Reading Charts: An Introduction to Technical Analysis
Charts are a visual representation of price over time. Technical analysis is the discipline of reading those charts to identify patterns, levels, and conditions that may help explain market behaviour. This module introduces the core concepts.
What a chart actually shows
A price chart shows how much buyers and sellers agreed a particular instrument was worth at each point in time. Every candle, bar, or data point on a chart represents a transaction — or more precisely, the consensus of thousands of transactions — within a given time period.
The most common chart type in financial markets is the candlestick chart, which originated in 18th century Japan and was used for tracking rice prices. Each candlestick shows four pieces of information for its time period: the opening price, the closing price, the highest price reached, and the lowest price reached. The body of the candle represents the range between open and close; the thin lines (wicks) above and below show the high and low.
A candle that closes higher than it opened is typically shown in green or white. A candle that closes lower than it opened is typically shown in red or black. The pattern, size, and position of candles relative to each other form the basis of candlestick analysis.
Support and resistance
Support and resistance are among the most fundamental concepts in technical analysis. They describe price levels where buying or selling pressure has historically been significant enough to cause a reversal or slowdown in price movement.
Support is a price level where downward movement has previously stopped or reversed. The idea is that at this level, buyers have historically stepped in with enough force to hold price up. When price approaches a support level again, traders watching charts will take note.
Resistance is the opposite — a level where upward movement has previously stopped or reversed. Sellers have been active there historically, and when price returns to that level, the same dynamic may repeat.
Support and resistance are not precise numbers. They are zones. Price rarely bounces at exactly the same point twice. Understanding them as approximate areas rather than exact lines reduces the frustration of watching price breach a "level" by a few points before reversing.
Key concept: Support and resistance roles can switch. A level that previously acted as support (where price bounced upward) can, once broken convincingly, become resistance (where price struggles to break back above). This role reversal is one of the more reliable observations in technical analysis.
Trend lines and trend structure
A trend describes the general direction of price movement over a period of time. Uptrends are characterised by a sequence of higher highs and higher lows — each peak exceeds the previous peak, and each trough is higher than the previous trough. Downtrends show the reverse: lower highs and lower lows.
Trend lines are drawn by connecting at least two significant swing points. An uptrend line connects higher lows; a downtrend line connects lower highs. The more times price has respected a trend line, the more significant it is considered to be. A trend line that price has touched and bounced from five times carries more weight than one drawn through two points.
Markets don't trend continuously. They alternate between trending phases (directional, impulsive moves) and consolidation phases (range-bound, sideways movement). Recognising which phase a market is in helps calibrate which analytical tools are most relevant — trend-following tools perform differently in ranging conditions than in trending ones.
Indicators: what they do and don't do
Indicators are mathematical transformations of price data. They don't contain information that isn't already in the raw price; they repackage it into a form that can be easier to interpret for specific purposes.
Common indicator categories include:
- Trend indicators (e.g. Moving Averages): Smooth price data to show direction more clearly by filtering out short-term noise.
- Momentum indicators (e.g. RSI, MACD): Measure the rate of change in price to identify whether a move is accelerating or decelerating.
- Volatility indicators (e.g. Bollinger Bands, ATR): Measure how much price is moving, which can indicate changing market conditions.
- Volume indicators: Measure trading activity alongside price to gauge the strength of moves.
Indicators are tools, not oracles. Because they are derived from price, they inherently lag — they confirm what has already happened, not what will happen. The most common beginner mistake with indicators is waiting for indicator confirmation before acting, then finding the move is already largely complete by the time the indicator fires.
Price action vs indicator-led analysis
Price action analysis refers to reading charts using raw price data — candlestick patterns, structure, support/resistance, trend — without relying on indicators. Many experienced traders prefer this approach because it removes the lag introduced by mathematical transformations and keeps analysis closer to what the market is actually doing.
Indicator-led analysis adds statistical layers that some traders find useful for confirming conditions or measuring momentum. Neither approach is categorically superior; both have practitioners who apply them effectively.
For beginners, a useful exercise is to learn support, resistance, and trend structure on a clean chart first — with no indicators — before adding indicator layers. This builds foundational chart-reading skills that don't depend on a specific tool, and makes later indicator use more intuitive.