on the chart, and another – chaotic movement without structure. An overabundance of information makes it difficult to figure it out – modern trading platforms offer dozens of indicators and tools, and an inexperienced trader can get confused if he tries to use everything at once. A gradual approach will help here: start with mastering the basics (for example, candles and trend lines), and then complicate things.
Conclusion: Technical analysis provides effective methods for trading, but requires competent application. The best result is achieved when technical analysis is used in conjunction with a fundamental approach and risk management rules. Then the investor gets a more complete picture and can confidently make decisions.
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Comments
Alexey: Great article! I am a beginner investor and have long wanted to understand what technical analysis is. Now I understand the main tools and figures. Thank you for the clear explanations – without unnecessary “water”, everything is to the point.
Maria: Please tell me how much can you trust the figures on the chart? I often see how the price seems to have left the triangle, and then returns back. How can I avoid such false signals?
Evgeny (expert): @Maria, unfortunately, there can be no 100% trust – false breakouts happen from time to time. To reduce the risk, many traders wait for confirmation: for example, for the price to consolidate above the resistance level, or use indicators for filtering. The same volume indicator or RSI can tell you whether the breakout is supported by strength. Experience also helps: over time, you will learn to distinguish really strong movements from market noise.
Irina: Thank you for the explanations on the indicators! I was always curious about what all those lines below the chart mean. It turned out that it was nothing to worry about – I have already tried setting up a couple of indicators in my application. I think I will start with the moving average and RSI, as you advised.
Victor: What indicators would you recommend for those who are just starting out? And is it worth jumping into trading with real money right away after reading such articles?
Admin: @Victor, for a start, it is really better to limit yourself to basic indicators: moving averages (MA) to understand the trend and the same RSI to assess the strength of the movement. This will be enough to take the first steps. As for trading, we recommend that you first practice on a demo account or small amounts. Learn in practice how technical analysis methods work, hone your skills. When you feel confident and get a stable result without major errors, then you can gradually increase the volume of operations. Remember that analysis is a probabilistic thing, so always follow the rules of capital management.
