The analysis essentials / 01
Technical analysis,
made understandable.
Learn to read a chart, understand common indicators, and turn observations into a plan you can test.
01 / Read the chart
Start with what price actually did.
Technical analysis studies market data, usually price and volume, to describe trends and explore possible scenarios. It does not reveal a certain future or replace research into the asset and its risks.
Check the symbol, timeframe, price scale, and data source first. A daily candle summarizes one trading day; a five-minute candle summarizes five minutes. A pattern can look different when you change the timeframe.
Read one candle.
Fictional prices · one time period
The body spans the open and close. The wicks extend to the high and low. Change the close while the other prices stay fixed:
The close is $4 above the open. The body shows that rise; the wicks show the full price range.
A candle does not show the exact order of every price move within the period. Chart colors and display conventions vary by platform.
Spot common chart patterns.
Fictional prices · simplified shapes
Chart patterns are names for shapes price sometimes makes before a bigger move. Pick one to see its shape, the key lines to watch, and where the pattern is usually considered confirmed:
Reversal patterns · may signal a trend is turning
Continuation patterns · may signal a pause before the trend resumes
Wedges · can signal either a reversal or a continuation
Double top
Price rises to a high, pulls back, then rallies to about the same high again and fails. It is often read as a sign that an uptrend is losing strength.
Usually confirmed by: a close below the neckline, the low between the two peaks.
Cancelled if: price pushes clearly above the two highs.
Double bottom
Price falls to a low, bounces, then drops to about the same low again and holds. It is often read as a sign that a downtrend is losing strength.
Usually confirmed by: a close above the neckline, the high between the two lows.
Cancelled if: price falls clearly below the two lows.
Triple top
Like a double top, but price fails at about the same high three times before turning lower.
Usually confirmed by: a close below the neckline, the lows between the peaks.
Cancelled if: price pushes clearly above the three highs.
Triple bottom
Like a double bottom, but price holds at about the same low three times before turning higher.
Usually confirmed by: a close above the neckline, the highs between the lows.
Cancelled if: price falls clearly below the three lows.
Head and shoulders
Three peaks: a higher peak, the head, between two lower peaks, the shoulders. It is often read as a sign that an uptrend is weakening.
Usually confirmed by: a close below the neckline, the line through the two lows between the peaks.
Cancelled if: price climbs back above the right shoulder.
Inverse head and shoulders
The upside-down version: a deeper low, the head, between two shallower lows, the shoulders. It is often read as a sign that a downtrend is weakening.
Usually confirmed by: a close above the neckline, the line through the two highs between the lows.
Cancelled if: price falls back below the right shoulder.
Bull flag
A sharp rise, the pole, is followed by a short pause where price drifts slightly lower between two parallel lines, the flag. It is often read as a rest before the uptrend continues.
Usually confirmed by: a close above the flag’s upper line.
Cancelled if: price breaks below the flag’s lower line.
Bear flag
A sharp drop, the pole, is followed by a short pause where price drifts slightly higher between two parallel lines, the flag. It is often read as a rest before the downtrend continues.
Usually confirmed by: a close below the flag’s lower line.
Cancelled if: price breaks above the flag’s upper line.
Cup and handle
A rounded dip, the cup, brings price back up to its earlier high, the rim. A smaller, shallow pullback, the handle, follows. It is often read as a pause before an uptrend continues.
Usually confirmed by: a close above the rim, the resistance at the top of the cup.
Cancelled if: the handle sinks deep into the cup, roughly below its halfway point.
Rising wedge
Price climbs between two rising lines that squeeze closer together, with the lower line rising faster. The narrowing range suggests buyers are losing momentum, and it often resolves lower.
Usually confirmed by: a close below the lower line.
Cancelled if: price breaks clearly above the upper line.
Falling wedge
Price falls between two falling lines that squeeze closer together, with the upper line falling faster. The narrowing range suggests sellers are losing momentum, and it often resolves higher.
Usually confirmed by: a close above the upper line.
Cancelled if: price breaks clearly below the lower line.
These are simplified drawings. Real patterns are messier, can take weeks or months to form, and often fail: price can break a line and then reverse. Many traders also check volume and the bigger trend before acting on a pattern.
What are trends, support, and resistance?
Higher swing highs and lows describe an uptrend; lower ones describe a downtrend. Support and resistance are areas where price previously paused or turned. Treat them as zones to observe, not barriers that must hold.
Do patterns predict the next move?
Names such as hammer, double top, or triangle describe shapes in past prices. Their interpretation depends on context and how the pattern is defined. A breakout can fail; a familiar shape is not a guaranteed trade.
Explore the basics: Fidelity’s technical-analysis introduction ↗
02 / Understand the tools
An indicator is a calculation, not an instruction.
Indicators transform market data into another view of trend, momentum, or volatility. Settings change the result. Several indicators built from the same prices are not independent proof.
Moving averages smooth price.
A simple moving average averages a chosen number of prices. It can make direction easier to see, but reacts after prices change. Crossovers can repeatedly reverse in a sideways market.
RSI summarizes momentum.
The Relative Strength Index compares recent gains and losses on a scale from 0 to 100. Readings above 70 or below 30 are common reference points, not automatic sell or buy orders. Strong trends can sustain extreme readings.
Volume adds participation context.
Volume measures trading activity in the data being shown. An increase may add context to a price move, but does not prove it will continue. Coverage differs by market and feed.
What do MACD and Bollinger Bands show?
MACD compares moving averages to summarize momentum. Bollinger Bands place bands around an average using a volatility measure. A crossover or band touch is an observation to investigate, not a stand-alone forecast.
How many indicators do I need?
Use only tools that answer a defined question. Decide whether you are studying direction, momentum, volatility, or participation. Adding more overlays can hide the price action without adding useful information.
What about Fibonacci levels and advanced patterns?
These tools mark candidate areas or organize a market interpretation. They do not establish that price must reach a level, fill a gap, or follow a wave count. Write down definitions before testing them to avoid changing the story after the outcome.
Learn the calculations: Fidelity’s technical-indicator guide ↗
03 / Test your plan
Define the idea before you know the outcome.
“What would support this idea, what would invalidate it, and what could I lose if execution goes badly?”
Write specific rules.
Name the market, timeframe, setup, entry condition, and exit conditions. Separate what you observed from what you expect. Include relevant news and event risk.
Test more than the winning examples.
Include losing setups, different market conditions, spreads, fees, and plausible slippage. Test on data you did not use to tune the rules. Simulated results do not guarantee live performance.
Plan the position and the failure case.
Consider position size, total exposure, liquidity, and related positions. A stop order does not guarantee its execution price; a stop-limit order may not execute at all. A planned loss is not a maximum loss.
How does position-size arithmetic work?
For a simple long-stock example, a hypothetical $100 planned loss divided by a $2 gap between entry and planned stop gives 50 shares. This is only sizing arithmetic, not a recommendation or loss cap. Fees, gaps, and slippage can increase the actual loss; leveraged products need different calculations.
Does a 2-to-1 reward-to-risk ratio make a good trade?
Not by itself. A target twice as far away as the planned stop says nothing about how often either will be reached. Win rate, actual gains and losses, execution, and costs all affect results.
What should I record in a journal?
Save the chart and your rules before the outcome, then record execution, costs, results, and deviations. Review a group of trades rather than treating one win as proof or one loss as disproof.