Every trader aims to buy at the right time and sell at the peak. However, it is hard to predict stock market trends, and that too with full accuracy. Markets move in cycles, influenced by various factors, including technological advancements, inflation, regulatory reforms, and changes in economic policy. Sometimes, traders’ confidence pushes prices up, while fear causes declines.
The stock market may seem unpredictable, but historical price patterns, trends, and critical indicators often repeat. Technical analysis assists you in decoding these patterns, predicting stock market trends, and making better decisions. Let’s learn how in detail below!
Understanding share market trends
Stock market trends can primarily be categorised into:
- Uptrend (bullish market): Prices consistently rise, forming higher highs and higher lows.
- Downtrend (bearish market): Prices decline over time, making lower highs and lower lows.
- Sideways trend (consolidation): Prices fluctuate within a range, making it difficult to analyse if there is a clear upward or downward movement.
For example, if a stock price rises from ₹100 to ₹150 over a few weeks while consistently making higher lows, it indicates an uptrend. On the other hand, if it falls from ₹200 to ₹150 while making lower highs, it signals a downtrend. If it has been trading between ₹100 to ₹150 for several months and not climbing higher or dropping lower, it is a sideways trend.
Tools and methods analysts utilise for technical analysis
Analysts apply different tools and methods to conduct technical analysis, such as:
Relative Strength Index (RSI)
Think of RSI as a stock’s temperature check. It shows whether a stock is “too hot” (overbought) or “too cold” (oversold), using a scale from 0 to 100.
- Above 70 = Overbought, might cool down (price could fall)
- Below 30 = Oversold, might heat up (price could rise)
Example:
Say a stock has been climbing for 10 straight days and its RSI shoots up to 75. That’s like a fever; it’s overheated. A price dip might be around the corner.
Now, if the RSI is at 25, the stock has been falling too much. It might be too cold to ignore, hinting at a possible rebound.
Moving Average Convergence Divergence (MACD)
Think of MACD as two runners on a track. It compares the speed of price changes over two different timeframes (usually 12 and 26 days).
A “signal line” (9-day average) is used as a benchmark.
Example:
Picture two runners: the MACD line and the signal line.
- When the MACD line crosses above the signal line, it’s like the faster runner pulling ahead. That’s a bullish signal; momentum is rising.
- When the MACD line crosses below the signal line, the runner is lagging; momentum is fading. That’s bearish and might hint at a price drop.
So, if a stock’s MACD line just crossed above the signal line, traders may see it as a cue to buy in. If it crosses below, it might be time to sell or wait.
Bollinger Bands
Think of Bollinger Bands like a rubber band wrapped around a stock’s price, stretching when things get volatile and relaxing when it’s calm.
Bollinger Bands help you see how volatile a stock is, and spot overbought or oversold conditions.
Bollinger Bands has three parts:
- Middle band: A 20-day Simple Moving Average (SMA) (average of the last 20 days)
- Upper band: Usually 2 standard deviations above the SMA
- Lower band: Typically 2 standard deviations below the SMA
What makes Bollinger Bands special is their adaptability. The bands expand and contract based on price volatility, like a rubber band stretching and relaxing.
Example:
Suppose you are analysing a stock, and its price is often touching or crossing the upper band. This is like the rubber band getting overstretched on the upside. The stock might be overbought, and a price drop could follow.
Now let’s say the price is hugging the lower band. That’s like the rubber band stretched downward. The stock might be oversold, and a bounce-back could be near.
So:
- Price near upper band = Overbought (potential sell signal)
- Price near lower band = Oversold (potential buy signal)
Tip: Bollinger Bands don’t predict the direction of the trend itself but they’re great at showing how intense the movement is. Pair them with trend indicators for better decisions.
Candlestick patterns
Think of them like mood swings in the market. Candlestick charts show the opening, closing, high, and low prices of a stock during a specific time period, all in a single candle. These patterns tell who is in control: buyers or sellers.
Key patterns explained with simple examples:
Doji – “I can’t decide!”
A Doji forms when the opening and closing prices are very close to each other. It shows indecision in the market where neither buyers nor sellers are winning.
Example:
If a stock has been going up steadily and suddenly forms a Doji, it means the rally is losing steam. There is a chance that buyers are getting tired, and the trend might reverse.
Hammer – “Buyers are fighting back!”
A Hammer appears after a downtrend and has a small body with a long lower shadow (wick). It means sellers pushed prices down, but buyers came in strong and pulled it back up.
Example:
Suppose a stock is falling and drops to ₹100. During the day, it dips to ₹95, but buyers step in and push it back to close near ₹100. This creates a hammer pattern, which can be a sign that a bullish reversal may be coming.
But, for confirmation, the next candle should close higher than the Hammer’s closing price.
Tip: Candlestick patterns don’t work in isolation, they are more powerful when combined with volume, support/resistance levels, or other indicators.
Fibonacci Retracement
Fibonacci retracement is a tool that helps you predict possible turning points in the market by identifying key support and resistance levels. It is based on the Fibonacci sequence, a series of numbers you can find in nature, art, and surprisingly, the stock market too.
It helps answer the question: “Where might the price take a breather?”
Key levels to watch:
- 23.6%
- 38.2%
- 50% (not an official Fibonacci level but widely used)
- 61.8%
These levels tell us where a stock might pause or reverse during a pullback.
Example:
Let’s say a stock rises from ₹380 to ₹489, which is a strong uptrend. Then, the stock starts pulling back. Here, you can apply the Fibonacci retracement to the move.
If the price retraces 61.8%, it might find support around ₹420. That means buyers could step in around ₹420, and the price may bounce back up.
So, what does it help with?
Fibonacci levels act like checkpoints on a price journey. They can offer clues for:
- Entry points
- Profit targets
- Stop-loss placements
How to use it:
- Place the Fibonacci retracement tool from the lowest point (₹380) to the highest point (₹489).
- The tool will automatically show retracement levels like 23.6%, 38.2%, etc.
- Look for reactions at these levels—prices may bounce, pause, or reverse.
Tip: Fibonacci retracement works best when used with other indicators, such as trendlines, volume, or candlestick patterns, to confirm market moves.
Volume analysis
Volume analysis helps you know whether the crowd is backing the price move.
Volume measures how many shares are being traded during a given time period. It’s like tracking how much interest a stock is generating because a price move without the crowd behind it might not go far.
Volume analysis helps you judge whether a price change is strong and reliable, or weak and likely to fade.
How to read volume:
- Price goes up + high volume: Strong buying interest (bullish signal)
- Price goes down + high volume: Strong selling interest (bearish signal)
- Low volume (not many buyers/sellers): Shows uncertainty or weak conviction
Example:
Imagine a stock is trading at ₹500.
One day, it jumps to ₹550, and you observe that 10 million shares were traded. That is high volume, which shows strong bullish momentum and suggests buyers have confidence.
Another stock falls from ₹600 to ₹550, also with high volume. This shows a strong bearish sentiment.
But if a stock rises from ₹500 to ₹510 on very low volume, that rise might not last and the uptrend is weak.
How to use it:
- Look at volume bars below a stock chart
- Compare the volume during big price movements
- High volume confirms a trend
- Low volume warns you to be cautious
Tip: Use volume with indicators like RSI or candlesticks for stronger confirmation of trend strength and possible reversals.
To sum up
Analysts use various tools and methods for technical analysis. Analysts use various tools and methods for technical analysis. These include momentum indicators, Bollinger Bands, candlestick patterns, Fibonacci retracement, and volume analysis. Combine technical analysis with other types of research to improve accuracy and spot better opportunities.
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Learning materials, such as user guides, articles, video tutorials, and informative FAQs, are available to help you easily understand stock market concepts. If you need further assistance, customer support is available 24/7. Open your demat account on MO Riise today and trade with confidence!
