Technical Analysis is the study of price charts for the purpose of forecasting future price trends.
It is based on three principles:

1.  Market action discounts everything

All information available to the market is reflected in the price. Charts reflect the psychology of the traders/investors. If the market is rising then the psychology is bullish. On the other hand if the market is falling then the psychology is bearish.

2.  History repeats itself

Markets move in identifiable patterns. If a price pattern has worked well in the past then it will perform well in the future as well. Markets are based on human crowd psychology which never changes. It is based on fear and greed. The future lies in the study of the past.

3.  Prices move in trends

In the late 19 century, Charles Dow claimed through empirical observation that prices move in trends. They follow a pattern of zigzag patterns. A trend is more likely to continue than to reverse.



There are different chart types:

1. Bars

  • A vertical line bar represents the timeframe's range(i.e. daily).
  • The tic to the left represents the Opening price.
  • The tic to the right represents the Closing price.
  • The highest point of the bar represents the High price.
  • The lowest point of the bar represents the Low price

bar chart


2. Japanese Candlesticks

  • The Japanese version of bar charting.
  • It records Open, High, Close, Low.
  • The shadow/wick (a thin line) shows the period's range from the high to the low.
  • The real body (a wider portion of the bar ) measures the distance between the Open and the Close.



3. Line Chart

  • Some traders believe that the Closing price is the most important.
  • Open, High and Low prices are not used.
  • Shows a general picture of the price movement.

line chart


4. Point and Figure

  • Alternating columns of X's and O's.
  • Rising prices are represented by a rising column of X's.
  • Falling prices are represented by a falling column of O's.
  • Precise signals
  • Objective trendlines
  • Price targets
  • Time is not linear
X O X