Technical Analysis - Principles, Types of Charts, Indicators & How to Use

The financial and investing world may seem complicated, especially if you are just starting to trade or invest. However, there is a method which is helpful to beginners in making better decisions: technical analysis. Whether you wish to trade stocks, forex, or cryptocurrencies, technical analysis is a helpful way of seeing what is happening in the financial markets; rather than dealing with complicated financial statements, you will use price charts and technical indicators. In this guide, I will explain precisely how technical analysis works, what its key features are, what tools you will need, and how you can implement technical analysis step by step to increase your odds of success.

What is Technical Analysis?

Technical analysis analyzes historical market data (i.e., mainly price and volume), to forecast future price action. If you've ever looked at a price chart of a stock, you've seen price move up, move down, or go sideways, and that is the basic premise of technical analysis. Differentiated from fundamental analysis, which focuses on a company's profit, earnings, or management, technical analysis proposes that all available information is already incorporated in the price. Technical analysts combine patterns, trends, and signals to determine both when to buy and sell. This market analysis tool can be used by both beginners and professionals when investing in the stock market, foreign exchange market, cryptocurrencies, or even commodity trading.

Core Principles of Technical Analysis

Technical analysis of stock trends is built on three fundamental principles that form the foundation of this analytical approach:

1. Market Discounts Everything

This principle means that the prevailing price for any asset (stocks, currencies, crypto, etc.) takes account of all available information, including news, earnings, interest rates, even the mood of the public, whatever has an influence on that asset. Technical analysts operate under the assumption that all known and unknown influences are weighted in the prevailing market price.

2. Price Moves in Trends

The second core principle of technical analysis suggests that prices move in identifiable trends rather than randomly. These trends can be:

• Uptrends: Series of higher highs and higher lows

• Downtrends: Series of lower highs and lower lows

• Sideways trends: Price moves within a horizontal range

Understanding how to identify and follow trends is crucial for successful stock market technical analysis. Trends persist until clear signals indicate a reversal is occurring.

3. History Repeats Itself

Human psychology in the marketplace habitually replays itself. Patterns you observe on all forms of charts tend to repeat over and over again, and therefore are often useful for forecasting. Technical Analysis is based on the patterns and signals that evolved over decades of price behavior.

How Technical Analysis Is Used

1. Identifying entry and exit points: Decide the best time to buy or sell.
2. Risk management: Use charts and signals to set stop-losses and protect yourself from big losses.
3. Gauging market sentiment: Detect if the market is bullish (optimistic) or bearish (pessimistic).

Step-by-Step Example

Imagine you’re looking at the technical analysis of the financial markets to buy a stock:

1. You check if the price is in an uptrend or downtrend.

2. You look for chart patterns or indicator signals (like RSI or MACD) to confirm if the timing is right.

3. You set a price where you’d sell if things don’t go as planned (stop-loss).

4. You watch for your “take-profit” level based on earlier high points.

Types of Technical Analysis Charts

Understanding different types of charts in technical analysis is essential for effective market analysis. Each chart type provides unique insights into price action:

1. Line Charts

A line chart is the most basic type of price representation. A line chart connects each closing price for the time period it represents with a continuous line. While it's easily read and understood, line charts offer limited information about intraday price action.

Best for:

• New traders learning technical analysis

• Long-term trends

• Reducing market noise

Limitations:

• Do not show the opening, high or low prices

• Are less detailed than other types of charts

2. Bar Charts

Bar charts provide more detailed information than line charts. Each bar represents one time period and shows four key price points:

• Open: The first traded price

• High: The highest traded price

• Low: The lowest traded price

• Close: The last traded price

Bar charts, also referred to as OHLC (Open-High-Low-Close) charts, provide traders with complete information about price action during each period.

Best for:

• Understanding complete price action

• Recognizing price ranges

• Understanding volatility

3. Candlestick Charts

The candlestick chart uses the same information as the bar chart but it appears more visually attractive. Each candlestick has three parts:

• Body: The area between opening and closing prices

• Wicks/Shadows: Lines extending from the body showing high and low prices

• Green/White candles: the closing price is higher than the opening price (bullish) 

• Red/Black candles - the closing price is lower than the opening price (bearish)

Most traders prefer candlestick charts because it is easier to identify patterns and quickly understand the market sentiment.

Best for:

• Pattern recognition

• Understanding market psychology

• Quick visual analysis

Indicators for Technical Analysis

Technical indicators are mathematical calculations based on price, volume, or other market data. Here are the three most important indicators every trader should understand:

1. Moving Averages

Moving averages are among the most widely used tools in technical analysis of stocks. They smooth out price data to help identify trend direction and potential reversal points.

Simple Moving Average (SMA): gives the average price for a specific number of periods. For example, the 20-day SMA will add the 20 days' closing prices and divide by 20.

Exponential Moving Average (EMA): gives more weight to recent prices than older prices. Therefore, the EMA is quicker to respond to current market conditions.

Common periods: 10, 20, 50, 100, and 200 days

Trading signals:

• Price above moving average = Uptrend

• Price below moving average = Downtrend

• Moving average crossovers = Potential trend changes

2. Relative Strength Index (RSI)

The RSI is a momentum oscillator that measures the rate and the size of price changes. It varies from 0 to 100 and can be useful for markets gauging overbought or oversold conditions. 

RSI above 70: Often considered overbought (potential sell signal) 

RSI below 30: Often considered oversold (potential buy signal) 

RSI around 50: Neutral momentum

The RSI is especially helpful in identifying possible reversals and helps confirm the strength of a current trend while doing technical analysis in the stock market.

3. MACD (Moving Average Convergence Divergence)

MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price.

Components:

• MACD Line: Difference between 12-period EMA and 26-period EMA

• Signal Line: 9-period EMA of the MACD line

• Histogram: Difference between MACD line and signal line

Trading signals:

• MACD crossing above signal line = Potential buy signal

• MACD crossing below signal line = Potential sell signal

• Histogram crossing zero = Momentum confirmation

Use of Technical Analysis

Now that you know the tools, here’s how traders apply them in the market:

1. Entry and Exit Points

• Identify your entry points (buy) and exit points (sell) with the use of support & resistance levels, moving averages, or candlestick patterns.

• For example: If price breaks above a long-term resistance, they may “enter” the trade anticipating price will continue to rise.

2. Risk Management

• Many technical analysis tools will also allow you to determine logical stop loss points (like certain trend lines, prior lows, etc).

• While it is important to make profits in your trading, it is just as important to protect your capital.

3. Market Sentiment

• Measuring Market Sentiment with technical tools can help you determine whether most traders are bullish or bearish based on volume analysis or certain technical indicators (like the Advance/Decline Line, Put/Call Ratio, etc.)

• Knowing when to ignore anomalies (and therefore what phase of sentiment the market is in) is valuable knowledge for avoiding trading against the majority.

Time Frames in Technical Analysis

Different time frames serve different purposes in technical analysis:

Short-term (1-minute to 1-hour)

• Used by day traders

• Provides detailed entry/exit signals

• Higher noise level

• Requires constant monitoring

Medium-term (4-hour to daily)

• Most popular among swing traders

• Good balance of detail and reliability

• Suitable for position holding periods of days to weeks

• Filters out much short-term noise

Long-term (weekly to monthly)

• Used by position traders and investors

• Shows major trends clearly

• Less frequent signals

• Best for long-term investment decisions

Tip: Always analyze multiple time frames. Use longer time frames to identify the overall trend, then use shorter time frames for precise entry and exit timing.

Common Mistakes and Best Practices

Even experienced traders make mistakes. Here’s what to watch out for and how to get it right:

Common Mistakes

• Using multiple indicators at once, leading to confusion (analysis paralysis).

• Not considering the underlining trend directions.

• Basing decisions on emotions (fear or greed).

• Overtrading: Placing too many trades based on inaccurate indications

Best Practices

• Use a few indicators, and learn them well.

• Always trade in the direction of the larger trend. 

• Create a trading plan and stick to it. 

• Demo trading before risking real money is very good practice.

• Log all trades in a journal to learn from mistakes.

Technical Analysis in Different Markets

Stock Market Technical Analysis

Technical analysis of the stock market is perhaps the most classical use of technical analysis. Things to consider are:

• Earnings seasons could add volatility 

• Dividend dates could add price movement 

• Sector rotation impacts an individual stocks performance 

• Market cap affects liquidity and volatility details

 

Forex Technical Analysis

The foreign exchange market, or forex, is open 24 hours a day and therefore technical analysis becomes even more valuable:

• Currency pairs expose the relationship between economies

• Central bank policy creates longer-term trends

• Economic data releases can create short-term volatility

• Carry trades have longer-term impacts

Cryptocurrency Technical Analysis

Crypto markets are highly volatile, making technical analysis both challenging and rewarding:

• 24/7 trading means patterns can develop at any time

• High volatility means there are more opportunities but more risk

• News sensitivity causes price to change quickly

• Less regulation causes more extreme price moves

Commodities Technical Analysis

Commodity markets have unique characteristics:

• Seasonal patterns due to harvest cycles and weather

• Supply and demand fundamentals strongly influence prices

• Storage costs affect futures pricing

• Economic cycles impact industrial commodity demand

Understanding Technical Analysis

The key to developing a solid understanding of technical analysis is to understand that it is an art and a science. The science is comprised of the mathematical indicators and objective chart patterns, while the art is in applying those signals to current market conditions.  

Key concepts to master:

1. Support and Resistance: The price level where buying or selling pressure tends to surface 

2. Trend Analysis: Direction and strength of price movement 

3. Pattern Recognition: Repetitive formations that suggest future price direction 

4. Volume Analysis: The relationship between trading volume and price movement 

5. Risk Management: Protecting your capital through proper position size and stop-losses

How Can I Learn Technical Analysis?

Getting started isn't as hard as you think! Here is a simple step-by-step plan:

1. Read beginner-friendly books or articles like this one, visit educational finance websites, and whatever else you can find with information about trading.

2. Watch online tutorials on YouTube about things like basic chart readings, RSI, MACD, etc.

3. Practice using the demo platforms first (they use virtual money so don't risk anything).

4. Experiment with charting tools - There are plenty of free apps and websites that can allow you to draw trendlines and use indicators on charts.

5. Participate in free webinars or discussion forums where you can ask questions and get up-to-date tips.

6. Take certified online trading courses if you want to take it seriously or if you want to make a career out of trading/investing.

And the most important part? Take your time, start with small amounts, and practice as much as possible!

If you don’t want to learn it yourself, use the Dhanarthi platform to get an instant technical analysis report in seconds.

Step-by-Step Guide: Analyzing Any Stock in Seconds

Step 1: Sign Up or Log In

• Go to the Dhanarthi website.

• If you're new, create a free account by entering your name, email, and password or just sign up with Google.

• Already have an account? Simply log in.

Step 2: Search for a Stock

• After logging in, go to the "Stocks" tab on the top menu.

• Now type the name of the company or stock symbol you want to analyze in the search box (e.g., Reliance, Infosys, etc.)

Step 3: View Instant Technical Analysis Report

Once you select a stock, you’ll see a complete technical analysis dashboard showing:

• Overall Score – Stock’s overall technical outlook (Bullish / Bearish / Neutral)

• Trend Score – Strength and direction of the price trend

• Momentum Score – Price momentum based on key indicators like RSI, CCI, ROC

• Volatility Score – How much the price is fluctuating (using Bollinger Bands, ATR)

• Volume Score – Trading activity strength (e.g., MFI)

• Trend Indicators – SMA, EMA values with buy/sell signals

• Momentum Indicators – RSI, CCI, ROC readings with status

• Volatility Indicators – Bollinger Band levels, ATR value

• Volume Indicators – Money Flow Index with trend bias

• Color-Coded Signals – Green = Strong, Yellow = Neutral, Red = Weak for quick reading

👉 Note: Each ratio is color-coded (Green = Strong, Red = Weak), helping you instantly assess where the company performs well and where it needs improvement.

Identifying Trends and Reversals in the Market

Spotting whether prices are moving in a trend or about to reverse saves both beginners and professionals from bad trades. Here’s how:

1. Trends

• Uptrend: Higher highs and higher lows on consecutive days/weeks.

• Downtrend: Lower lows and lower highs.

Draw trendlines connecting lows (uptrend) or highs (downtrend) to highlight the direction.

2. Reversals

• Reversal Patterns: Classic shapes like “head and shoulders” or “double tops/bottoms” signal a big change in direction.

Volume spikes can confirm that a reversal is stronger or more likely to last.

Example:

If the price of a stock is making new highs, but the RSI starts falling (called bearish divergence), it could warn you of a possible reversal.

Learning how to do technical analysis of stocks often starts with visual identification of trends and reversals on different chart types.

Advantages and Limitations of Technical Analysis

Advantages

• Market Timing: The beauty of technical analysis is how it is great for timing entry and exit points, which can help you to generate the most profit and to minimize losses. 

• Universal Applicability: The same principles can be applied to any market and time frame, making it a universal tool for analysis. 

• Ease of Visualization: Charts allow you to use a very easy intuitive way to see your position when making trades, which can lead to faster actions. 

• Risk Management: Technical analysis gives clear levels for setting stops and risk-reward. 

• Psychological Assessment: Charts have the ability to show the collective psychological state of a market participant which can show fear, greed, and other emotions too.

 

Speed: Technical analysis will allow you to assess the market quickly and make decisions once you get accustomed to it. 

Limitations

• No Fundamental Context: Technical analysis ignores company fundamentals (how the business is doing), economic conditions, or news events that could impact prices.

• False Signals: Not every technical signal yields the expected price shift, which can result in some trades becoming loss-making.

• Subjective Interpretation: Different analysts may interpret the same technical chart differently, which provides conflicting signals.

• Past Performance: Technical analysis is based on historical data and therefore provides no promise of future performance.

• Market Manipulation: In small markets, large market participants can manipulate prices designed to trigger technical signals.

• Lagging Navigator: Most technical indicators are based on historical prices and are therefore lagging indicators that will not represent any actual turning point in the market.

Balancing Strengths and Weaknesses

The most successful traders and investors often combine technical analysis with other forms of analysis:

• Use fundamental analysis to identify what to trade

• Use technical analysis to determine when to trade

• Combine multiple time frames for a better perspective

• Consider market context and major news events

• Practice proper risk management regardless of the analysis method

Difference Between Technical Analysis & Fundamental Analysis

The following is the key comparison table between technical analysis and fundamental analysis:

Conclusion

Technical analysis is one of the most powerful ways to comprehend stock market behaviour, find trade opportunities and make decisions. The underlying principles are the same - knowing how to read charts, spotting trends and selecting the right indicators. With regular practice and the right tools, anyone can sharpen their skills and improve their confidence when interacting with the markets.

If you want to skip the steep learning curve, the Dhanarthi platform gives you instant, AI-powered technical analysis reports so you can make decisions in seconds without mastering every chart pattern. And if you’re looking to grow from a beginner to a pro, check out our in-depth guide here: Beginner to Pro – Ratio, Financial & Technical Analysis. It’s the perfect next step to boost your knowledge and get the most out of Dhanarthi’s features.

Disclaimer: This analysis is for educational purposes and not financial advice. Please consult a financial advisor before making investment decisions.

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