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  • Table of Contents
    • Overview
      • Why Analyze Securities?
      • Technical Analysis
      • Fundamental Analysis
      • Random Walk vs. Non-Random Walk
      • Asset Allocation and Diversification
      • John Murphy's 10 Laws of Technical Trading
      • John Murphy's "Charting Made Easy" eBook
      • Technical Analysis 101
        • TA 101 – Part 1
        • TA 101 – Part 2
        • TA 101 – Part 3
        • TA 101 – Part 4
        • TA 101 – Part 5
        • TA 101 – Part 6
        • TA 101 – Part 7
        • TA 101 – Part 8
        • TA 101 – Part 9
        • TA 101 – Part 10
        • TA 101 – Part 11
        • TA 101 – Part 12
        • TA 101 – Part 13
        • TA 101 – Part 14
        • TA 101 – Part 15
        • TA 101 – Part 16
        • TA 101 – Part 17
      • Irrational Exuberance
      • Cognitive Biases
      • Arthur Hill on Goals, Style and Strategy
      • Arthur Hill on Moving Average Crossovers
      • Multicollinearity
      • "The Trader's Journal" by Gatis Roze
        • Stage 1: Money Management
        • Stage 2: Business of Investing
        • Stage 3: The Investor Self
        • Stage 4: Market Analysis
        • Stage 5: Routines
        • Stage 6: Stalking Your Trade
        • Stage 7: Buying
        • Stage 8: Monitoring Your Investments
        • Stage 9: Selling
        • Stage 10: Re-Examine, Refine, Re-Enhance
        • Additional Reading
      • Bob Farrell's 10 Rules
      • Richard Rhodes' Trading Rules
      • Donchian Trading Guidelines
      • Why and How To Use Correlation
    • Chart Analysis
      • What Are Charts?
      • Support & Resistance
      • Trend Lines
      • Gaps and Gap Analysis
      • Introduction to Chart Patterns
      • Chart Patterns
        • Broadening Top or Megaphone Top
        • Double Top Reversal
        • Double Bottom Reversal
        • Head and Shoulders Top
        • Head and Shoulders Bottom
        • Falling Wedge
        • Rising Wedge
        • Rounding Bottom
        • Triple Top Reversal
        • Triple Bottom Reversal
        • Bump and Run Reversal
        • Flag, Pennant
        • Symmetrical Triangle
        • Ascending Triangle
        • Descending Triangle
        • Rectangle
        • Price Channel
        • Measured Move—Bullish
        • Measured Move—Bearish
        • Cup With Handle
      • Chart Types
        • Arms CandleVolume
        • CandleVolume
        • Elder Impulse System
        • EquiVolume
        • Heikin-Ashi Candlesticks
        • Kagi Charts
        • Renko Charts
        • Three Line Break Charts
        • MarketCarpets
        • Relative Rotation Graphs (RRG Charts)
        • Seasonality Charts
        • Yield Curve
      • Candlestick Charts
        • Introduction to Candlesticks
        • Candlesticks and Traditional Chart Analysis
        • Candlesticks and Support
        • Candlesticks and Resistance
        • Candlestick Bullish Reversal Patterns
        • Candlestick Bearish Reversal Patterns
        • Candlestick Pattern Dictionary
      • Point and Figure Charts
        • Point and Figure Basics
          • Introduction to Point & Figure Charts
          • Point & Figure Scaling and Timeframes
          • P&F Trend Lines
        • Classic Patterns
          • P&F Bullish Breakouts
          • P&F Bearish Breakdowns
          • P&F Signal Reversed
          • P&F Catapults
          • P&F Triangles
          • P&F Bull & Bear Traps
        • P&F Price Objectives
          • P&F Price Objectives: Breakout and Reversal Method
          • P&F Price Objectives: Horizontal Counts
          • P&F Price Objectives: Vertical Counts
        • Point & Figure Indicators
        • P&F Scans and Alerts
          • P&F Pattern Alerts
      • Chart Annotation Tools
        • Andrews' Pitchfork
        • Stock Market Cycles
        • Fibonacci Retracements
        • Fibonacci Arcs
        • Fibonacci Fans
        • Fibonacci Time Zones
        • Quadrant Lines
        • Raff Regression Channel
        • Speed Resistance Lines
    • Technical Indicators & Overlays
      • Introduction to Technical Indicators and Oscillators
      • Technical Indicators
        • Accumulation/Distribution Line
        • Alligator Indicator
        • Aroon
        • Aroon Oscillator
        • ATR Bands
        • ATR Trailing Stops
        • Average Directional Index (ADX)
        • Average True Range (ATR) and Average True Range Percent (ATRP)
        • Balance of Power (BOP)
        • Bollinger BandWidth
        • %B Indicator
        • Chaikin Money Flow (CMF)
        • Chaikin Oscillator
        • Chande Trend Meter (CTM)
        • CMB Composite Index
        • Commodity Channel Index (CCI)
        • ConnorsRSI
        • Coppock Curve
        • Correlation Coefficient
        • DecisionPoint Price Momentum Oscillator (PMO)
        • Detrended Price Oscillator (DPO)
        • Distance From Highs
        • Distance From Lows
        • Distance To Highs
        • Distance To Lows
        • Distance From Moving Average
        • Ease of Movement (EMV)
        • Force Index
        • Gopalakrishnan Range Index
        • High Low Bands
        • High Minus Low
        • Highest High Value
        • Linear Regression R2
        • Lowest Low Value
        • Mass Index
        • MACD (Moving Average Convergence/Divergence) Oscillator
        • MACD-Histogram
        • MACD-V
        • MACD-V Histogram
        • Median Price
        • Money Flow Index (MFI)
        • Negative Volume Index (NVI)
        • On Balance Volume (OBV)
        • Percentage Price Oscillator (PPO)
        • Percentage Volume Oscillator (PVO)
        • Performance Spread
        • Price Relative/Relative Strength
        • Pring's Know Sure Thing (KST)
        • Pring's Special K
        • Rate of Change (ROC)
        • Relative Strength Index (RSI)
        • Relative Volume (RVOL)
        • RRG Relative Strength
        • StockCharts Technical Rank
        • Slope
        • Standard Deviation (Volatility)
        • Stochastic Oscillator (Fast, Slow, and Full)
        • StochRSI
        • Traffic Light
        • TRIX
        • True Range
        • True Strength Index
        • TTM Squeeze
        • Typical Price
        • Ulcer Index
        • Ultimate Oscillator
        • Vortex Indicator
        • Weighted Close
        • Williams %R
      • Technical Overlays
        • Anchored VWAP
        • Bollinger Bands
        • Chandelier Exit
        • Double Exponential Moving Average (DEMA)
        • Hull Moving Average (HMA)
        • Ichimoku Cloud
        • Kaufman's Adaptive Moving Average (KAMA)
        • Keltner Channels
        • Linear Regression Forecast
        • Linear Regression Intercept
        • Moving Averages—Simple and Exponential
        • Moving Average Ribbon
        • Moving Average Envelopes
        • Parabolic SAR
        • Pivot Points
        • Price Channels
        • Triple Exponential Moving Average (TEMA)
        • Volume-by-Price
        • Volume-Weighted Average Price (VWAP)
        • ZigZag
    • Market Indicators
      • Introduction to Market Indicators
        • Market Indicator Dictionary
      • Advance-Decline Line
      • Advance-Decline Percent
      • Advance-Decline Volume Line
      • Advance-Decline Volume Percent
      • Arms Index (TRIN)
      • Bullish Percent Index (BPI)
      • DecisionPoint Intermediate-Term Breadth Momentum Oscillator (ITBM)
      • DecisionPoint Intermediate-Term Volume Momentum Oscillator (ITVM)
      • DecisionPoint Swenlin Trading Oscillator (STO)
      • High-Low Index
      • High-Low Percent
      • McClellan Oscillator
      • McClellan Summation Index
      • Net New 52-Week Highs
      • Percent Above Moving Average
      • Pring's Bottom Fisher
      • Pring's Diffusion Indicators
      • Pring's Inflation and Deflation Indexes
      • Pring's Net New High Indicators
      • Put/Call Ratio
      • Record High Percent
      • Volatility Indices
    • Market Analysis
      • Dow Theory
      • Sector Rotation Analysis
      • Intermarket Analysis
      • The DecisionPoint Chart Gallery
      • DecisionPoint Rydex Asset Analysis
      • Wyckoff Analysis Articles
        • Wyckoff Market Analysis
        • Wyckoff Stock Analysis
        • The Wyckoff Method: A Tutorial
      • Elliott Wave Analysis Articles
        • Introduction to Elliott Wave Theory
        • Identifying Elliott Wave Patterns
        • Guidelines for Applying Elliott Wave Theory
    • Trading Strategies & Models
      • DecisionPoint Trend Model
      • Trading Strategies
        • Bollinger Band Squeeze
        • CCI Correction
        • CVR3 VIX Market Timing
        • Faber's Sector Rotation Trading Strategy
        • Gap Trading Strategies
        • Harmonic Patterns
        • Hindenburg Omen
        • Ichimoku Cloud Trading Strategies
        • The 'Last' Stochastic Technique
        • MACD Zero-Line Crosses With Swing Points
        • Moving Average Trading Strategies
          • Finding Support and Resistance in Moving Averages
          • Guppy Multiple Moving Average: An MA Ribbon Designed to Tip the Market’s Hand
          • How To Trade Price-to-Moving Average Crossovers
          • Trading the Bounce: Finding Support and Resistance in Moving Averages
          • Trading the Death Cross
          • Trading Using the Golden Cross
          • Using the 5-8-13 EMA Crossover for Short-Term Trades
        • Moving Momentum
        • Narrow Range Day NR7
        • Percent Above 50-day SMA
        • Percent B Money Flow
        • The Pre-Holiday Effect
        • RSI(2)
        • Six-Month Cycle MACD
        • Slope Performance Trend
        • Stochastic Pop and Drop
        • Swing Charting
        • Trend Quantification and Asset Allocation
    • Index & Market Indicator Catalog
      • Advance-Decline Indicators
      • Cboe Indices and Indicators
      • CME Futures and Spot Prices
      • DecisionPoint Sentiment Indicators
      • Dow Jones Breadth Indicators
      • Dow Jones Global Indices
      • Dow Jones Select Indices
      • Dow Jones Titans Indices
      • Dow Jones US Indices
      • Economic Indicators
      • ICE Futures and Spot Prices
      • Intellidex Indices
      • MSCI Indices
      • New 52-week Highs and Lows for Exchanges
      • NYSE Arca Equity Indices
      • NYSE Equity Indices
      • Philadelphia Indices
      • S&P 500 Sector and Industry Groups
      • S&P GSCI Indices
      • StockCharts AD Percent
      • StockCharts AD Volume Percent
      • StockCharts Bullish Percent Index
      • StockCharts High-Low Index
      • StockCharts High-Low Percent
      • StockCharts Percent Above Moving Average
      • StockCharts Pseudo Symbols
      • StockCharts Record High Percent
      • StockCharts Theoretical Indices
      • US Treasury Yields
    • 📖Glossary
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On this page
  • Chart Data
  • Price Data
  • Index Data
  • Key Assumptions of Technical Analysis
  • High Liquidity
  • No Artificial Price Changes
  • No Extreme News
  • Chart Construction

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  1. Table of Contents
  2. Overview
  3. Technical Analysis 101

TA 101 – Part 3

PreviousTA 101 – Part 2NextTA 101 – Part 4

Last updated 10 months ago

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This is the third part of a series of articles about technical analysis from a new course we're developing. If you are new to charting, these articles will give you the “big picture” behind the charts on our site. If you are an “old hand”, these articles will help ensure you haven't “strayed too far” from the basics. Enjoy!

Tip. See the entire series

Chart Data

Charts are created from data such as price data and index data.

Price Data

Exchanges record the price and number of shares for each stock transaction, which is called tick data. Tick data is compiled over different periods of time to construct price bar data. Price bars show the beginning, highest, lowest, and ending prices for a chosen period. Individual price bar time periods can range from one minute to one year. Daily, weekly, and 60-minute price bars are other common examples.

Price bars less than a day long are known as intraday price bars. They range from one minute to one hour and are typically used in technical analysis by day traders who hold positions for minutes or hours.

A daily price bar is constructed of all the transactions during a full trading day. Investors who hold positions for days or years most often use daily price bars in technical analysis.

The number of shares traded in each transaction is called volume. Volume is recorded as tick data just like price. Volume tick data is added together to construct volume bars and are then charted with their corresponding price bars for technical analysis.

Index Data

Data for hundreds of indices, published by financial service companies and the major exchanges, are provided to StockCharts.com through third party data providers. Indices are not tradable financial instruments. Indices represent domestic and foreign market averages, industries, commodities, currencies, bonds and many other price, volume, and breadth measurements of market activity. Examples of market indices include the Dow Jones Industrial Average ($INDU), NYSE Healthcare Index ($NYP) and the New Zealand Dollar ($NZD). The financial service companies are responsible for the accuracy of the indices they publish.

Breadth indices measure how many issues move within a particular market index. Breadth indices give analysts insight into investor sentiment. Examples of breadth indices include NASDAQ Advance-Decline Issues ($NAAD), NYSE Advance-Decline Volume ($NYUD) and AMEX Issues Unchanged ($AMADU).

Key Assumptions of Technical Analysis

There are three things that you must verify are true about a security before you can apply standard chart and/or indicator analysis to the security's chart. These three key assumptions are:

High Liquidity

Liquidity is essentially volume. It means that shares have the ability to trade quickly without dramatically affecting prices. If someone buys 100 shares of Microsoft today, that trade by itself will have almost no effect on the price of the stock. Why? Because MSFT is extremely liquid with lots of buyers and selling at any given moment.

Low Liquidity is a trap that many amateur investors can fall into. When you buy a stock with low liquidity, you probably won't get it at the price you were quoted because there are no sellers at that price. The broker has to raise the price - often significantly - before a seller can be found. Similarly, when you sell a low liquidity stock, the broker will need to lower the price significantly to find a buyer.

In addition, these thinly-traded stocks are often very low priced - often less than 1 cent - and that means that their price can be manipulated by someone with lots of resources (and lots of time).

None of this is illegal or hidden or “wrong” in any way. It is just that the principles upon which Technical Analysis is based assume that only normal market forces move a stock's price - not the manipulation or issues with trading volumes that low liquidity stocks can have.

No Artificial Price Changes

Similar to the reason for high liquidity, prices cannot be changed by forces other than the fear and greed that drives the market. Anything else that changes prices is considered “artificial” and needs to be eliminated before standard technical analysis techniques can be applied.

So what is an example of an “artificial” price change? Splits, dividends, and distributions are the most common “culprits.” When a stock splits, let's say 2-for-1, the market participants don't really care. They get double the shares at half the price - a net-zero transaction that doesn't change their opinion of the stock one way or the other.

However, consider what happens to the stock's chart. It now has a huge (50%) gap down on it. If you didn't know about the split, you'd be very worried about the stock. And, because technical indicators are dumb, they would all give bearish “sell” signals at that point.

For this reason, the effects of these “artificial” price changes must be removed from the data before standard technical analysis techniques can be used. Ironically, this is done by adjusting all of the data prior to the split downwards, thus eliminating the gap on the chart.

No Extreme News

Technical Analysis cannot predict extreme events such as, for example, a company's CEO dying unexpectedly or the huge tragedy of 9/11. When “extreme news” happens, technicians have to wait patiently until the chart settles down and starts to reflect the “new normal” that results from such news.

This is not to say that charts are useless when one or more of these three things occur. It means that the philosophical underpinnings of the signals and chart patterns that traditional technical analysis uses are gone in those cases. Standard technical signals and predictions cannot be accurately used in those circumstances.

Chart Construction

The security's price data is displayed on a price chart: a graph which shows how price and volume changes with time. This visual representation of price data is very helpful when using technical analysis techniques.

Price charts on StockCharts.com are called SharpCharts (Time-independent charting methods like Point & Figure charting will be discussed in detail later).

The example above illustrates the layout of a typical SharpChart. Price data, volume data and technical indicators are displayed on a SharpChart. A technical indicator is a mathematical expression of price and/or volume which can provide insight into future price movements. We will talk more about technical indicators later.

Price data and overlays are plotted in the Price Plot Area. Overlays are technical indicators that are normally expressed in terms of price. Non-price values of overlays are displayed on the left axis as shown above.

Technical indicators that cannot be expressed in terms of price are normally plotted in the Indicator Panels. Although only a single Indicator Panel is shown above, SharpCharts can be created with multiple Indicator Panels displayed above and below the Price Plot Area. Additional date/time axes can be added between the Indicator Panels if needed. The legend for both the Price Plot Area and Indicator Panel contain the information used to create the SharpChart.

In Part 4, we'll get into the specifics of line charts, OHLC Bar charts, and candlestick charts.

Technical Analysis 101
Chart showing sections of a SharpChart