Learning Objectives

After completing this chapter, you will be able to:

• Understand what technical analysis is.
• Learn why investors use price charts.
• Identify the different types of price charts.
• Understand the basic components of a price chart.
• Learn how to recognise trends using charts.
• Understand the limitations of technical analysis.

Introduction

Technical analysis is a method of analysing financial markets by studying historical price movements and trading activity. Instead of focusing on a company's financial statements, technical analysts use charts to identify trends and potential buying or selling opportunities.

Learning how to read price charts is one of the first steps towards understanding technical analysis.

What is Technical Analysis?

Technical analysis is the study of past market prices and trading volume to help identify possible future price movements.

Technical analysts believe that:

• Market prices reflect available information.
• Prices often move in trends.
• Historical price patterns may repeat over time.

Technical analysis does not predict the future with certainty. Instead, it helps investors identify potential opportunities based on historical market behaviour.

Why Do Investors Use Price Charts?

Price charts help investors understand how a share has performed over time.

Investors use charts to:

• Identify market trends.
• Find potential buying opportunities.
• Identify possible selling opportunities.
• Measure market sentiment.
• Monitor price movements.

Charts allow investors to visualise price changes rather than simply looking at numbers.

Types of Price Charts

There are several types of charts used in technical analysis.

Line Chart

A Line Chart connects the closing prices over a selected period.

It is:

• Easy to understand.
• Ideal for beginners.
• Useful for identifying overall trends.

However, it does not show daily price highs and lows.

Bar Chart

A Bar Chart provides more detailed information.

Each bar displays:

• Opening price.
• Highest price.
• Lowest price.
• Closing price.

Bar charts are commonly used by experienced traders.

Candlestick Chart

The Candlestick Chart is the most widely used chart in technical analysis.

Each candlestick shows:

• Opening price.
• Closing price.
• Highest price.
• Lowest price.

Candlestick charts make it easier to identify buying and selling pressure and recognise price patterns.

Understanding a Candlestick

Each candlestick represents price movement over a selected time period.

A candlestick consists of:

• Open Price – The first traded price.
• Close Price – The last traded price.
• High Price – The highest price reached.
• Low Price – The lowest price reached.

If the closing price is higher than the opening price, it usually indicates buyers were stronger during that period.

If the closing price is lower than the opening price, it generally indicates sellers were stronger.

Understanding Time Frames

Price charts can be viewed over different time periods.

Common time frames include:

• 1 Minute
• 5 Minutes
• 15 Minutes
• 1 Hour
• Daily
• Weekly
• Monthly

Long-term investors often focus on daily, weekly, or monthly charts, while short-term traders may use shorter time frames.

Understanding Volume

Volume refers to the number of shares traded during a specific period.

Higher trading volume generally indicates greater market activity.

Investors often analyse volume to:

• Confirm price trends.
• Measure investor interest.
• Identify unusually strong buying or selling activity.

Price movements supported by higher volume are often considered more significant than those occurring on low volume.

Understanding Market Trends

One of the main purposes of technical analysis is to identify trends.

There are three basic market trends.

Uptrend

An Uptrend occurs when prices generally move higher over time.

Characteristics include:

• Higher highs.
• Higher lows.
• Strong buying interest.

Downtrend

A Downtrend occurs when prices generally move lower over time.

Characteristics include:

• Lower highs.
• Lower lows.
• Strong selling pressure.

Sideways Trend

A Sideways Trend occurs when prices move within a relatively narrow range.

Characteristics include:

• No clear upward or downward direction.
• Balanced buying and selling.
• Often occurs before a new trend develops.

Reading a Real ASX Example

Let's look at a simplified example using BHP Group (BHP).

When reviewing BHP's price chart, investors may observe:

• Whether the share price is trending upward or downward.
• Trading volume during major price movements.
• Recent highs and lows.
• Overall market direction over different time periods.

Price charts help investors understand how a stock has behaved, but they should always be used alongside broader company research.

Limitations of Technical Analysis

Technical analysis is a useful tool, but it has limitations.

Investors should remember:

• Past price movements do not guarantee future performance.
• Market conditions can change quickly.
• Technical signals are not always correct.
• Company fundamentals remain important.
• Technical analysis works best when combined with other forms of research.

Successful investors often use both technical and fundamental analysis together.

Why Understanding Price Charts Matters

Learning to read price charts helps investors:

• Identify market trends.
• Better understand price behaviour.
• Improve market timing decisions.
• Recognise changes in market sentiment.
• Build confidence when analysing investments.

Price charts are one of the most widely used tools in technical analysis and provide a foundation for learning more advanced charting techniques.

Key Takeaways

• Technical analysis studies historical price movements and trading volume.
• Price charts help investors identify trends and market behaviour.
• The three main chart types are Line Charts, Bar Charts, and Candlestick Charts.
• Candlestick charts display the open, high, low, and close prices.
• Volume measures trading activity and helps confirm price movements.
• Markets generally move in uptrends, downtrends, or sideways trends.
• Technical analysis should be combined with fundamental analysis for better-informed investment decisions.