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 What is a Technical Chart?

A Technical Chart is a image or a tool showing you the trend of a particular stock, Technical

charts are build using the all or one of the 4 parameters for a particular stock, these

 parameters mainly include the open, high, low and close of a particular stock for a particular 

time period (say a minute of a day or a week).

 Below is a example of a Technical Chart  

Technical Charting has become increasingly popular over the past several years, as more 

and more people believe that the historical performance of a stock is a strong indication of 

fu ture performance.

The use of past performance should come as no surprise. People using fundamental analysis

have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical

analyst’s belief that securities move according to very predictable trends and patterns. These

trends continue until something happens to change the trend, and until this change occurs,

 price levels are predictable.

What is Technical Analysis?

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Technical Analysis can be defied as the study of market activities and action, mainly using

charts for the purpose of forecasting or predicating the future price trends. Here “market 

activities” refer to the changes in the price and volume of stock.  

Technical analysis is mainly used by Trades (i.e people of often buy and sell stocks for 

Intraday or Swing basis) and not for Investors(i.e people how invest in a company for 3-5years) to identify what is the next trend that the stock is going to make. It can be tough of a

torch that guides a Trader to make profits in dark.

Over the time there have been many types of Technical charts have been developed, the main

contributors to Technical analysis have been the Japanese , their major invention was the

Candlestick Charts that are mostly used now-days by almost all Traders and Technical

Analyst.

Technical Analysis supposes markets have memory. If so, past prices, or the current price

momentum, can give an idea of the future price evolution. Technical Analysis is a tool to

detect if a trend (and thus the investor’s behavior) will persist or break. It gives some results but can be deceptive as it relies mostly on graphic signals that are often intertwined, unclear 

or belated. It might become a source of representativeness heuristic (spotting patterns where

there are none)

Chart formations tell stories which only technical analysts could read. Examples are double

top formations which signal a potential decline in the price of the particular stock. Double

 bottom is the opposite signal illustrating a stock ready to advance in price. Technical analysts

use such chart formations to enter or exit their positions.

Technical analysis is a form of analysis whi ch seeks to make judgments about the 

performance of a share based solely on i ts historic and current pr ice behavior and without 

reference to the underlying business, the sector the company’s in, or the economy as a 

whole. 

There are many instances of investors successfully trading a security using only their 

knowledge of the security’s chart, without even understanding what the company does.

However, although technical analysis is a terrific tool, most agree it is much more effective

when used in combination with fundamental analysis.

After the end of this Pathshala you shall be familiar with all the techniques used by various

Technical experts to understand charts.

Why Technical Charts?

Yes, this is most common question a normal trader would ask, i.e why there is actually a

need to use Technical Charts? 

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In-fact, I too had the same question in mind when I started just started to trade. Well,

Technical charts are very useful to any trader who seeks to understand how a stock reacts to

 previous trends and well as helps him to foresee future events for a stock.

Imagine, if you wanted to look at the price of a script say 4-5 months ago, yes, you could get

the data in a tabular form, but it would be very confusing, as searching for a particular datewould be very difficult, on the other had, consider a CandleStick Technical chart, using a

chart you could easily browse the stock open, high, low & close rates for a rage of dates. This

would also help you know the trend of a particular stock.

Moreover, Technical charts with various Indicators such as RSI, Ichimoku clould and DMA’s

can help you predict where a stock is likely to go in the next couple of days and even weeks .

Technical charts are also used to predict the entry and exit levels of a asset.

Technicians say that a market’s price reflects all relevant information, so their analysis looks

more at “internals” than at “externals” such as news events. Price action also tends to

repeat itself because investors collectively tend toward patterned behavior – hencetechnicians’ focus on identifiable trends and conditions. 

Technical analysis is frequently contrasted with fundamental analysis, the study of 

economic factors that influence prices in financial markets. Technical analysis holds that

 prices already reflect all such influences before investors are aware of them, hence the studyof price action alone. Some traders use technical or fundamental analysis exclusively, while

others use both types to make trading decisions.

Users of technical analysis are most often called technicians or market technicians. Some

 prefer the term technical market analyst or simply market analyst. An older term, chartist, is

sometimes used, but as the discipline has expanded and modernized the use of the term

chartist has become rare.

Types of Charts OHLC - Open High Low Close charts plot the high and low of the price movement vertically

and the open and close horizontally. Used to graph range and outliers.

Candlestick chart - Similar to OHLC, but open and close are filled. Often Black or Red

candles represent a close lower than the open. While White, Green or Blue candles represent

a close higher than the open.

 Line chart - Connects each closing interval together on a line

Over the past several decades Technical Analysis with quality charts, have proven and given

traders more returns on their Investment.

What are CandleStick Charts?

CandleStick charts is a style of bar-char used to indicated the price movements of a securityover a period of fixed time.

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It is a combination of a line-chart and a bar-chart, in that each bar represents the range of 

 price movement over a given time interval. It is most often used in technical analysis of 

equity and currency price patterns. They appear superficially similar to error bars, but are

unrelated.

History of CandleStick Charts Candlestick charts are said to have been developed in the 18th century by legendary Japanese

rice trader Homma Munehisa. The charts gave Homma and others an overview of open, high,

low, and close market prices over a certain period. This style of charting is very popular due

to the level of ease in reading and understanding the graphs. Since the 17th century, there has

 been a lot of effort to relate chart patterns to the ldata points instead of one. The Japanese rice

traders also found that the resulting charts would provide a fairly reliable tool to predict

future demand.

It was during mid 1700’s CandleStick trading became more refined. Candlestick analysis had

 been developed over the years simply due to the tracking of rice price movements. However,

in the mid 1700’s they were really fully utilized. “The god of the markets” Homna came intothe picture. Munehisa Homna, the youngest son of the Homna family, inherited the family’s

 business due to his extraordinary trading savvy. This at a time when the Japanese culture, as

well as many other cultures, thought it common that the eldest son should inherit the family

 business. The trading firm was moved from their city, Sakata, to Edo (Tokyo). Homna’s

research into historic price moves and weather conditions established more concrete

interpretations into what became known as Candlesticks. His research and findings, known as

“Sakata Rules” became the framework for Japanese investment philosophy.

The method was picked up by Charles Dow around 1900 and remains in common use by

today’s traders of financial instruments. 

Build of a CandleStick Chart 

A CandleStick charts are made of a block of rectangle known as the body that is either black 

or white, and an upper and a lower shadow. The upper and lower Shadows are nothing but

the line’s that represent the high and low of a candle (these lines are commonly know as

wicks). The body illustrates the opening and closing trades. If the security closed higher than

it opened, the body is white or unfilled, with the opening price at the bottom of the body and

the closing price at the top. If the security closed lower than it opened, the body is red (filled),

with the opening price at the top and the closing price at the bottom. A candlestick need not

have either a body or a wick.

Candlestick patterns 

There are multiple forms of candlestick chart patterns, with the simplest depicted at right.Here is a quick overview of their names:

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 1. White candlestick - signals uptrend movement (those occur in different lengths; the longer 

the body, the more significant the price increase)

2. Black candlestick - signals downtrend movement (those occur in different lengths; the

longer the body, the more significant the price decrease)

3. Long lower shadow - bullish signal (the lower wick must be at least the body’s size; the

longer the lower wick, the more reliable the signal)

4. Long upper shadow - bearish signal (the upper wick must be at least the body’s size; the

longer the upper wick, the more reliable the signal)

5. Hammer - a bullish pattern during a downtrend (long lower wick and small or no body);

Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no

upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.

6. Inverted hammer - signals bottom reversal, however confirmation must be obtained from

next trade (may be either a white or black body); Shaven bottom - signaling bottom reversal,

however confirmation must be obtained from next trade (no lower wick); Shooting star - a

 bearish pattern during an uptrend (small body, long upper wick, small or no lower wick)

7. Spinning top white - neutral pattern, meaningful in combination with other candlestick 

 patterns

8. Spinning top black - neutral pattern, meaningful in combination with other candlestick 

 patterns

9. Doji - neutral pattern, meaningful in combination with other candlestick patterns

10. Long legged doji - signals a top reversal11. Dragonfly doji - signals trend reversal (no upper wick, long lower wick)

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12. Gravestone doji - signals trend reversal (no lower wick, long upper wick)

13. Marubozu white - dominant bullish trades, continued bullish trend (no upper, no lower 

wick)

14. Marubozu black - dominant bearish trades, continued bearish trend (no upper, no lower 

with no lower wick)

What is Support?

Support can be defined as a level from which a stock tends to bounce back. Its a level which

indicates that the stock is likely to witness some fresh buying, and some upside is possible in

the next coming days. Its is an awareness of patterns associated with support zones (areas

usually associated with previous trading ranges, in which prices find support against further decline) enables investors to more accurately define the direction of significant market trends.

Such patterns also suggest areas in which price reversals are likely to take place.

Stock never advance in a straight line, they tend to go up in a series of advance’s, flat or 

retracement period, further advance, another flat or retracement period, and so forth.

Identifying the support level of stock is merely done by looking at the last 3-4 low’s of the

stock from which it bounced back, but it takes some practice and is somewhat subjective

 because there are points that can be considered weak support or resistance and strong support

or resistance. Supports are areas where prices tend to consolidate and reverse. Support

 provides support to prices that are declining.

Determining the strength of the Support levels also plays an important, this is done by

counting how many times did the stock price hold prices from dipping further, in other words

counting the number of times the stock bounced back from its support levels, The more times

it appreciated, the stronger and more significant the support point.

As seen in the left hand side chart, it

shows the support level of Idea, it faced strong support around 48 levels, it manged to touch

that level nearly 4-5 times, in a series.

Once it made a close above 49-50, it made a high of 62, this indicates the importance of asupport levels, but if the stock would have gone below is support level of 48, it could easily

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see 35 levels. A trader should only make a buy decision once he witnesses some buying

interest in the stock.

What is Resistance?

Resistance can be defined as a level from which a stock tends to go down. Its a level which

indicates that the stock is likely to witness some profit booking, and some downside is

 possible in the next coming days.

Its is an awareness of patterns associated with resistance zones (areas usually associated with

 previous trading ranges, in which prices find resistance against further upside) enables

investors to more accurately define the direction of significant market trends. S

Identifying the Resistance level of stock is merely done by looking at the last 3-4 high’s of 

the stock from which it declined, but it takes some practice and is somewhat subjective

 because there are points that can be considered weak support or resistance and strong support

or resistance. Resistance are areas where prices tend to consolidate and reverse. Resistance

 provides resistance to prices that are shooting pu.

Determining the strength of the Resistance levels also plays an important role, this is done by

counting how many times did the stock price declined prices from shooting up further, in

other words counting the number of times the stock declined from its support levels, The

more times it declined, the stronger and more significant the Resistance point.

As seen in the left hand side chart, it

shows the resistance level of Idea, it faces strong resistance around 62 levels, it manged to

touch that level nearly 2-3 times, in a series.

But, once a stock successfully crosses its resistance, some more upside can be seen in the

stock.

What is a breakout level?

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We have always noticed stocks moving in a trading range for long. This at times does get

frustrating. Upside limit of this range is always a strong resistance level for the stock. This is

where a stock witnesses heavy selling pressure/profit booking and finds it difficult to move

above a certain level.

On the downside or the lower trading range of the stock is where selling pressure eases and

stock starts to see buying start to come in. To explain this further, below is an example.

Lets take the chart of Shoppers stop. Chart shown below is from September 2009 through

September 2010. As we can see since November 2009 till May 2010, almost for 7 months,

stock was moving in a range of 320 to 400. It continued to see selling pressure as it neared

410 levels and buying interest resumed as it neared 320-330 levels.

Finally on May 28th 2010, it gave a closing above 410 levels closing 6% higher or at 424 that

day. Stock witnessed huge volumes, which indicated that fresh money was entering the stock.Stock went into a consolidation mode after this breakout. Stocks consolidating after a

 breakout is very important for the future movement of a stock. This indicates, that yes, after a

 breakout, stock is not witnessing much of selling pressure or profit booking and is managing

to trade above its resistance level of 410. On 1st of june Nifty corrected by 110 points, but

Shoppers stop managed to hold onto its support levels and closed 4rs lower at 424.

Shoppers stop

This was a strong indication of a breakout. Stock was not witnessing selling pressure and was

 poised for an up-move in coming days.

We usually notice that stocks give a breakout by moving 8-10% on a particular day, but the

next day or in coming days, they correct and revert back to the previous levels. To avoid

entering such stocks and booking losses, one needs to wait for some consolidation in a stock 

after a breakout and then enter it. Shoppers stop had a fabulous rally after this breakout from

420 it rallied and made a high of 711. A return of 73% in 2 months.

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 Triple Top offers one of the bets methods to have a look at the major resistance level for a

stock. The formation shows the 3 major high's of the stock over a period, from where it

 previously saw selling pressure. These levels act as a resistance level. Failure to again cross

them (for the 4rd time), could result in some downside. It is often used by trades for mid/longterm trades

Sr.  Stock name  Close  Change  CandleStick   PnF 

1 Whirlpool of India Ltd   280.30 3.20 %  link   link  

2 The Byke Hospitality 

190.15 3.91 %  link   link  

3 Pantaloon Retail (India) Ltd   241.05 2.82 %  link   link  

4 Redington India Ltd   89.20 0.45 %  link   link  

5  Nandan Exim  29.90 9.72 %  link   link  

6 Hindustan Zinc Ltd   142.70 4.47 %  link   link  

7 ICICI Bank Ltd   1136.05 1.32 %  link   link  

8 Gayatri Projects   125.65 0.60 %  link   link