Technical analysis classroom: Understanding chart patterns, trend lines

Chandan Taparia

Chandan TapariaMotilal Oswal Securities

Technical Analysis is an art to identify trend changes at an early stage and to maintain a trading or an investment position until the weight of the evidence indicate that the trend has reversed.

Technical analysis is an analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Technicians mainly use charts, Trend, Trend Lines and Price Patterns to come at the decision to buy, sell or hold on any assets mostly which are traded on financial market, where price moves up or down by the forces of demand and supply.

Chart

Chart is a tool in the hand of technical analyst which helps then to read the data setup. Technical Analysis is an Art as well Science as requires to follow some concepts while also requires to understand behaviour over the time.
A chart is simply a graphical representation of a series of prices over a set time frame.

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Technical analysis is done by plotting graphs of price movement of a stock, index, commodities, currencies or any other assets class. These may be in the form of Line chart, Bar chart, Candlestick chart, Point and Figure or other traditional or contemporary way of data chart.

Trend

The trends from these charts could be identified by way of - patterns, moving averages, trend lines or through oscillators. Time horizon for such analysis could be – intra hours, daily, weekly or monthly depending upon the need of trader or investors.

Trend line

Trend lines means connecting consecutives tops or bottoms. There are three basic kinds of trends: An uptrend where prices are generally increasing, a Down trend where prices are generally decreasing while a Consolidation trend where price remains in a particular trading boundary. Traders or investor should follow trend as it is said that trend is your friend, follow the trend.

In general technicians looks at trend, trend lines, support and resistance while there are many price patterns like Head and Shoulders, Double Top, Double Bottom, Channels, Flags, Pennants, Cup and Handle.

Analysts also use many technical indicators, few are leading while other are lagging like Moving Averages, Relative Strength Index, Moving Average Convergence Divergence, Stochastic, Bollinger Band and many more.

It helps to pick the stock for our financial goal and maximize the chances of getting return in shortest or longest period as per the price behaviour of the particular stock.