Technical analysis is all about finding patterns in market data. But how do you do that? And what patterns are traders actually looking for? In this video, we’ll break down what technical analysis is, three key concepts, common chart types, and some examples of technical indicators so you can start spotting trends for yourself. Technical analysis is an essential tool for every chart-driven trader.
The core idea of technical analysis is to analyze past market data—mainly historical price and volume—to try to gauge future price movements. Unlike what’s known as fundamental analysis, technical analysis isn’t focused on a stock’s news, underlying financials, or profitability.
There are three concepts you need to know when getting started: Number one: Technical analysis believes that the stock price and volume is pretty much all you need, anything outside that is just noise. Number two: Even when things look totally random, stock prices often move in trends. When in doubt, zoom out.
Number three: History doesn’t repeat itself, but it often rhymes. Tons of chart patterns have been used for over a hundred years because market behavior tends to repeat itself in recognizable ways.
Now, where's the best place for this analysis? Deep in the charts. Let's dive into some common types. One of the most common types is a bar chart. Just by glancing at it, you get the entire story of a stock’s price movement. Here’s how. This line represents how high the stock price reached in a day. And this line? That's how low the price went. That’s good info, but you also want to know where the stock opened and closed for the day. That's what these lines here represent. Candlestick charts are another way to look at the same data.
The body of the candlestick is usually green if the stock closes higher and red if it closes lower. Last but not least, there’s your favorite chart from math class: line charts. Openings, ranges, up moves, down moves—line charts leave all that out. They typically connect just the closing prices with a line to get a big picture view of price movement. How much a stock moved up and down in a day isn’t as important here.
Now that you know the ins and outs of some common chart types, it's time to identify the trends within them. One way I like to think of it is that trends can be your friends; they help inform your trade ideas.
There are three types: uptrends, downtrends, and sideways trends. You identify trends by looking at the direction prices are moving over time. Traders often draw trendlines between two or more price points to help visualize that direction. With an uptrend, you draw a line between two or more low price points on a stock.
With a downtrend: you draw a line between two or more high price points, like this. A sideways trend sees both its upper and lower trend lines stay flat, like this. A trend stays intact as long as a stock’s price respects the trendline. But if a price crosses that line? It’s a sign that things are changing. Trends aren’t just about direction. Changing the timeframe can reveal different trend lengths which traders often describe as primary trends, secondary trends, or minor trends. Think of trends like the ocean: the tide is your primary trend, the waves are your secondaries, and the ripples in the water are your minor trends. They all move at different speeds, but still interact with each other. So far, we’ve focused on reading the price itself, but analysts often use another set of tools called technical indicators. These are calculations based on factors, like stock price or volume, to analyze past price behavior and help you gauge future movements.
You’ll usually find them on or below a chart. There are dozens of indicators out there, but let’s look at three common ones. First up: RSI, or relative strength index. This measures the speed and magnitude of price movements. It’s usually shown on a scale of 0-100. A stock may be considered overbought when its RSI is above 70...and oversold when it’s below 30.
A stock’s RSI stays higher during uptrends, and lower during downtrends. Next, there’s MACD, which stands for Moving Average Convergence/Divergence. It can help you determine buy or sell opportunities. It’s charted alongside another line called the signal. There’s a lot of math behind it, but essentially it reveals changes in the momentum, strength, and direction of a stock's price. A crossover of its lines can indicate a potential momentum shift and a possible trading opportunity. For example, if the MACD crosses above the signal line, that may indicate a buy. On the other hand, if the MACD crosses below the signal, it could indicate a sell. Last up: there’s SMA, or simple moving average.
A moving average tracks the average price over a set period and plots it as a line on the chart. Here’s an example of a 20-day SMA. Each day the average is recalculated using prices from the past 20 days. The result is a smoother line that helps filter out short-term noise and makes the broader price trend easier to see.
Technical analysis takes practice, but now you have a better idea of how to read charts, spot trends, and use a few common indicators—the foundation of every chart‑driven trader. If you still have any questions, fidelity.com/learn has a ton of helpful in-depth articles that cover technical analysis. ‘Till next time investors!
6 min