Technical Analysis for Beginners - Detailed Guide on Technical Analysis

Anisa Batabyal
| 11 January, 2019 | 2 min

People tend to have an inclination towards the idea of the investing in stocks or in any other financial assets but lack the idea of analyzing or basics of technical analysis. Financial markets have its own language which is overwhelming in the beginning but comes easy with practice over time.

It has two major parts: Fundamental Analysis and Technical Analysis

  • Fundamental analysis is about analyzing any assets/companies fundamentals like annual reports, quarterly performance etc given a financial year.
  • Technical analysis is about reading the price charts (graph) of the asset, understanding the masses behavior and psychology etc (the purpose of technical analysis)

Simply put, Fundamental analysis is about knowing "which" company/stocks to enter while Technical analysis is all about knowing "when" to buy/sell the assets.

Now, let's focus on the most common types of technical analysis and parts of which stock charts/graph is crucial. Line and Candlestick charts are the most widely used one, but the other less common types are bar charts and point and figure charts.

Charts of any financial asset are prices (vertical) plotted over Time (horizontal). There are few ways to represent the Price-Time points of the financial asset like:

1) Line charts

2) Candlestick charts

Line charts

It simply represents the price of an asset's price with "line".

If u google "Bitcoin price", the image you will see along with the price, is the line chart of the bitcoin price over time.

The green line shows the price over the period of time(monthly in this case).

The tabs like 1D (daily),1M (Monthly),1Y (Yearly) are time periods.

Candlestick charts

Let's discuss one of the widely used chart patterns which i.e. Candlestick chart pattern.

As the name suggests itself, it's a chart which is formed of candles(bar) like pattern with green and red color mostly.

Green candle (bar) signifies that price of the asset or stock was bullish (price moved up) for that particular time period whereas Red candle (bar) signifies that price of the asset or stock was bearish (price moved down).

In the figure above, one can see red and green candles(bars) over a period of time(year).

First green candle bar represents the price points of the year 2017 and Second red candle bar represents the price points of the year 2018 and the last candle bar is yet to be developed and will be completed at the end of the year 2019.

Overall its a yearly chart of Bitcoin price which means that the price of bitcoin for a particular year can be summed up in a single candle(bar).

How is it done?

Simply by illustrating 4 price points of an asset i.e. Open, High, Low and Close price points over the year say 2017.

  • Open--Price at which coin price traded on 1st January 17.
  • Close--Price at which coin price traded and closed on 31st December 17.
  • Low-Lowest price of the asset for that particular year 2017.
  • High-Highest price of the asset reached for that particular year 2017.

This is just the basics for candlesticks chart pattern and just tip of an iceberg when it comes to technical analysis examples and charts but with given time and experience, one can fairly get an idea about future price movements of any stocks/assets.

Additional information is also required while reading and understanding candlestick charts with technical analysis tools and can be very useful analysis:

Volume:

Volume is simply the amount of financial asset that has been bought and sold over a period of time. If any of the asset’s price moves(up or down) on low volume then it means that only a few traders/investors participated in the movement and the trend formed will not be strong to continue. But if it moves on higher volume, then many traders/investors are involved in the trade and the trend is strong enough to continue.

Support & Resistances:

As one can see in the figure, Resistance and Support levels are simply levels which seem strong enough to break. Think of it to be strong walls which are quite tough to break into. Such a theory is used by traders when it comes to technical analysis for day trading.

Trendline:

An uptrend is price moving in upward direction and Downtrend is price moving in the downward direction.

Trend lines are just a way to understand the strength of the trend(up-trend or downtrend) and think of it as a staircase whose levels, supported from the ground, are tough to break.

Overall, price charts (lines, candlesticks) gives us a visual understanding of price movements over daily, weekly, monthly and yearly periods. Developing an understanding of price charts is a crucial first step for investing in any stocks or financial assets.

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