A

Handbook
of
Technical
Analysis 1|Page

A HANDBOOK OF TECHNICAL ANALYSIS

CONTENTS
Introduction 3
CHAPTER - 1 5
Types of Charts 5
1.1: Line Charts: 6
1.2: Bar Charts: 7
1.3: Candlestick Chart: 7
CHAPTER - 2 9
Trends 9
2.1: Market Trend and Range-Bound Consolidation: 10
2.2: Trendline & Channels: 12
2.3 Role Reversal: 14
2.4: Channels 14
CHAPTER - 3 16
Volume 16
CHAPTER- 4 19
Classical Chart patterns 19
4.1: Head and Shoulder & Inverse Head & Shoulder: 20
4.2 Double Tops and Bottoms: 21
4.3: Triple Tops and Bottoms: 22
4.4 Triangles: 23
4.5: Flag and Pennant: 24
4.6 Wedge: 25
CHAPTER – 5 26
Candlestick Reversal Patterns 26
5.1: Hammer: 27
5.2: Shooting Star: 28
5.3: Inverted-Hammer: 30
5.4: Hanging Man: 30
5.5: Bullish Engulfing Pattern: 31
5.6: Bearish Engulfing Pattern: 32 2 | P a g e
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5.7: Piercing Pattern: 32
5.8: Dark Cloud Cover: 33
5.9: Doji: 33
CHAPTER - 6 35
Indicators 35
6.1: Simple Moving Average: 36
6.2: RSI: 37
6.2.1: Calculation: 38
6.2.2: Usage: 38
6.3: ADX: 38
Conclusion 40
About Us 42
Elearnmarkets 43 3 | P a g e
A HANDBOOK OF TECHNICAL ANALYSIS
Introduction
A HANDBOOK OF TECHNICAL ANALYSIS
4|Page
Introduction:
Market analysis is broadly categorized into two main methods, the first one is fundamental
analysis and the second one is technical analysis. In fundamental analysis an analyst needs to
look at the financial statements of a company, its business model, overall macroeconomic
scenarios, management capabilities and many more things for coming to a specific fair value of a
company. On the contrary the discipline of technical analysis is not at all concerned with this
detailed study of fundamental factors. On the contrary, a technical analyst only looks at price of
a stock derived as a result of supply-demand interaction. For a technical analysts’ price is
supreme and he or she sees price as manifestation of every fundamental reality. Hence, they
look only at two main aspects in the market. Price -over -time and volume.
The entire discipline of technical analysis is based on these two data points, price over time and
volume. All patterns, indicators, concepts are derived from these two basic data points.
Technical analysis is a very interesting subject. This is not a definitive science, rather a
probabilistic discipline. In simple terms, it is more of an art than science. There are well known
chart patterns or indicators in the market. But nothing works 100% of time. We still follow them
because they work more number of times than they fail. Hence emerged the concept of
probability, the number of times anything works among the number of times that occur. This
ratio is different in different stocks in different phases. That is why it is called an art. With
experience, a chartist is able to form an opinion of his or her own so that he has some extra
edge on the market assessment than someone having just bookish knowledge of technical
analysis. This book on technical analysis is your stepping stone towards the journey to become a
seasoned technical analyst. We request you to go through the concept slowly one at a time and
keep observing charts on regular basis. Look at old charts and also look at contemporary live
charts. Once you find a pattern or some indicator try to predict the future move and note down
your prediction. Then as time flows try to match the price action with your prediction. Then
analyze why it worked or not worked. Make notes and progress with the e-book and the notes.
This a long journey and we wish you best of luck. 5 | P a g e
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CHAPTER - 1
Types of Charts 6|Page

A HANDBOOK OF TECHNICAL ANALYSIS

Chapter 1: Types of Charts
Charts are two-dimensional representation of price over time. There are many types of charts available.
But most popular and widely used among them are Line Charts, Bar Charts and the Candlestick Charts.
The X axis, i.e. the time axis is crucial. The unit can be month, week, day, hour, 5 min or few seconds. The
shorter the time period, more detailed the chart becomes. The beauty of time in technical analysis is that
the same concepts apply to charts irrespective of time-frame of observation. However, the success rate
of individual patterns or indicators-based decisions may vary across time frames. Generally higher the
time frame of chart, relatively higher is the probability of any concept in market.
1.1: Line Charts:
In line chart each and every price point is represented as a dot. The X axis represents the time scale and
the Y axis represents the price. Each dot or point represents the closing price at the end of a unit of time.
These points are then joined to form a line. This is the simplest form of chart. But this is quite good if we
want to plot 3-4 similarly priced stocks in a single chart and compare. Moreover, the line chart gives the
clearest idea about price direction of a stock.
Figure 1.1: Line Chart 7 | P a g e
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1.2: Bar Charts:
A bar chart is comprised of a series of bars. Every bar has four important price points - open close high
and low. The bars are represented in green or blue color when close is higher than open and red color
when close is lower than open. The bar charts are more detailed than the line chart and are good for
demonstrating or spotting the classical price patterns. We will discuss about the classical chart patterns in
appropriate time.
Figure 1.2: Bar Chart
1.3: Candlestick Chart:
The concept of candlestick charts came from Japan. That is why they are often referred to as Japanese
candlestick charts. These charts are the most versatile and popular form of chart representation. Price
behavior during each time unit is represented in the form of a candle. If the closing price of a stock is
higher than open price during a particular time period, then the candle is green, if the close price is below
the open price then the candle is red. Each candle has a body and two wicks. The distance between open
to close is represented by the body of a candle and the upper and lower wicks represent the highs and
lows of a candle. 8 | P a g e
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Figure 1. 3(a): Candlestick Chart Diagrammatic Representation
Candlestick chart is special not only because it adds a special visual clarity about the price action, but also
because often a single candle stick or two or three consecutive candlesticks together form a pattern that
indicate reversal of a prior move or give conviction on continuation of the ongoing move. These are called
candlestick patterns. We will discuss about them in due course of time.
Figure: 1.3(b): Candlestick Chart Pattern Example
After getting introduced to the concept of charting we will discuss about the concept of trend. 9 | P a g e
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CHAPTER - 2
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Chapter 2: Trends
2.1: Market Trend and Range-Bound Consolidation:
Often market movements happen in the form of trends. A price trend is a continuous or a directional
price movement in upward or downward direction. We call them up -trend and down -trend respectively.
Now if we look at price action in market through charts, we will find that no price movement happens in
a straight line.
Suppose we are looking at a broader uptrend represented as primary move, we may find intermediate
corrections represented as secondary trend and minor counter moves among the secondary moves
represented as minor trend. This is how the market behaves generally in both the up and the down
trends.
Figure: 2.1(a): Market Trends
Often an up- trend is represented in the form of a sequence of higher highs and higher lows. Similarly a
downtrend is represented as a sequence of lower lows and lower highs. A trend is said to reverse when
the sequence is broken. 11 | P a g e
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Figure: 2.1(b): Trend Reversal
We should remember a simple point that market is not trending all the time. Often the market
consolidates within a small range and goes nowhere. Then suddenly it can break on the upside or
downside.
Figure 2.1(c): Market Consolidation 12 | P a g e
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2.2: Trendline & Channels:
Trendline and Channels are one of the most simple and useful tools in the market. During an uptrend, a
trendline is formed by joining lowest points of periodic pull-backs, defined as secondary moves in the
previous section. The up-trend line has positive slope. To be precise we need two lows to join to form a
trendline during an up-move. This line is then extended in the upward direction; the third move towards
the trend-line is used to validate the trend line. If the trend line is not broken in the pull back, then it is
called trend-line validation. It is often observed that price pulls back towards the trend line and moves
higher. In an uptrending market it is often easier to make money if one buys near the trend line and sells
higher. The more number of time the trend-line is validated, more important it becomes. An upward
trend line is said to be the area of support. The selling pressure meets the buying pressure here and
eventually overtime when buying pressure is higher than selling pressure price sees an upward bounce.
Figure 2.2(a): Uptrend
Now when one buys he or she is looking for the prices to move higher. But this may or may not happen.
Hence the investor should maintain a stop loss point below which he-or she should cut his position, i.e.
book loss.
When a trend line is broken, either the market may reverse the trend, continue the uptrend with little
less force or just go sideways. 13 | P a g e
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Figure 2.2(b): Uptrend Reversal
Similarly, during a down-trend: a trendline is formed by joining pull-back highs. They slope downwards.
Just like an up-trend line a down-trend line is formed by joining two points and then extended in
downward direction. Pull backs towards the trend-lines are low risk points for short selling with a stop
loss little above the trend line. More number of times the line is validated, more it grows in importance.
Figure: 2.2(c): Downtrend
Similar to an uptrend-line, when a down trending trend line is broken the trend may continue with less
pace, or reverse or may go side-ways. A downward trend line is said to be area of resistance. The selling
pressure 14 | P a g e
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meets the buying pressure here and eventually overtime when selling pressure is higher than buying
pressure price sees a decline.
2.3 Role Reversal:
Once a trendline support or resistance is broken, its role is reversed. If the price falls below a support line,
that line will become resistance. If the price rises above a resistance line, it will often become support. As
the price moves past a line of support or resistance, it is considered that supply and demand have shifted,
causing the breached line to reverse its role. For a true reversal to occur, however, it is important that the
prices make a strong move through either the support or resistance line.
Figure 2.3: Role Reversal
2.4: Channels
The concept of channel is much similar to trend lines. When in an uptrend or in a down trend or in a
consolidation, we see rhythmic movement in form of parallelogram, we can draw channels. The channel
boundaries are good points for reversal trades with small stop losses. 15 | P a g e
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Figure 2.4: Channels
Once price is out of the channel, the trend or range of the stock is broken. 16 | P a g e
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CHAPTER - 3
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Chapter 3: Volume:
In this section we introduce the second aspect of charting. This is called volume. Traded volume is the
number of quantity of stocks which change hand. The volume is shown as a sub graph in the price-time
chart, below the price window. Higher the volume in any particular move, the greater is the conviction in
that move to continue greater distance in that direction. However, if volume is on the lower side during a
move, the stock is generally bound to lose momentum.
Generally, during range bound phases, the volume is low.
Figure 3: Volume
An important point regarding volume is that traded volume in absolute term has no significance.
When we talk about higher or Volume Interpretation
lower volume, it is relative to
average volume over certain
time periods. Trend
Up High Uptrend may go greater
distance
Up Low Lack of conviction/ participation
in uptrend. Likely to retrace.