How to Read Charts and Use Technical Analysis for the First Time

Technical analysis is a tool used to understand market behavior by recognizing patterns and managing risk. It helps manage our emotions, reminds us to stay grounded in our strategy, and to avoid making any bad decisions so that we confidently make smart choices based on real-time data.

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Let's talk about technical analysis. If you've heard myths about it, let's try to clear those up first by telling you how we use it. Technical analysis alone does not work for us and it is never objective because its rules are always being bent and twisted by emotions and big investors. Vogi group defines technical analysis as the chart patterns made by price action. To us, technical analysis is more of an art form based on data than a science or a rigid math. Because of this, we never use it as concrete evidence or as our main strategy.

Technical analysis is like any art form. There are rules and techniques that came before which guide it to new outcomes. We see technical analysis this way. Every security behaves differently, and even the same security changes its behavior over time. Yet common universal patterns still appear. How we follow those rules depends on the artist, meaning the investor, and how we feel about a pattern and its potential outcome.

The way we think about technical analysis is like an artist looking for patterns they like. We are always searching for attractive patterns in charts. Patterns in the market occur repeatedly at different scales for legitimate reasons, indicating crucial information we can use to our advantage when we understand what each pattern represents.

Patterns and indicators often hint when big moves are about to happen, especially when no news is affecting the stock price. Certain patterns also indicate the start or end of a trend. When you get really good at using technical analysis, it will prepare you for these situations.

The psychology of technical analysis is vital. We are not aiming for a single solution to a problem, we are aiming for a positive result. Art as an analogy works better as a mindset for doing technical analysis than math and science, which often provide indisputable one answer solutions. While math and science serve their purpose for computing data, they follow strict rules to arrive at concrete solutions that fail to process certain variables that capture an entire investment thesis. Art's malleability aligns with technical analysis because it is more of a journey of managing risk and building up fluid opinions instead of a "set it and forget it" approach.

When all else fails and your strategy and plan crumble in front of your eyes, technical analysis can be your only reliable source of data that helps you manage risk and succeed when others are panicking. It is such an accessible and reliable place for data. You can wake up from a coma, look at charts across markets, and within a few hours get a snapshot of what is going on.

Reading charts is a good stand alone indicator of general trend, market environment, and sentiment, especially when looking at charts of different assets, like in different sectors and between stocks and indices. It shows where money is flowing or not, and what people are hopeful or pessimistic about.

We look out for these patterns: 

Bullish Patterns

• Bull flag

• Inverse head and shoulder

• Double bottom

• Trending up, making higher highs and higher lows

Bearish Patterns

•   Head and shoulder

•   Double top

•   Failed bull flags

Head and shoulders, not the shampoo, or a double top or double bottom indicate trend reversals. How they actually behave and what patterns they form show the initiation of potential major moves, but not always, and how they behave afterward varies.

We typically combine these patterns and strategies of technical analysis in looking at the RSI chart. This tracks the rate at which the price is being bought and sold, it’s from 0-100 so a lower number (below 30) indicates it may have been sold off too rapidly and a number above 70 indicates it may have been overbought. Analyzing the RSI can help give an additional layer of information but it’s not essential for reading chart's in technical analysis.

At this point, you may be thinking this doesn’t say much, but it does provide a basis to create probabilities for what’s about to occur to the price. This can improve both confidence to avoid emotionality as well as the ability to spot good opportunities.

The most commonly used and talked about indicator you likely have already heard of are support and resistance. These are areas where after big moves in either direction, we expect the stock to reassess its trajectory based on previous areas in the past where the stock has changed its direction or pattern.

Support is a price level or range where the price continuously in the past does not go below. It is a floor, showing that every time the price has gotten that low many buyers appeared. This indicates that for that stock, there is a high chance that all else equal it will trade above that area.

Resistance acts as a ceiling for the price. If it constantly goes up to a price and does not move much past it, it can act as an area of resistance. We could likely expect it not to go above, only positive news really changes anything.

For example, if a stock is massively tanking, we can use technical analysis to see where previous support is for where it can stop declining and assess our risk situation. Also, if we do not see any patterns, we can wait until it stops that trend to look for potential patterns we are familiar with.

Just following the movement of the stock chart without acting on it and investing will give you a good gauge on sentiment after the tank, such as whether it has further to go or potentially was oversold (with RSI). If a stock sharply rises or continues to fall, we can assume traders are still speculating, or that there is serious interest in one way or another. Further, if it forms a stagnation range for an extended period at support, we can assume an accumulation of buyers:

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Conclusion 

It can get tricky because technical analysis is fluid and never fully dependable. Always consider the counter argument. You have to be careful. Do not try to catch any falling knives, as they say. Try to get in early enough when a stocks sentiment is out of favor, like during accumulation. We like to look for the prolonged support and resistance stages where there are neither up nor down trajectories laid out yet and assess our risk strategy from there. Note that options flows are increasingly influencing price action as more traders use it as a tool for leverage, speculation and multidimensional investing.