How to Read Technical Analysis Charts
- 1). Look for horizontal lines overlaid on price information. These identify levels of support and resistance. Support is defined as a level where falling prices may stall, and resistance is defined as a level where rising prices may stall. These levels are often used as possible entry points for trades.
Many technical analysts consider support and resistance to be interchangeable, with support sometimes becoming resistance and resistance becoming support. One of the most popular ways of determining support and resistance is calculating Fibonacci retracements. To do this, the analyst measures a price range with the Fibonacci tool and horizontal levels are plotted at 38.2 percent, 50 percent and 61.8 percent levels of the entire range.
- 2). Identify moving averages. Moving averages appear as smooth lines moving along with prices. Often, you will see two or more moving averages plotted along with prices. Together, a shorter period average and a longer period average signal the market trend. When the shorter average is higher than the longer average, it signals a bull market and when the shorter average is below the longer average, it signals a bear market.
- 3). Become familiar with oscillators. Oscillators are often plotted below a price chart, and they derive their name because they oscillate back and forth within a range. Each oscillator works in a slightly different way, but most are used to measure momentum or act as confirmation for changing market trends. Some popular oscillators are the RSI, MACD and Stochastics.