Technical Analysis Basics
Technical Analysis (TA) is the art of predicting future price movements based on past price movements. It doesn't care what the company does; it only cares how the stock price is moving.
The Core Philosophy
- Price Discounts Everything: All news (good or bad) is already reflected in the price.
- History Repeats Itself: Human psychology (fear and greed) doesn't change, so patterns repeat.
- Prices Move in Trends: Stocks don't move randomly; they follow a direction.
1. Candlestick Charts (The Language of TA)
Forget line charts. Traders use Japanese Candlesticks.
Each candle represents a time period (e.g., 1 Day). It has 4 price points:
- Open: Price at 9:15 AM.
- Close: Price at 3:30 PM.
- High: Highest price of the day.
- Low: Lowest price of the day.
Green Candle (Bullish)
- Close > Open.
- Buyers won the day.
Red Candle (Bearish)
- Close is Lower than Open.
- Sellers won the day.
🕯️ Key Patterns
- Doji: Open = Close. Looks like a cross. Means indecision (War between buyers and sellers).
- Hammer: Small body, long lower wick. Looks like a hammer. Bullish signal (Price fell but buyers pushed it back up).
- Engulfing: A big green candle completely "eats" the previous small red candle. Strong Bullish signal.
2. Support and Resistance (The Floors and Ceilings)
- Support: A price level where a falling stock stops and bounces back up. (Think: Floor).
- Psychology: "This stock is cheap at ₹100. Let's buy!"
- Resistance: A price level where a rising stock stops and falls back down. (Think: Ceiling).
- Psychology: "This stock is expensive at ₹200. Let's sell!"
Breakout: When price breaks the Resistance (Ceiling), it usually shoots up fast. The old Ceiling becomes the new Floor.
3. Trend Lines
- Uptrend: Higher Highs and Higher Lows. (Buy on dips).
- Downtrend: Lower Highs and Lower Lows. (Sell on rise).
- Sideways: Price stuck in a range. (No clear trend).
Rule: "The Trend is your Friend." Never trade against the trend.
4. Indicators (The Helpers)
Indicators are mathematical calculations plotted on the chart.
A. Moving Averages (MA)
Smooths out price data to show the trend.
- 50-Day MA: Short-term trend.
- 200-Day MA: Long-term trend.
- Golden Cross: When 50 MA crosses above 200 MA. (Very Bullish).
- Death Cross: When 50 MA crosses below 200 MA. (Very Bearish).
B. RSI (Relative Strength Index)
Measures the speed of price changes. Range: 0 to 100.
- RSI > 70: Overbought. (Stock might fall).
- RSI below 30: Oversold. (Stock might rise).
C. MACD (Moving Average Convergence Divergence)
Shows momentum.
- MACD Line crosses Signal Line upwards: Buy Signal.
- MACD Line crosses Signal Line downwards: Sell Signal.
Technical Analysis vs Fundamental Analysis
| Feature | Technical Analysis | Fundamental Analysis |
|---|---|---|
| Focus | Price & Volume | Financials & Business |
| Time Horizon | Short Term (Days/Weeks) | Long Term (Years) |
| Data Used | Charts | Balance Sheet, P&L |
| Goal | Trade for Profit | Invest for Wealth |
7-Day Action Plan
Day 1: Open a chart on TradingView or your Broker App. Switch to "Candlestick" view.
Day 2: Identify a Green Candle and a Red Candle. Find the Open, High, Low, Close.
Day 3: Draw a "Support Line" connecting the bottom points of a stock chart.
Day 4: Draw a "Resistance Line" connecting the top points.
Day 5: Add "50 Day Moving Average" indicator. Is the price above or below it?
Day 6: Check RSI. Is it Overbought (>70) or Oversold (below 30)?
Day 7: Identify one pattern (Doji or Hammer) on a daily chart.
Quiz
Test Your Knowledge
Question 1 of 5
1. In a Green Candle, the Close price is:
💡 Final Wisdom: Indicators are like the dashboard of a car. They tell you speed and fuel, but YOU have to drive. Don't blindly follow indicators; look at the road (Price Action).