The Basics of Technical Analysis

No matter what your approach is to the market, you've undoubtedly taken a look at the chart of a stock or an index. But the information you take away from that chart does depend heavily on your approach. While many people see simply a line representing price history, technical analysts see much, much more.

Technical analysts study past price movement for the purpose of understanding what future prices may look like. They review charts of a particular company or index's price action and examine the changes in price over a particular period of time.

If you want to think more like a technical analyst, this report is a good place to start. However, it's not meant to be an exhaustive examination. Its intent is to provide a basic introductory overview for people unfamiliar with chart-reading and hopefully spark their interest. That said, there is a lot more to learn about each aspect presented here, so I'd encourage anyone interested to pursue it further, and RealMoney is a good resource to use. Now, let's move on to the charts.

Start With the Charting Basics

The first two things you need to know about reading charts are also the most important: price and volume. These are the building blocks that make up a chart's foundation; all of the other indicators and overlays which, while helpful and revealing, are ultimately secondary. Let's start with price.

Price is represented in several different ways, depending on the type of chart you're using. There are bar charts, in which price is represented by a bar, as you can see on the left graphic below; candlestick charts, in which price is represented by what resembles a candlestick, as you can see on the graphics in the middle and the right; and line charts, where price is nothing more than, well, a line.

Let's look first at a bar.

As you can see on the graphic, the line on the left represents the opening price of the trading day. The bar's length, or the center vertical line, represents the day's price range, with the top of the bar indicating the day's high and the bottom representing the lowest. The small horizontal line on the right is the closing price for the day.

Much of the same information is reflected in the candlesticks. It too features the open, high, low and close for price that time period. The primary difference between a bar and a candle is reflected in the body, with the length of both the body and the wick, or shadow, representing the type of activity -- heavy selling or light buying, for example -- that took place. In the graphic, the white candlestick represents an up day, or a day when a stock's price increased, and the black candle is a down day, when the stock's price fell.