Understanding Basics to Advance Level of Technical Analysis for Stock Market

In this article, we will discuss

Most investors who understand that the stock market is not a gambling arena prefer to research the stock before investing in it. Broadly, technical analysis and fundamental analysis are the two methods to analyse a company and its stock. While the former is more suitable for day traders and short-term investors, the latter is for long-term investors seeking value stocks. If you are a day trader or a short-term investor who wants to learn the skills of market analysis, then you have landed on the right page. In this blog, we will cover the A-Z of how to analyse a stock technically. Keep reading!

What is Technical Analysis?

Traders use this analysis method to identify trading opportunities in the market. They use information like price data, volume data, statistical trends, graphs etc., to make assumptions about the behaviour of a stock in future. In simpler words, it is a historical analysis that leverages the past behaviour of a security or stock to predict its future price movements. Traders can use technical analysis for not just shares but any security that has a trading history. You can use it to analyse shares, commodities, currencies, fixed income and other securities as well.

Basics of Technical Analysis

The very basics of this analysis include charts and technical indicators that you can use to interpret your results. Just like there can be different types of charts, there are also different indicators. Let’s take a look at them in detail.
  • Charts
Price charts are one of the most commonly used tools in this analysis. Traders use charts of different time ranges to predict and understand the price movement of a stock. The time range for a chart could be 5-minute, 15-minute, hourly, 4-hour or daily. Apart from this, there are also weekly, monthly, quarterly, semi-annual and even annual charts.
  • Depending upon the choice and strategies of a trader, they may choose a time frame that is more suitable to them.
  • Intraday traders mostly use 5-minute or 15-minute charts for their market analysis as they are short-frame charts.
  • Traders who wish to hold their position overnight or for longer durations would be more inclined to consider daily, weekly or other charts.
Remember, the choice of charts is entirely the personal choice of the trader, and there are no hard and fast rules for the choice. It won’t make sense if a trader who wishes to remain invested in the market for just five or six hours analyses the yearly performance of a stock. They would rather prefer to see how it performs in 15 minutes. The three most commonly used chart types are bar charts, candlestick charts and line charts.
  • Candlesticks are the most commonly used chart types among traders.
  • Candlestick patterns and bar graphs represent a more detailed movement of a commodity because they show its opening, closing, highs and lows with every candlestick or bar.
  • With the use of charts, various researchers have also developed several charting patterns that help traders identify entry and exit points while doing market analysis.
  • Technical Indicators
These indicators are heuristic patterns that technical analysts leverage in order to identify profitable opportunities. Analysts derive these patterns from historical data, which helps them in determining future price movements. The indicators usually have a graphic representation, and analysts make comparisons of these indicators with the corresponding price charts. It helps them understand investor psychology and behaviour, which can act as an indication of future price movement. Out of the many indicators that exist, most analysts prefer to use price and volume-based indicators for their research. Some popular examples of these indicators are moving averages, relative strength index etc.
  • Moving Averages
Think of moving averages as an extension of averages that you learned in school. It is called a moving average because you need to constantly recalculate it based on the latest price data.
  • You sum up the data points of a security and then divide it by the total number of data points it has to get an average.
It helps analysts find out the support and resistance points of a security by evaluating its price movement in the share market. You can calculate moving averages of data points such as opening price, closing price, highs and lows. If you are calculating a 5-day average, every time you add the latest data from the last trading day, you discard the data of the oldest day, i.e. you move to newer data. A moving average can be a simple moving average, an exponential moving average, or a moving average crossover.
  • Relative Strength Index (RSI)
When it comes to technical analysis, RSI is one of the most popular indicators. It was developed to measure the speed and change of price movements, overbought and oversold market conditions. It can also help determine the trendlines, time entries, etc.
  • It is an indicator of the oscillator category and is expressed as a value between 0 - 100.
Formula: RSI = 100 - 100/(1 + RS). Here, RS is the average gains or losses in a particular time period.
  • When the indicator range is above 70, the market is said to be overbought and indicates a temporary near end to the short-term gains of a security. It means the price of the stock is approaching a declining trend.
  • Similarly, if the indicator has a range under 30, the market is oversold. It means the short-term price decline in the security is ending for the time being and may shoot up for the short term in the near future.

Advance Level of Technical Analysis

An advanced level of technical analysis is a systematic approach to incorporating multiple technical indicators, theories and chart patterns. It helps to identify the future price movement of a security. It either combines multiple tools or uses a complex tool to find good trading opportunity in the market. Hereon, we have discussed some of the most commonly used advanced technical tools to manage risk, maximise returns, and properly allocate assets to create a diversified portfolio.
  • Ichimoku cloud
It is a Japanese charting and analysis method. Investors can use this tool to find information regarding levels of support and resistance, moments, or trend directions using a cloud. It has five different lines that form the cloud, viz. Tenkan Sen, Kijun-Sen, Senkou Span A and B, and finally Chikou Span. Tenkan-Sen, or Conversion Line, is the midpoint of the highest and lowest price of an asset over the last nine periods. It is the fastest-moving line in this particular indicator. On the other hand, Kijun-sen is the midpoint of the high and low over the last 26 periods.
  • When the cloud is below the price point, it is a bullish signal.
  • It is a bearish signal when the price point is below the cloud.
  • When the price is in the middle of the cloud, it is a ranging trend.
  • When Tenkan Sen crosses Kijun-Sen from below to above, it is a buy signal. When Tenkan Sen crosses it from above to below or goes on a downside trend, it is a sell signal.
  • Bollinger bands
The Bollinger band analysis is built around the concept of standard deviation. Traders can implement it to measure volatility of a stock price by identifying how far its price diverges from its mean average.
  • It helps you find sharp, short-term price movements so that you can identify potential entry and exit points for your trade.
  • Bollinger bands consist of a middle band which is a moving average, and an upper and lower band.
  • The upper and lower band are set above and below the moving average line as per the number of standard deviations in the price.
  • If you compare the position of stocks relative to the bands, it will help you answer the question if the stock price is relatively low or relatively high.
  • The width of the band is an indicator of its volatility. If the width is narrow, it means the level of volatility is low and vice versa.
  • Bands are formed on price charts to identify patterns, such as Double Bottoms, Classic M Top, Three Pushes to High and more.
  • Elliott wave theory
Another important technical analysis tool, it is used to predict price trends and the correction which comes after it. The founder of this theory, Ralph Elliott, stated that for every action there is a reaction. Hence every time the share market has an impulsive wave, it is followed by a correction wave, which is its counter-trend. As per this theory, the price movements of stock are repetitive, and if you look at them from a broader vantage point, they look like waves of the ocean. Thus the name Wave Theory.
  • It is based on a repetitive eight-wave pattern, where the first five waves are usually the impulsive waves, which make up a large impulsive wave. This large wave is then followed by a three-wave pattern indicating a correction trend.
  • You must remember that Wave 2 never goes below the starting point of Wave 1. If it does, then you have spotted a wrong Wave 1.
  • If there are three impulse waves, Wave 3 will never be the shortest of the three.
  • Finally, Wave 4 never goes below the final point of Wave 1. If so, it will continue to be treated as part of Wave 3 instead of Wave 4.


Technical Analysis is a complex analysis skill but is also very crucial in identifying the right opportunities at the right time. Traders can leverage different analysis tools based on their preferences and understanding to maximise their returns. You must remember that the entire concept of technical analysis is based on the past performance of a stock. However, as harsh as it may sound, past performance is never a comprehensive indicator of the future performance of a stock. It is only a guide traders use to form their analyses and predictions, but no technical analysis tool is entirely flawless. Hence, constant re-evaluation is equally important to validate the signals of a tool.


  • What is an oscillator?

Ans.  It is a subset of technical analysis and forms two bands, viz., high bands and low bands. The band forms between two extreme values, creating a trend indicator that fluctuates within the perimeters of these bands.
  • How is technical analysis different from fundamental analysis?

Ans. While technical analysis relies heavily on chart patterns and technical indicators, fundamental analysts consider factors such as the growth of the company, economic factors, industrial factors and various others to determine the fair value of the stock. They use it to identify value stocks. In contrast, technical analysts focus on identifying trading opportunities in the share market.
  • What are some limitations of using technical analysis?

Ans. One of the biggest limitations of this analysis is that even though it is so extensive, it is not 100% accurate. Another limitation is that it overlooks the underlying fundamentals of a stock, and different traders can interpret different tools in different manners. This makes it quite a subjective concept.
  • If the technical analysis is not entirely accurate, why do traders still use it?

Ans. Firstly, there is no foolproof analysis method that will give you a 100% accurate result. However, due to the complexities of the market, you still need certain bases to make analyses and predictions. The pillars of technical analysis state that price moves in trends, and history repeats itself in the market. Hence, traders use technical analysis indicators to find the trends and patterns that have occurred historically and might take place again.
  • Which is the most accurate technical indicator?

Ans. Moving average indicator, Relative strength index, and Moving average convergence divergence are considered to be three of the most accurate technical indicators. They are widely popular among both short term and long term investors.


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