Read the market from its own record of price and volume: the trend, the patterns that signal a turn, and the indicators that confirm it.
Technical analysis evaluates securities from statistics of trading activity, mainly price and volume. Unlike fundamental analysis, it assumes all relevant information is already in the price. It is used across equities, currencies, commodities and crypto, especially for short to medium term trading. Chapter 4 (4.3) gave a first look.
Economic, political and psychological information is already in the price. Analysts look only at price and volume.
Up, down or sideways. An established trend is more likely to continue than reverse.
Behaviour is cyclical and driven by psychology; patterns recur.
Patterns give probabilities, not certainty. It is about managing risk, not guaranteeing outcomes.
High volume on breakouts or reversals adds credibility.
| Technical | Fundamental | |
|---|---|---|
| Focus | Price action and market behaviour | Intrinsic value of the asset |
| Data | Historical price and volume | Financial statements, economic reports, industry publications |
| Horizon | Short and medium term trading | Long-term investment |
| Tools | Chart patterns; RSI, moving averages, MACD, OBV | Cash flow statements, DCF, SWOT, ratio analysis |
| Assumption | Price captures all information; trends continue | Prices can deviate from intrinsic value |
| Objective | Forecast price moves and trading opportunities | Find undervalued or overvalued assets |
| Used by | Traders, chartists, speculators, short-term investors | Fund and portfolio managers, value and long-term investors |
Closing prices joined as a line. Quick trend view, long-term perspective. Ignores open, high and low.
Open, high, low, close for each period. Detailed price action and volatility; shows range and direction.
Like a bar chart but clearer, with coloured "candles". Best for patterns such as doji, hammer, engulfing.
Price moves only; ignores time and volume. Breakouts and support and resistance; filters noise; long-term trends.
Fixed price moves ("bricks"), not time intervals. Trend clarity, momentum; smooths minor moves; suits trailing stops.
Adjusted candles that average price data to cut noise. Trend following; keeps traders in longer by filtering whipsaws.
Developed by Charles Dow through editorials between 1900 and 1902, and organised into a formal theory after his death by William Hamilton and Robert Rhea. Still a foundation of technical analysis.
Aligns with the Efficient Market Hypothesis.
Primary (long term), secondary (weeks to months), tertiary (days to weeks).
Accumulation (smart money enters quietly), public participation, distribution (smart money exits). Mirrors Wyckoff's cycle.
Major indices should move the same way, for example Nifty and Sensex.
Volume should rise in the direction of the primary trend.
The basis of trend following, trailing stops and moving average crossovers.
| Primary | Secondary | Tertiary | |
|---|---|---|---|
| What | Dominant, long-term direction | Correction or rally against the primary trend. Lets the market digest gains or losses, shake out weak hands and reset overbought or oversold levels | Short-term moves within the larger trend |
| Length | Typically one year or more | About 3 weeks to 3 months (can vary) | Usually under 3 weeks (some say up to 6) |
| Types or traits | Bull (confidence, expansion), bear (fear, contraction), sideways (indecision) | Bull market correction (often 10% to 20%, a "pullback"); bear market rally ("relief rally"). Retraces 1/3 to 2/3 of the prior move (Dow Theory). Volume usually lower | Volatile, news-driven, reverses often; unreliable for long-term forecasts |
| Drivers | Economic cycles, monetary and fiscal policy, geopolitics, investor psychology | Data releases, central bank shifts, geopolitics, earnings surprises, technical exhaustion | Sentiment, news, technical triggers |
| Tools | 50 or 100-day moving averages, trendlines, MACD, higher highs and lows | Fibonacci retracement (38.2%, 50%, 61.8%), trendlines, 50 DMA, volume, RSI or stochastic | 5, 10 or 20-day EMAs, RSI, stochastic, candlestick patterns, pivots |
| Use | Asset allocation, avoiding counter-trend trades, riding the trend | Buying dips in uptrends, selling rallies in downtrends, swing trading | Fine-tuning entries, exits and tight stops. Building blocks of flags, pennants and wedges |
Tertiary trends carry risks: noise in choppy markets, whipsaws (false breakouts), and overtrading, which raises costs and risk.
Each candle shows open, high, low and close. The real body is the gap between open and close; the thin lines above and below are the shadows (wicks). Below, green candles closed higher and red candles closed lower. The highlighted candles form the pattern.
A congestion area is a price range where the market trades repeatedly, often for several weeks, before breaking out up or down.
Pauses within a trend, usually followed by a breakout. Dashed lines are the trendlines drawn along the highs and lows.
After a sharp rally (the flagpole), price moves sideways or slightly lower in a small rectangle.
Same idea, but the pause forms a small triangle. Traders buy when price breaks above the upper trendline.
Support: a level where a downtrend is expected to pause because of concentrated demand: a "floor".
Resistance: a level where an uptrend is expected to pause because of concentrated supply: a "ceiling".
Broken support often becomes resistance, and vice versa: trapped traders exit at breakeven, sentiment shifts, institutions reposition.
| Type | Description | Book's example |
|---|---|---|
| Horizontal | Flat levels where price repeatedly reverses | A stock resisting around Rs 1,950 |
| Trendline | Diagonal lines through higher lows (support) or lower highs (resistance) | Upward sloping support in a bull trend |
| Moving averages | Dynamic levels, for example the 50-day MA | Price bouncing off the 50 DMA |
| Fibonacci levels | From retracement ratios 23.6%, 38.2%, 61.8% | Stock retracing 23.6% from a swing high |
| Pivot points | From the previous period's high, low and close | Mostly used intraday |
| Psychological | Round numbers act as barriers | Nifty 25,000 |
Book's case notes: Nifty found strong support around 24,350 from May to September 2025; Reliance faced resistance around 1,300 from October 2021 to July 2023 before breaking out in January 2024.
Two parallel trendlines, one through highs and one through lows. Ascending (higher highs and lows) is bullish; descending is bearish; horizontal is range-bound. Its width reflects volatility. Trade within it (buy at support, sell at resistance); a break of either line is a breakout or breakdown, with a target projected from the channel width.
Rising volume on breakouts; candlesticks (engulfing, hammer, shooting star) at the lines; RSI divergence or MACD crossovers near boundaries; lines visible on higher timeframes carry more weight.
Forcing lines to fit a bias; ignoring breakouts and not redrawing after invalidation; relying on lines without other confirmation.
A smoothed line of average closing prices (daily, weekly or monthly). Rising MA: uptrend; falling: downtrend. MAs are lagging indicators but good for major trends. When monthly, weekly and daily MAs point the same way, the trend is likely to continue. Trading at or near a rising MA can be a good time to buy.
In a bull market price usually finds support around the 34 EMA. All three rising and spreading apart: a strong bull market.
Price tends to meet resistance around the 34 EMA. All three falling and spreading apart: strong selling pressure.
| Indicator | Measures | Key numbers and signals (book) |
|---|---|---|
| Moving averages | Trend (lagging) | 13, 21, 34 EMA; price above all three in an uptrend |
| MACD | Momentum | 26 EMA minus 12 EMA; slow line 9 EMA; do not trade zero-line crossovers |
| RSI | Speed and size of price changes | 0 to 100; above 70 overbought, below 30 oversold; best in a trading range |
| ADX | Trend strength, not direction | 14 bars; below 25 weak; use with +DMI and −DMI |
| RSC | Performance versus a benchmark | Normalised to 100; above 100 outperforming; 5 to 6 years of data |
| OBV | Volume flow | Read with its 20-period average; divergence warns of reversal |
Tap the card to flip. On a keyboard: space flips, right arrow = got it, left arrow = again.
Scoring works like the real exam: +1 for a right answer, minus 0.25 for a wrong one, 0 for a skip. Skipping is allowed.