Complete Technical Analysis Guide

Bearish reversal pattern with three peaks - a higher peak (head) between two lower peaks (shoulders). Break below the neckline confirms the pattern with a measured move equal to the height of the head.

Bullish reversal pattern - mirror image of head and shoulders. Three troughs with middle trough (head) lower than shoulders. Break above neckline signals bullish reversal.

Bearish reversal pattern forming two peaks at approximately the same level. Break below support between the peaks confirms the pattern. Common after extended uptrends.

Bullish reversal pattern with two troughs at similar levels. Break above resistance between troughs confirms pattern. Often signals end of downtrend.

Bullish pattern with flat top resistance and rising support. Buyers increasingly aggressive, eventually break through resistance. Higher volume on breakout confirms.

Bearish pattern with flat bottom support and descending resistance. Sellers increasingly aggressive. Break below support on high volume confirms bearish continuation.

Consolidation pattern with converging trendlines. Typically continues prior trend. Direction of breakout (up or down) determines trade direction. Wait for breakout confirmation.

Bullish continuation pattern. "Cup" is rounded bottom, "handle" is small consolidation. Break above handle resistance signals continuation of uptrend.

Short-term consolidation (flag/pennant) after strong move up (pole). Typically breaks higher, continuing the uptrend. High-probability pattern in strong trends.

Brief consolidation after sharp decline. Pattern slopes against downtrend before breaking lower. Reliable in strong downtrends with high volume.

Open and close nearly equal. Long wicks show indecision. At tops = potential reversal down, at bottoms = potential reversal up. Requires confirmation.

Small body, long lower wick (hammer) or upper wick (inverted). Found at bottoms. Shows rejection of lower prices and potential reversal higher.

Small body, long upper wick (shooting star) or lower wick (hanging man) at tops. Shows rejection of higher prices and potential reversal lower.

Small red candle followed by large green candle that "engulfs" prior candle. Shows strong buying pressure overwhelming sellers. High-probability reversal.

Small green candle followed by large red candle engulfing it. Strong selling overwhelms buyers. Reliable reversal pattern at tops.

Three-candle pattern. Morning star (bullish): down candle, small-body indecision, strong up candle. Evening star (bearish): reverse. Very reliable.

What is technical analysis and how does it work?

Technical analysis is the study of historical price and volume data to forecast future price movements. It's based on the idea that price reflects all available information and that history tends to repeat as market psychology remains consistent. Technical analysts use charts, patterns, and indicators to identify trends, support/resistance levels, and trading opportunities. Unlike fundamental analysis (which values companies), technical analysis focuses purely on price action.

How do you read stock charts?

Start by identifying the trend (uptrend, downtrend, or range). Look at timeframes from daily to weekly to monthly for context. Identify support (where price bounces) and resistance (where price stalls). Recognize chart patterns like triangles, head and shoulders, or flags. Apply indicators like RSI or MACD for confirmation. Analyze volume to confirm price moves. Candlestick patterns provide additional insights on short-term sentiment.

What is the RSI indicator and how do you use it?

RSI (Relative Strength Index) measures momentum on a 0-100 scale. Above 70 indicates overbought conditions (potential to reverse down), below 30 indicates oversold (potential to reverse up). However, in strong trends, RSI can stay overbought/oversold for extended periods. The best signals come from divergence: if price makes a new high but RSI doesn't, momentum is weakening and a reversal may be coming. Use RSI in conjunction with other indicators for confirmation.

What is MACD and how does it work?

MACD (Moving Average Convergence Divergence) shows the relationship between two moving averages. It consists of the MACD line (12-day EMA minus 26-day EMA), signal line (9-day EMA of MACD), and histogram (distance between MACD and signal). When MACD crosses above the signal line, it generates a bullish signal. Below = bearish. The histogram shows momentum strength. MACD works best in trending markets and can lag in choppy conditions.

What are support and resistance levels?

Support is a price level where buying pressure exceeds selling pressure, creating a "floor" where price bounces. Resistance is where selling exceeds buying, creating a "ceiling" where price stalls. These levels form at previous highs/lows, moving averages, round numbers, or psychological levels. When price breaks through resistance, it often becomes new support (and vice versa). Stronger levels have multiple touches, high volume, and psychological significance.

What are the most reliable chart patterns?

Head and shoulders (reversal) and cup and handle (continuation) are among the most reliable, especially with volume confirmation. Bull/bear flags in strong trends have high success rates. Double tops/bottoms are reliable at extremes. Triangles can be effective but need breakout confirmation. Pattern reliability improves with: (1) longer timeframes (daily+ better than intraday), (2) volume confirmation on breakout, (3) multiple timeframe alignment, (4) clean, well-formed patterns. No pattern is 100% reliable - always use stop losses.

How do moving averages work?

Moving averages smooth price data to identify trends. Simple Moving Average (SMA) is the average price over X periods. Exponential Moving Average (EMA) gives more weight to recent prices. Common periods: 20-day (short-term), 50-day (medium-term), 200-day (long-term). Price above MA = uptrend, below = downtrend. MAs act as dynamic support/resistance. Golden cross (50-day crosses above 200-day) is bullish, death cross (below) is bearish. Use multiple MAs to confirm trend strength.

What is the difference between technical and fundamental analysis?

Fundamental analysis values companies based on financial statements, earnings, cash flows, and economic factors to determine intrinsic value. Technical analysis studies price charts and patterns to predict future movements regardless of underlying value. Fundamentals answer "what to buy," technicals answer "when to buy/sell." Long-term investors often prefer fundamentals, traders prefer technicals. The best approach combines both: use fundamentals to find quality companies, technicals to time entry/exit.

What are Bollinger Bands and how are they used?

Bollinger Bands consist of a middle band (20-day SMA) and upper/lower bands (2 standard deviations from middle). They measure volatility and potential overbought/oversold conditions. When bands narrow (squeeze), volatility is low and a big move is coming. When price touches upper band, it may be overbought; lower band = oversold. However, in strong trends, price can "walk the band." Use with RSI or other indicators for confirmation. Bollinger Band bounces work best in range-bound markets.

How important is volume in technical analysis?

Volume is critical for confirmation. Price moves on high volume are more reliable than low volume. Key principles: (1) Volume should increase in direction of trend (up-volume in uptrends), (2) Breakouts need volume spikes to be valid, (3) Volume precedes price - accumulation (high volume at lows) or distribution (high volume at highs) signals future moves, (4) Decreasing volume in trend = weakening momentum. Always analyze volume alongside price action.

What are candlestick patterns?

Candlestick patterns show price action within a specific period. Each candle displays open, high, low, close. The body (open to close) and wicks (high/low) reveal sentiment. Key patterns: Doji (indecision), hammer (bullish reversal), shooting star (bearish reversal), engulfing patterns (strong reversals), morning/evening star (major reversals). Candlesticks work best on daily+ timeframes and need confirmation from next candle or volume. They provide early signals of sentiment shifts.

Can technical analysis predict stock prices?

Technical analysis doesn't predict exact prices but estimates probability and direction. It identifies high-probability setups based on historical patterns and market psychology. Success depends on proper risk management, confirmation from multiple indicators, and accepting that no setup is 100% reliable. Professional traders use technical analysis for entries/exits while managing risk with stop losses. It works best combined with fundamental analysis and proper position sizing. Expect 50-60% win rate with proper risk/reward ratios.

What timeframe should I use for technical analysis?

Timeframe depends on your trading style: Day traders use 1-5 minute charts, swing traders use hourly to daily, investors use daily to weekly. Always analyze multiple timeframes - use higher timeframe (weekly/monthly) for overall trend, intermediate (daily) for entry timing, and lower (hourly) for precise entry. Longer timeframes are more reliable and have less noise. Start with daily charts until you master the basics. Signals that align across multiple timeframes have higher probability of success.