Technical Analysis Basics: Reading Charts Like a Pro
Learn the essential concepts of technical analysis, chart patterns, and indicators to make informed trading decisions in any market.
What is Technical Analysis?
Technical analysis is the study of price movements and trading volume to predict future market behavior. Unlike fundamental analysis, which focuses on company financials, technical analysis relies purely on chart patterns and mathematical indicators.
“The market discounts everything” - This core principle means that all available information is already reflected in the price.
Price Action
The movement of price over time forms patterns that can indicate future direction.
Volume Analysis
Trading volume confirms price movements and indicates market strength.
Market Psychology
Charts reflect the collective emotions of fear and greed in the market.
Essential Chart Types
1. Candlestick Charts
The most popular chart type, showing open, high, low, and close prices for each time period.
Bullish Candle
- • Close price above open price
- • Usually colored green or white
- • Indicates buying pressure
Bearish Candle
- • Close price below open price
- • Usually colored red or black
- • Indicates selling pressure
2. Line Charts
Simple charts connecting closing prices, useful for identifying long-term trends.
3. Bar Charts
Vertical lines showing high-low range with horizontal marks for open and close prices.
Support and Resistance Levels
Support and resistance are fundamental concepts in market analysis that help identify key price levels.
Support Levels
- • Price level where buying interest emerges
- • Acts as a “floor” for the price
- • Multiple touches strengthen the level
- • Break below often signals further decline
Resistance Levels
- • Price level where selling pressure appears
- • Acts as a “ceiling” for the price
- • Multiple rejections strengthen the level
- • Break above often signals further rise
Popular Technical Indicators
Moving Averages
Smooth out price data to identify trend direction and potential reversal points.
Simple MA (SMA)
Average of closing prices over specified period
Exponential MA (EMA)
Gives more weight to recent prices
Common Periods
20, 50, 100, 200 periods
RSI (Relative Strength Index)
Momentum oscillator measuring speed and change of price movements (0-100 scale).
MACD (Moving Average Convergence Divergence)
Trend-following momentum indicator showing relationship between two moving averages.
- • MACD Line: 12-period EMA minus 26-period EMA
- • Signal Line: 9-period EMA of MACD line
- • Histogram: Difference between MACD and signal line
- • Crossovers: Generate buy/sell signals
Common Chart Patterns
Bullish Patterns
Double Bottom
Two lows at similar levels, indicates reversal
Ascending Triangle
Higher lows with horizontal resistance
Cup and Handle
U-shaped pattern with small consolidation
Bearish Patterns
Double Top
Two peaks at similar levels, indicates reversal
Descending Triangle
Lower highs with horizontal support
Head and Shoulders
Three peaks with middle one highest
Putting It All Together
Successful technical analysis combines multiple indicators and patterns for confirmation.
Analysis Checklist
- ✓ Identify overall trend direction
- ✓ Mark key support/resistance levels
- ✓ Look for chart patterns
- ✓ Check multiple timeframes
- ✓ Confirm with volume analysis
- ✓ Use 2-3 complementary indicators
- ✓ Consider market context
- ✓ Plan entry and exit points
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