Day 3 – Mastering Basic Technical Analysis & Chart Reading





Introduction

You’ve set up your paper trading account, built your first mock portfolio, and taken your first trades.

Today, we step into one of the most powerful tools for timing the market:
Technical Analysis (TA) — reading price charts to make informed entry and exit decisions.

If Day 1 was about mindset and Day 2 about practice, Day 3 is about vision — learning to see patterns that others miss.

Step 1: What is Technical Analysis?

Technical Analysis is the study of price action — how prices move over time — using charts and indicators.

The core belief:

All known information about a stock is already reflected in its price.
Price movements tend to form patterns that repeat over time.

Unlike fundamental analysis (which asks “Is the company good?”), TA asks:

“Is now a good time to buy or sell?”

Step 2: Understanding Chart Types

Before we dive into strategies, let’s cover the most common charts traders use.

1. Line Charts

  • Simple, connects closing prices over time.

  • Best for long-term trends, but lacks detail.

2. Bar Charts

  • Shows open, high, low, and close for each period.

  • More detail than line charts, but still not as visual as candlesticks.

3. Candlestick Charts (most popular)

  • Each “candle” shows:

    • Body: open-to-close range.

    • Wicks/Shadows: high and low prices.

    • Color: Green (close > open) or Red (close < open).

  • Excellent for spotting patterns.

Pro Tip: Always start with candlestick charts for trading.

Step 3: Timeframes Matter

Your chart timeframe depends on your style:

  • Day traders: 1-minute, 5-minute, or 15-minute charts.

  • Swing traders: 1-hour or daily charts.

  • Long-term investors: Weekly or monthly charts.

Golden rule: Higher timeframes = stronger trends, lower timeframes = more noise.

Step 4: Support and Resistance

These are the building blocks of TA.

Support

  • A price level where buying pressure tends to stop the stock from falling further.

  • Think of it as a floor.

Resistance

  • A price level where selling pressure tends to stop the stock from rising.

  • Think of it as a ceiling.

Example:
If HDFC Bank keeps bouncing back every time it hits ₹1,500, that’s a support level.
If it struggles to go above ₹1,600, that’s a resistance level.

Trading tip: Buy near support, sell near resistance — but confirm with other signals.

Step 5: Moving Averages (MA)

Moving Averages smooth out price data to identify trends.

Types:

  • Simple Moving Average (SMA): Average price over a set period.

  • Exponential Moving Average (EMA): Gives more weight to recent prices, reacts faster.

Common Uses:

  • Trend direction: Price above MA = uptrend, below MA = downtrend.

  • Crossover signals:

    • Golden Cross: Short-term MA crosses above long-term MA → bullish.

    • Death Cross: Short-term MA crosses below long-term MA → bearish.

Example:
50-day SMA crossing above 200-day SMA often signals a strong uptrend.

Step 6: Relative Strength Index (RSI)

RSI is a momentum indicator that measures how overbought or oversold a stock is.

  • Scale: 0–100

  • Above 70 = Overbought → Possible pullback.

  • Below 30 = Oversold → Possible bounce.

How to use:

  • Combine with support/resistance: If a stock is at support and RSI < 30, it’s a stronger buy signal.

Step 7: MACD (Moving Average Convergence Divergence)

MACD is a trend-following momentum indicator.

  • Two lines: MACD line and Signal line.

  • Buy signal: MACD line crosses above Signal line.

  • Sell signal: MACD line crosses below Signal line.

Extra tip: If MACD is crossing near the zero line, signals tend to be stronger.

Step 8: Basic Candlestick Patterns

Candlestick patterns help spot market psychology shifts.

Bullish Patterns:

  • Hammer: Small body, long lower wick → Buyers stepped in after selling.

  • Bullish Engulfing: Large green candle fully covers previous red candle.

Bearish Patterns:

  • Shooting Star: Small body, long upper wick → Buyers lost control.

  • Bearish Engulfing: Large red candle fully covers previous green candle.

Step 9: Putting It Together – A Simple Trading Setup

Here’s a basic strategy you can practice today:

The RSI + MA Crossover Setup

  1. Use daily candlestick chart.

  2. Plot 20-day EMA and 50-day EMA.

  3. Buy when:

    • 20-day EMA crosses above 50-day EMA and

    • RSI is between 40–60 (neutral zone, not overbought).

  4. Sell when:

    • Price hits resistance or

    • RSI goes above 70.

Why it works:
You’re entering at the start of a trend, not after it’s overextended.

Step 10: Your Day 3 Practice Plan

By the end of today, you should:

  1. Study charts of 5 stocks from your mock portfolio.

  2. Identify at least 2 support and 2 resistance levels per stock.

  3. Plot 20-day and 50-day EMAs on each chart.

  4. Check RSI readings and note any overbought/oversold conditions.

  5. Spot at least one candlestick pattern in each chart.

  6. Record findings in your trade journal.

Common Mistakes to Avoid on Day 3

  • Forcing patterns: Not every price movement forms a recognizable setup.

  • Ignoring the trend: Never trade against the main trend unless you have strong confirmation.

  • Overloading indicators: 2–3 key indicators are enough; too many cause confusion.

Your End-of-Day Review Questions

  1. Did I identify support/resistance correctly?

  2. Were my indicators giving consistent signals?

  3. Did I see any fake-outs (false breakouts or breakdowns)?

  4. How confident would I be taking these trades with real money?

Preview of Day 4

Tomorrow, we’ll dig into Risk Management and Position Sizing in Depth — because even the best chart reader loses money without disciplined risk control.

You’ll learn:

  • The “2% Rule”

  • How to adjust position sizes for volatile stocks

  • Risk/Reward ratio calculations

  • How to survive losing streaks

Final Thought for Day 3:
Charts don’t predict the future; they reflect the present. But if you learn to read them well, you can tilt the odds in your favor — and in the market, odds are everything.