Technical analysis

18 February 2022

1 Introduction
Technical analysis is done on the price of the shares or index or any commod-
ity. It predicts the future price with some probability. The whole idea behind
technical analysis is that, it depends solely on rule that “History repeats itself”.
The parameters which are applied on the data are derived from the historical
observations and there is no scientific assurity of the predictions. I would like
to understand who has come up with these heuristics? What are the
reasons behind these rules?
In technical analysis two factors are major analysed: price and volume.
1. Prices: There are four main prices associated with certain share: open (open-
ing market price in that time interval), high (highest price achieved in the
same time interval), low (similarly lowest price), and close (last traded
price in the time interval).
2. Volume: No of shares which change the hands during the day is known
as volume of share. If current day volume is higher than immediate 5
previous volume bars, it is good conformation on volume.

2 Charts
In my experience, the analysis is done by looking at the charts of prices. There
are mainly following types of charts are used for analysis.
1. Line Chart: Line chart is formed by joining closing prices (Figure 1).

Figure 1: Line chart of share prices.

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2. Bar chart:

Figure 2: Bar chart of share prices.

3. Volume Bar chart: Prices and volume both are plotted on chart. Price
movement is more significant when volume is above average.

Figure 3: Volume Bar chart of share prices.

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 4. Candlestick chart:

Figure 4: Candlestick chart of share prices.

Out of these charts, candlestick chart with volume will be of most use because
it can give a lot of information in a single frame. A candle itself contains four
prices in compact fashion.

Figure 5: Candlesticks showing four prices. If the close is lower than the open
price then it is a red candle otherwise green.

3 Trend
This gives indication about the movement of the prices.

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1. Up trend: Up trend comprises higher highs and higher lows.

Figure 6: Uptrend

2. Down trend: It comprises lower highs and lower lows.

Figure 7: Downtrend

3. Sideways trend: Highs and lows are range bound, they do not go anywhere.

Figure 8: Sideways trend

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Rule of thumb
1. Never sell in an uptrend.
2. Never buy in down trend.

3. Never trade in sideways trend as an investor. Wait and watch for break
out directions.

4 Trend reversals