Technical Analysis

If a term feels confusing in the chapters, come back here. This is the lookup.

Most traders open a chart and immediately start drawing lines. That's backwards. A chart shows three things — price, volume, time. Read those three first. Everything else, including every pattern and indicator in this course, just helps you read those three faster.

1.1The Three Things Every Chart Shows

The vertical axis. Where buyers and sellers agreed. That's it. Not "what the stock is worth" — just where transactions happened.

The horizontal axis. Each bar or candle represents a fixed slice of time. A 5-minute candle means 5 minutes of trading compressed into one bar.

Usually shown as bars below the chart. Number of shares (or contracts) that changed hands in that time period. Bigger volume = more conviction behind the move.

Every "indicator," "pattern," and "signal" is just one of these three repackaged. Master reading price, time, and volume directly first. Indicators come second.

1.2Chart Types

The standard. Each candle shows open, high, low, and close. Green/white = closed higher than open. Red/black = closed lower. Wicks show the extremes that didn't hold. Best balance of detail and readability.

Just closing prices connected. Removes noise. Useful for seeing the big-picture trend on long timeframes. Hides too much for active trading.

Same data as candles but thinner. Some traders prefer them. Mostly a style choice.

1.3Timeframes

Each timeframe tells a different story:

• 1m, 5m, 15m — intraday noise. Day trading territory.
• 1h, 4h — swing trading detail. Best for entries and exits.
• Daily — the main trend. The most important timeframe for most members.
• Weekly — the big picture. Long-term direction.
• Monthly — for true long-term context.

1.4Which Timeframe Should You Trade?

Match the timeframe to how long you hold trades:

• Day trader — primary chart 5m or 15m, context from 1h and daily
• Swing trader — primary chart daily, context from weekly, entries from 1h
• Investor — primary chart weekly or monthly, entries from daily

The mistake new traders make: looking at every timeframe at once and getting confused. Pick your primary timeframe based on your style. Use one shorter timeframe for timing and one longer timeframe for context. That's it.

Support and resistance are the bones of every chart. Trends, patterns, breakouts — all just descriptions of how price interacts with these levels. Get this chapter right and you'll understand 70% of what charts do.

2.1What S/R Actually Is

Support is a price where buyers tend to step in. Price drops to it, bounces. Resistance is a price where sellers tend to step in. Price rises to it, gets rejected.

These levels aren't magic. They exist because traders remember them. If a stock bounced off $50 three times, every trader watching that stock is watching $50. The level becomes self-fulfilling — everyone places orders around it.

2.2Finding Horizontal Support & Resistance

The simplest type. Look for prices where the stock has reacted multiple times:

• Multiple touches at the same price = strong level
• The more touches over a longer timeframe, the stronger
• Round numbers ($50, $100, $150) act as natural levels
• 52-week highs and lows are major levels
• All-time highs are major levels everyone watches — and once price clears one, there's no old resistance left above it

2.3Drawing Trendlines as Dynamic S/R

S/R doesn't have to be a horizontal line. Trendlines act the same way at a slope.

• Uptrend trendline — connects swing lows. Acts as support.
• Downtrend trendline — connects swing highs. Acts as resistance.

My rule: I want at least 3 touches before I trust a trendline. Two touches is just a guess. Four or more touches = strong line.

2.4Role Reversal

When price breaks through a level cleanly, that level flips its role:

• Old resistance becomes new support
• Old support becomes new resistance

This is one of the most reliable concepts in TA. A stock breaks above $50 resistance with volume. It pulls back. $50 should now hold as support. If it does, that confirms the breakout. If price closes back below and stays there, treat it as a fakeout.

2.5Multi-Timeframe Levels

Not all S/R is created equal. Levels from higher timeframes are stronger than levels from lower timeframes.

• A daily-chart support level is more important than a 15m support level
• A weekly support level beats a daily support level
• A monthly support level is critical — major institutions watch these

When you draw S/R, start from the longest timeframe and work down. The strongest levels are where multiple timeframes agree — a daily support that's also weekly support is a wall.

A trend is just the general direction price is moving. Up, down, or sideways. Three states. Knowing which one you're in determines whether your trade idea even has a chance.

3.1The Three Trend States

Higher highs and higher lows. Each peak is above the last peak. Each pullback bottoms higher than the last pullback. Buy dips, don't short.

Lower highs and lower lows. Each peak fails below the last. Each drop goes lower. Short bounces, don't buy.

No clear direction. Price bounces between support and resistance. Most time is spent here. Trade the range — buy support, sell resistance, but expect mediocre R/R.

3.2Spotting the Trend

Don't overthink this. Look at the chart from a few feet away. If the line goes up from left to right, it's an uptrend. Down, downtrend. Flat, sideways.

If you have to squint to figure it out, the trend is unclear and you should wait.

3.3Drawing Proper Trendlines

Bad trendlines lead to bad trades. The rules I draw them by:

1. Connect lows in uptrends, highs in downtrends. Never both.
2. Minimum 3 touches. Two is a line. Three is a trend.
3. Don't force it. If you have to make the line tilted weird to fit, it's not a real trend.
4. Use closing prices, not wicks. Wicks are noise. Bodies are commitment. (Plenty of traders draw through wicks instead — pick one method and stay consistent.)

3.4Channels

A channel is two parallel trendlines — one drawn through the swing lows, one through the swing highs. Price moves between them.

• Buy the bottom rail, sell the top rail as long as the channel holds
• A break of either rail signals a possible trend change
• The wider the channel, the more room to trade inside it

3.5When a Trend Breaks

Trends die two ways:

In an uptrend, a lower high is the first warning. A lower low confirms the uptrend is broken. Flip it for a downtrend: a higher low is the warning, a higher high confirms the break. This is the textbook signal.

Price closes below an uptrend line (or above a downtrend line) with volume. Often happens before the structure break and gives an earlier warning.

One break alone isn't enough. Wait for confirmation. Either a retest that fails, or a structure break following the trendline break.

Forget memorizing every candlestick pattern in the books. There are dozens. Most rarely show up clean. Learn the half-dozen reliable ones, understand the anatomy, and you'll read 95% of what candles can tell you.

4.1Anatomy

Every candle has four prices:

• Open — where the period started
• High — the highest point reached
• Low — the lowest point
• Close — where the period ended

The body is the thick part between open and close. The wick (or shadow) is the thin line above and below showing the highs and lows that didn't hold.

Green/white candle: close above open. Buyers won the period.

Red/black candle: close below open. Sellers won.

4.2Single-Candle Signals

Open and close are nearly equal. The candle has a tiny body with wicks. Means buyers and sellers fought to a standstill. Often signals indecision before a reversal.

Small body at the top, long wick below. Buyers rejected lower prices and pushed back up. Bullish signal at the bottom of a downtrend.

Small body at the bottom, long wick above. Sellers rejected higher prices. Bearish signal at the top of an uptrend.

Big body, no wicks (or tiny ones). One side dominated start to finish. Strong continuation signal in the candle's direction.

4.3Multi-Candle Patterns

A small candle followed by a much bigger one in the opposite direction that "engulfs" the smaller one. A reversal signal of moderate strength — in Thomas Bulkowski's tests the bullish version reversed about 63% of the time. Only trust it at a real level.

Three-candle pattern. Morning star = bullish reversal (red candle, small candle, big green). Evening star = bearish reversal (green, small, big red).

Three large candles in a row in the same direction with small wicks. A reversal pattern: three white soldiers after a decline signal a turn up; three black crows after a rally signal a turn down.

4.4What Candles Don't Tell You

A bullish reversal candle pattern at major support means something. The same pattern in the middle of nowhere means nothing.

Always read candles in context:

• Where is the candle on the chart? At support? Resistance? Mid-range?
• What's the trend doing? A bullish candle in an uptrend is continuation. In a downtrend it might be a reversal.
• What's volume doing? A reversal candle with massive volume means more than the same candle on average volume.

Candles are shorthand for what just happened. Context tells you what it means.

There are two families of chart patterns: continuation (the existing trend continues) and reversal (the trend flips). Knowing which family you're looking at matters more than knowing every pattern name. Get the family right, and the trade direction is decided for you.

5.1Continuation Patterns

Price was trending. It pauses. The pattern resolves and the trend continues.

Sharp rally (the pole), then a tight downward consolidation (the flag). Breaks out higher to continue the uptrend.

• Pole = strong move up on volume
• Flag = small pullback or sideways drift on lower volume
• Entry = breakout above the flag with volume return
• Target = pole height projected from breakout

Same shape, opposite direction. Sharp drop, small upward consolidation, then continues down.

Like a flag but the consolidation forms a small symmetric triangle. Same trading rules as a flag.

• Ascending triangle — flat top resistance, rising lows. Usually bullish.
• Descending triangle — flat bottom support, lower highs. Read as bearish, but in Bulkowski's data it breaks up about half the time (53%). Wait for the break.
• Symmetrical triangle — converging trendlines. Breaks up about 60% of the time in Bulkowski's data; the prior trend is only a weak hint. Wait for the break.

5.2Reversal Patterns

Price was trending. The pattern marks a top or bottom. The trend flips.

Three peaks. Middle peak (head) is highest. Outside peaks (shoulders) are similar height. The neckline connects the two troughs between them. Bearish reversal when price breaks below the neckline.

Inverse Head & Shoulders = same pattern flipped. Bullish reversal at the bottom.

Price hits resistance twice at the same level and fails. Bearish reversal when the swing low between the tops breaks.

Same as double top, flipped. Bullish reversal.

Two converging trendlines both sloped in the same direction.

• Rising wedge — both lines tilt up but the upper line tilts less. Usually bearish.
• Falling wedge — both tilt down but lower less. Usually bullish.

Wedges aren't only reversals. A falling wedge inside an uptrend often breaks up and continues the trend. Let the break decide.

5.3The Cup & Handle

The classic growth-stock pattern. A rounded bottom (the cup), then a smaller dip (the handle), then a breakout to new highs.

• Cup duration usually weeks to months
• Handle is typically 5-15% below the cup's high
• Entry = breakout above the cup's high with volume
• Target = cup depth added to the breakout point

This is one of the best-known bullish continuation patterns on daily charts. William O'Neil (IBD) made it famous after finding it at the start of many of the big winners he studied.

5.4Pattern Reliability

No pattern is 100%. Anyone selling you an "85% win rate pattern" is selling you something. In Thomas Bulkowski's large chart-pattern studies, roughly 15-30% of upward breakouts fail to move even 10%, and only about 50-70% reach their measured target, depending on the pattern and the market. Downward breakouts do worse.

What raises the odds:

• Volume confirmation on the breakout move
• Larger pattern on higher timeframe (daily > hourly)
• Pattern aligns with overall trend (bull flag in an uptrend > bull flag in a downtrend)
• Confluence with S/R levels at the breakout point
• Clean structure — sharp pole, tight consolidation, clear breakout

Treat patterns as edges, not guarantees. Size accordingly.

Indicators are derivatives of price. They never tell you something the price doesn't already show — they just summarize it. Useful for confirmation. Bad for primary signals. Pick two or three you understand. Skip the rest.

6.1Moving Averages

A line on the chart showing the average price over N days. The three you'll see most:

• 20-day MA — short-term trend. Active swing traders watch this.
• 50-day MA — medium-term trend. Often acts as dynamic support in uptrends.
• 200-day MA — long-term trend. The most-watched line on the chart; many traders use it as a rough bull/bear divider.

SMA (simple) treats every day equally. EMA (exponential) weights recent days more. EMA reacts faster. A common combo is the 20 EMA for short-term trend and the 200 SMA for the big picture.

• Trend filter: price above the 200 SMA = long-term uptrend. Below = long-term downtrend. A rule of thumb, not an official definition (a bear market is usually defined as a 20% drop from the high).
• Dynamic support/resistance: uptrending stocks often pull back to the 20 or 50 EMA and bounce. That's a setup.
• Golden cross / death cross: when the 50 SMA crosses above the 200 SMA, it's bullish. Below = bearish. Slow, lagging and widely watched — it often fires after much of the move is done and whipsaws in choppy markets, so use it for context, not timing.

6.2RSI

"Relative Strength Index." Momentum oscillator from 0-100. Tells you how overbought or oversold a stock is. The default setting is 14 periods (14 days on a daily chart).

• Above 70 — overbought. May be due for a pullback.
• Below 30 — oversold. May be due for a bounce.
• 50 — neutral.

RSI works best as a confirmation tool. Don't buy just because RSI is below 30 — stocks can stay oversold for weeks. Use it alongside trend and support levels.

When price makes a new high but RSI doesn't (or vice versa), that's a divergence. Often warns of a coming reversal. One of the most useful RSI signals.

6.3MACD

"Moving Average Convergence Divergence." Shows momentum shifts in the trend.

Three parts, default settings 12, 26, 9:

• MACD line — the 12-period EMA minus the 26-period EMA
• Signal line — a 9-period EMA of the MACD line
• Histogram — the bars showing the gap between the two. Bigger bars = stronger momentum.

When the MACD line crosses above the signal line = bullish signal. When it crosses below = bearish.

MACD is best on daily charts. On short timeframes it gives too many false signals.

6.4Bollinger Bands

A moving average (usually 20 SMA) with two bands above and below, spaced at 2 standard deviations.

• Price near the upper band — extended high, possibly overbought
• Price near the lower band — extended low, possibly oversold
• Bands squeezing tight — low volatility, often before a big breakout
• Bands expanding — high volatility, trending move underway

The squeeze is the most useful Bollinger signal. Tight bands almost always lead to expansion. Direction has to come from somewhere else.

6.5Volume Confirms Everything

The most underrated indicator on every chart is just the volume bar.

• Breakout on high volume — more likely to hold
• Breakout on low volume — fails more often (though most still don't fail)
• Selloff on high volume — real distribution, be careful
• Selloff on low volume — probably a healthy pullback
• Climax volume at extremes — often marks exhaustion (top or bottom)

Always check volume on the move that matters. A pattern breakout with no volume behind it deserves extra suspicion.

6.6Less Is More

You will see traders with 8 indicators on their charts in different colors. In my experience, they're usually the ones losing.

Pick 2-3 tools that make sense to you and master them. A clean chart might have:

• 20 EMA and 200 SMA
• RSI on the bottom
• Volume always visible

That's enough. Adding more indicators doesn't add more edge. It usually just adds confusion.

Breakouts look easy on a textbook chart — price punches through resistance, you buy, it goes up. In reality, a lot of them fizzle: in Thomas Bulkowski's chart-pattern studies, roughly 15-30% of upward breakouts fail to move even 10%, and only about 50-70% reach their measured target. Knowing the difference between a real breakout and a head-fake is the most valuable skill in chart reading.

7.1What Defines a Real Breakout

A real breakout has four characteristics:

1. Clean break — price closes decisively above resistance, not just wicks through it
2. Volume surge — significantly above average on the breakout candle
3. Follow-through — price continues higher in the next session, doesn't immediately reverse
4. Successful retest — if price pulls back to the broken level, it holds as new support

My rule: I want at least three of these four before I call a breakout real. Fakeouts usually have zero or one.

7.2The Volume Rule

My favorite filter. Real breakouts are usually loud. Fakeouts are usually quiet. My thresholds:

• 2x average volume on the breakout candle = real money is moving
• Less than 1.5x average = probably noise

If a stock breaks resistance on the same volume it had yesterday, the move was probably retail FOMO and a few algos. It's more likely to fail: in one large Bulkowski study, upward breakouts on the lightest volume failed about 25% of the time versus about 8% on the heaviest. His research isn't one-sided, though (another of his studies found heavy-volume breakouts failed more often), and most low-volume breakouts still hold. Volume is a clue, not a verdict.

7.3The Retest Rule

The most patient way to trade breakouts: wait for the retest.

After a clean breakout, price often pulls back to test the broken level — roughly half to two-thirds of the time in Bulkowski's data. If it holds (old resistance becomes new support), that confirms the breakout. Enter on the bounce. Stop below the retest low.

If price falls back below the broken level on the retest, treat the breakout as failed. Skip the trade.

Trade-off: you miss the initial pop, and some breakouts never retest at all — Bulkowski found those tend to run further than the ones that come back. But the retest entry has way better R/R because your stop is tight against a confirmed level.

7.4Spotting Fakeouts

Common fakeout patterns:

Price spikes above resistance during the session but closes back below it. Almost always a fakeout. The body of the candle matters, not the wick.

Price closes above resistance but volume is unremarkable. No commitment behind the move. Fails more often than a loud breakout, usually within a few sessions — though most still hold.

Breakout looks real, then on the retest, price slices straight through. The "support" doesn't hold. Now you're in no-man's land — exit fast.

A news headline pushes price above resistance instantly. Volume is high but it's all reactive — no follow-through buyers. Often retraces fully within hours.

7.5Multi-Timeframe Confirmation

The strongest breakouts happen when multiple timeframes agree.

• Daily breakout aligned with weekly trend — strongest
• Hourly breakout aligned with daily trend — solid
• Hourly breakout against the daily trend — weakest, often fades

Before you take any breakout, check the higher timeframe. If the daily is in a downtrend and you're buying a 1-hour breakout, you're fighting the bigger picture. Many of those fail.