The Basics of Technical Charts

basic lesson on tecnical charts

A. WHAT IS TECHNICAL ANALYSIS?

Technical analysis involves plotting the price of a stock, tick by tick, on a chart along with its volumes.

The X axis reflects the time, the Y Axis the price, and the volumes are displayed in a separate section. Check this image out to figure out the elements:

basics of technical charts

Now, Technical Analysis studies the changes of price and volumes over time.

Mathematicians, stock researchers, academics have created many formulas that extrapolate these elements and provide buying or selling signals.

You may have heard about Moving Averages, Relative Strength Index, Bollinger Bands, etc. – these are the names of different formulas.

Each formula works on all or some elements (price, high, low, change over previous price, volumes, number of periods, etc.) to provide   buying or selling signals.

In one sense technical analysis is the study of human behavior in response to fear or greed.

B. What Are Technical Indicators and Do These Work?

Technical analysis attempts to forecast the price movement by applying a formula to the price, volume and time.

This formula is referred to as a technical indicators. As stated above, there are many technical indicators available for free.

No technical indicator is perfect and every indicator does signal a false positive every now and then.

Therefore, it is best to work with a set of 3-4 indicators. If majority of these suggest a buy or a sell, only then you should act.

C. What Should I Study Before Technical Analysis?

It really helps to learn how to interpret OI Data.

D. When Does Technical Analysis FAIL?

It fails in the following cases

Illiquid Stocks

When it is applied to cash stocks. Remember that Technical Analysis works only with extremely liquid stocks that feature in the FNO section because such stocks can be quickly traded without much drama being enacted in the price.

Cash stocks can be easily manipulated and should not be analyzed on the charts.

If you are using charts to study cash stocks, you are playing with fire.

News-Based Events

When unexpected or unpredictable news hits a liquid stock, Technical Analysis does not work. You have seen many examples of liquid stocks such as Fortis, PC Jewellers, JP Associates, Rcom playing out in the recent past.

When good or bad news hits, the stock either gaps up or gaps down and all you can do is watch from the sidelines.

Emotions and Impulse

When you get all emotional and impulsive and act immediately without getting the trading signal confirmed by more than 2-3 indicators.

E. The Time Period On a Chart

You know from the explanation above that the time period is plotted on the X Axis.
Chartists typically analyze the time period per their trading style.
Intra day traders analyze charts based on time periods between 3- and 15-minutes, BTST traders use 30-minute and 1-hour periods, swing traders use 1 Hour or 1 Day chart periods while medium term investors/traders opt for 1 Week or 1 Month charts, though the 1 Month charts are rarely used.
It is essential for you to understand this time period because your forecast based on technical indicators is valid only for a certain period.

F. Minimum Time Period To Be Analyzed on Charts

For 1 Month Chart Periods – Analyze 3+ Years (Long term investors)
For 1 Week Chart Periods – Analyze 1.5 to 2 Years (Medium term traders/investors)
For 1 Day Chart Periods – Analyze 1 Year (Short-medium term traders)
For 3-4 Hour Chart Periods – Analyze 3-4 Months (Short term traders)
For 1 Hour Chart Periods – Analyze 1-1.5 Months (Swing traders)
Intra Day analyze lesser time periods.
But know that you must analyze the longer periods to understand the larger trend. For example, a 15-minute chart can be bearish, but a 1-Day chart can be bullish, and therefore if you know that the overall trend is bullish, you would quickly get out of a short that you may have taken based on a 15-minute chart.

G. Validity Of A Technical Analysis Forecast

You can assume that your reading should hold good for the next 8-12 time periods.
So, if you have entered into a trade based on an analysis of a 15-minute chart, you should book your profits or losses within 2-3 hours – the earlier the better.
This assumption holds true for all chart periods except when you are analyzing Open Interest and Options Data. Action hits the FNO markets first and then spills over to the cash market. Therefore, if you are acting on FNO data and technicals, know that price action may take 2-3 days to spill over from the FNO to the cash market.

H. Types of Charts

types of charts

Beginners should focus on 3 basic types of charts and lot bother about others. They can study the other chart formations after developing proficiency in TA.

LINE CHARTS: The closing price per time period is plotted on the chart.

OHLC (Open-High-Low-Close) CHARTS:

OPEN HIGH LOW CLOSE CHART PATTERN

Open-High-Low-Close (OHLC)  OR BAR charts show the open, high, low and close prices. The image above will help you understand what these imply.

CANDLE CHARTS:

These are easier to understand than the OHLC charts and it is highly recommended that you work with Candles as you begin your TA journey.

How to interpret green or white candlesticks

how to interpret candlesticks

I. Volumes

The volumes are plotted below the X-Axis (Time) and this is an important indicator.

For example, a Rs 10 rise in the stock with very low volumes need not imply anything (and vice versa).

However, a Rs 3 rise in the stock price accompanied by heavy volumes can suggest bullishness (and vice versa).

Therefore, it always makes sense to correlate volumes with price.

This post will help you understand how charts are constructed. The next suggested reading should be how to figure out support and resistance levels.

After that, you must understand how candlesticks are formed, and this will simplify your analysis.

Sometimes, understanding candle formations can help you understand the trend. You also must read this article.

You also should read on how to be 100% sure of a chart signal.

All the information above will help any beginner understand the basic construct of charts and know what time periods to apply.

Once you are done here, you should start understanding technical indicators and learn how to apply these in real life. I keep explaining each indicator on my blog, and you can always keep coming back for more.

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sunil.tinani

14 Comments

  4. Please send the same article about technical analysis to my email ID. It was really helpful bcoz I am a bigginer

    Reply

  5. Cash stocks can be easily manipulated and should not be analyzed on the charts.
    sir, I didn’t get the above lines. how do I analyze cash stocks if not by charts?
    the article was a good read.
    thanks

    Reply

  7. Excellent article. Keep it up. Can u please elaborate on this “This assumption holds true for all chart periods except when you are analyzing Open Interest and Options Data. Action hits the FNO markets first and then spills over to the cash market. Therefore, if you are acting on FNO data and technicals, know that price action may take 2-3 days to spill over from the FNO to the cash market.”

    Would be grateful

    Reply

  10. Dear Sir, ThanQ so much for this Basic Course, Sir do you manage PMS or provide F&O account management service? Kindly let me know if you do so sir

    Reply

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