What Technical Analysis Measures (and What It Doesn’t)
Technical analysis focuses on what the market is doing, not why it “should” do it. The raw inputs are:
- Price: where trades occur (the only thing that directly determines profit/loss).
- Time: how price changes across intervals (speed, rhythm, and structure).
- Volume (when available): how much participation occurred at each price/time.
The goal is to interpret observable behavior on a chart without adding stories or predictions. Instead of “this will go up because…”, use statements like: “Price pushed higher, met selling, and closed back near the open; buyers tried but didn’t keep control into the close.”
1) Chart Anatomy and Scaling
Core parts of a price chart
- Horizontal axis (X): time (minutes, hours, days, etc.).
- Vertical axis (Y): price.
- Bars/candles: summarize trading activity for each time interval.
- Volume bars (optional): participation per interval.
OHLC: the four numbers behind most charts
Most chart types are different visualizations of the same four values for a chosen timeframe:
- Open: first traded price of the interval.
- High: highest traded price of the interval.
- Low: lowest traded price of the interval.
- Close: last traded price of the interval.
Example (1-hour candle): Open 100, High 106, Low 98, Close 104. This tells you price explored down to 98 and up to 106, and finished the hour near the upper part of the range.
Chart types (quick orientation)
- Line chart: usually plots close only. Useful for a simplified view, but hides intraperiod struggle.
- Bar chart (OHLC bars): shows open, high, low, close with ticks. Information-rich but less intuitive for many learners.
- Candlestick chart: shows the same OHLC data with a body and wicks; often easiest for reading pressure and rejection.
Scaling: linear vs. logarithmic (log)
Scaling changes how you visually judge moves.
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- Linear scale: equal vertical distance = equal absolute price change. A move from 10 to 20 looks the same size as 110 to 120 (both +10).
- Log scale: equal vertical distance = equal percentage change. A move from 10 to 20 (+100%) looks similar to 100 to 200 (+100%).
Practical guidance:
- Use linear when price has stayed in a relatively tight range and you care about absolute points/ticks.
- Use log when analyzing long histories or assets that have multiplied in price; it prevents early moves from looking “flat” and later moves from looking “too steep.”
Practice prompt (scaling): Look at the same chart on linear and log. Describe what changes in plain language: “On log scale, the later rally looks less vertical because it’s similar in percentage terms to earlier rallies.”
2) Timeframe Selection and How Signals Change Across Timeframes
Timeframe = the lens you choose
A timeframe defines what one candle represents (e.g., 5 minutes, 1 hour, 1 day). Changing timeframe does not change the underlying trades, but it changes what is emphasized:
- Lower timeframes: more detail, more noise, more frequent swings.
- Higher timeframes: smoother structure, fewer but more “meaningful” swings.
How the same move looks different
Imagine price rises from 100 to 110 over a day, but within the day it drops to 97 first.
- On a daily candle, you might see a strong close near the high (looks like steady strength).
- On a 5-minute chart, you’ll see the drop to 97, the reversal, and many smaller battles (looks like a volatile fight).
Both are true; they answer different questions.
Match timeframe to decision horizon
- If you manage positions over weeks, prioritize daily/weekly structure; intraday wiggles are often irrelevant.
- If you trade intraday, you still benefit from checking higher timeframes to understand where you are within the bigger structure.
A simple multi-timeframe routine (no jargon)
- Start high (e.g., weekly/daily): identify where price is spending time (higher area, lower area, middle of a range).
- Go one step down (e.g., 4H/1H): observe the most recent swings and whether pushes are being accepted or rejected.
- Execute on your working chart (e.g., 15m/5m): look for a clear candle story aligned with the higher-timeframe context.
Practice prompt (timeframes): Pick one asset. On daily and 15-minute charts, describe the last 20 candles using plain language: “Daily: price is climbing with shallow pullbacks. 15-minute: price is choppy; rallies stall quickly and dips are bought back.”
3) Candlesticks: Open/High/Low/Close and What They Imply
Parts of a candlestick
- Body: distance between open and close.
- Wicks (shadows): distance from body to high/low (the extremes reached).
- Color (varies by platform): often “up” if close > open, “down” if close < open. Color is secondary to location and size.
What the body and wicks suggest about pressure
Think in terms of who managed to keep control into the close.
- Large body, small wicks: directional control during the interval (buyers or sellers kept pressure).
- Small body, long wicks: rejection and two-sided trade; attempts to move were pushed back.
- Long upper wick: price traded higher but couldn’t stay there by the close (selling pressure or profit-taking overcame buying).
- Long lower wick: price traded lower but couldn’t stay there by the close (buying pressure absorbed selling).
Important: a single candle is not a “signal” by itself. It is one sentence in a paragraph. Context decides meaning.
Step-by-Step: How to Read Any Candle in Context
Use this method on any chart, any timeframe. The output should be a plain-language description of behavior, not a label.
Step 1 — Identify the prior swing (what was happening before this candle?)
Ask:
- Was price moving up, moving down, or moving sideways?
- Were recent pushes making progress (new highs/lows) or failing?
Example language:
- “Price had been rising for several candles, but each push up was getting smaller.”
- “Price had been falling, then started to stall with smaller bodies.”
Step 2 — Note the candle’s location (where is it happening?)
Location is often more important than the candle shape.
- Is the candle near a recent swing high/low?
- Is it near a round number (e.g., 100, 1000) where traders often react?
- Is it near an area where price previously turned quickly (a “decision zone”)?
Example language:
- “This candle formed right at the prior high where price previously failed.”
- “This candle printed in the middle of the recent range, so it’s less informative.”
Step 3 — Compare relative size (is it unusually large or small?)
Compare the candle’s body and total range to the last ~20 candles on the same timeframe.
- Unusually large range: strong emotion/urgency; a meaningful attempt to move price.
- Unusually small range: hesitation; waiting; balance.
Example language:
- “This is the largest down candle in two days; sellers showed urgency.”
- “Ranges are shrinking; neither side is pressing.”
Step 4 — Read the close (who “won” the interval?)
The close tells you where price was accepted at the end of the interval.
- Close near high: buyers maintained control into the end.
- Close near low: sellers maintained control into the end.
- Close near middle: neither side kept control; balance or tug-of-war.
Step 5 — Translate into a one-sentence behavior statement
Use a template:
After [prior swing], price [attempted to move] at/near [location], but [was accepted/rejected], and closed [near high/middle/low], suggesting [buyers/sellers] had more control into the close.Examples:
- “After a steady rise, price pushed above the prior high, but was rejected and closed near the open; buyers tried to break higher but couldn’t keep it.”
- “After a decline, price dipped below the recent low and snapped back to close near the high; sellers pushed lower but buyers absorbed it.”
- “During a sideways range, price formed a small-bodied candle with wicks on both sides near the middle; neither side gained control.”
Guided Practice: Describe What You See (No Indicator Jargon)
Practice 1 — Single candle description
Pick any candle on your chart and answer:
- What was the prior swing (up/down/sideways)?
- Where is this candle located (near a recent high/low, round number, or middle)?
- Is its range/body bigger or smaller than recent candles?
- Where did it close within its range?
Write one sentence describing behavior (avoid words like “bullish,” “bearish,” “signal,” “setup”).
Practice 2 — Three-candle story
Select three consecutive candles and describe:
- What changed from candle 1 to candle 3?
- Did attempts to move get accepted (follow-through) or rejected (snap back)?
Plain-language example format: “Candle 1 pushed up, candle 2 stalled, candle 3 sold off and erased the push; buyers lost control quickly.”
Practice 3 — Timeframe comparison
Choose a moment where the market moved strongly. Describe it on two timeframes (e.g., 1H and 5m):
- On the higher timeframe: what does the move look like (smooth push, reversal, range expansion)?
- On the lower timeframe: what battles appear inside that same candle (failed pushes, quick reversals, grinding)?
Practice 4 — Location test
Find two similar-looking candles (e.g., both have long upper wicks). One should be near a recent swing high; the other should be in the middle of a range. Describe why the same shape can matter more in one location than the other, using only behavior words (attempt, rejection, acceptance, follow-through).
