Technical Analysis Glossary: Key Chart Terms
Glossary
This glossary covers the essential vocabulary of technical analysis, from basic chart types to advanced indicators and patterns. Whether you're reading price action on a five-minute chart or interpreting momentum oscillators, these terms form the foundation of how traders communicate and analyze markets. Use this reference to clarify any terms encountered throughout the book.
Ascending Triangle
A bullish continuation pattern where the upper resistance stays flat while the lower support rises, creating a converging triangular shape. The pattern forms when bulls gradually push higher lows while bears maintain a ceiling at a fixed resistance level. When the price breaks above the horizontal resistance, it typically signals a strong continuation of the uptrend. For example, a stock in an uptrend might consolidate with three touches of a $100 ceiling and progressively higher bounces at $98, then $99, before breaking above $100.
ATR
Average True Range measures volatility by calculating the average distance price moves over a specified period, typically 14 bars. Traders use ATR to set realistic stop-loss distances and understand when volatility is expanding or contracting. A stock trading with ATR of 2 dollars indicates average daily swings of roughly 2 dollars; doubling ATR signals heightened volatility. This metric helps position sizing—wider ATR often means wider stops and smaller position sizes.
Backtesting
The process of testing a trading strategy on historical price data to evaluate how it would have performed in the past. A trader might backtest a moving average crossover strategy across five years of S&P 500 data to see win rate, drawdown, and profitability before risking real capital. Software allows traders to automate this process, running thousands of simulations with different parameters. Backtesting reveals whether an edge exists but cannot guarantee future results due to changing market conditions and the risk of overfitting.
Bar Chart
A price chart where each bar represents a time period and displays the open, high, low, and close prices via vertical lines and horizontal ticks. The vertical line shows the period's range from low to high; the left tick marks the open and the right tick marks the close. Bar charts were standard before candlesticks became popular but remain useful for certain trading styles. A typical stock bar chart shows daily bars with the high and low as the bar extremes and ticks indicating entry and exit prices.
Bollinger Bands
A volatility indicator consisting of a moving average (middle band) and two bands plotted one or two standard deviations above and below it. When price moves toward the upper band, the stock is considered overbought; when it nears the lower band, it is oversold. Bands widen during high volatility and contract during low volatility, making them useful for identifying when a big move is likely. A trader might short a stock touching the upper Bollinger Band after an extended rally, expecting mean reversion back toward the moving average.
Breakout
A price movement through a significant support or resistance level, typically accompanied by increased volume. Breakouts signal that buyers or sellers have overwhelmed the previous price ceiling or floor, often triggering momentum in the breakout direction. A stock consolidating between $50 and $52 that closes at $52.50 on heavy volume has broken above resistance. Traders often buy breakouts expecting the trend to accelerate, though some breakouts fail and reverse (called a "false breakout").
Candlestick
A price chart type where each candle displays the open, high, low, and close; the body shows the open-to-close range and the wicks show the session's extremes. A green (or white) candle indicates the close was above the open (buyers in control); a red (or black) candle shows the close below the open (sellers in control). Candlesticks originated in Japan and remain the most popular chart format for traders. A long red candle with a small lower wick signals strong selling pressure with little buyer relief.
CCI
Commodity Channel Index measures the deviation of price from its average, oscillating above and below zero to identify cyclical turning points. CCI values above 100 suggest overbought conditions; values below −100 suggest oversold conditions. Many traders use CCI crossovers of the zero line as trend confirmation signals. For example, a currency pair showing CCI rising above zero while price breaks above a trendline confirms bullish momentum.
Chart Pattern
A recognizable geometric formation on a price chart that suggests future price direction based on historical repetition and trader psychology. Common patterns include triangles, head-and-shoulders, and flags, each with characteristic success rates and price targets. Patterns form because similar setups repeatedly occur when supply and demand imbalance in similar ways. A head-and-shoulders pattern at a major resistance level often precedes a sharp reversal.
Confluence
The alignment of multiple technical signals (indicators, support/resistance, patterns) at the same price level or time, increasing trade probability. When a Fibonacci retracement level, a moving average, and a prior swing high all converge, that zone becomes a high-confluence area worthy of attention. The more technical reasons price should reverse or break at a given level, the stronger the setup. A trader might enter a long position at an area where the 20-day moving average, 61.8% Fibonacci retracement, and a prior support level all meet.
Continuation Pattern
A chart pattern that signals the existing trend is likely to persist after a brief consolidation, as opposed to reversing. Flags, pennants, and ascending triangles are continuation patterns because they form within trends and typically resolve in the trend's original direction. These patterns help traders identify low-risk entry points to stay with the prevailing direction. A stock in a strong uptrend that forms a small flag before rallying higher is a classic continuation example.
Death Cross
A bearish technical indicator where the 50-day moving average crosses below the 200-day moving average. This crossover is considered a warning that the medium-term trend is shifting downward relative to the long-term trend. The death cross caught significant downturns in major indices during 2008 and 2020, making it a widely watched macro indicator. A trader might reduce exposure or shift to defensive holdings when the death cross occurs.
Divergence
A situation where price makes a new high (or low) but an indicator fails to confirm, suggesting weakening momentum and a potential reversal. Bearish divergence occurs when price reaches a new high but an oscillator like RSI fails to reach a new high, indicating weakening upside momentum. Divergences can precede reversals by bars or weeks, making them useful for early-warning trading setups. A stock rallying to a new multi-month high while RSI fails to exceed its prior peak often marks the top of a move.
Doji
A candlestick where the open and close are nearly equal, appearing as a small body with two wicks of similar length. Doji candles signal indecision—buyers and sellers battled to a stalemate, closing near the opening price. At resistance or support, a doji can mark a turning point; in a trending market, it may simply indicate consolidation. A long-legged doji at a major resistance level often precedes a reversal.
Donchian Channel
A volatility indicator showing the highest high and lowest low over a specified look-back period, with a midline at the median. Traders use Donchian Channels to identify overbought and oversold extremes, similar to Bollinger Bands but not based on moving averages. A 20-period Donchian Channel displays the highest high and lowest low from the past 20 bars. Breakouts above the upper channel or below the lower channel often signal strong directional moves.
Dow Theory
A foundational framework stating that price trends consist of three moves (primary, secondary, corrective), and that volume confirms price direction. Dow Theory teaches that markets move in discernible trends with reactions against those trends and that multiple markets should confirm major moves. It forms the basis for much modern technical analysis and trend-following approaches. The theory helped codify terms like bull market and bear market and reinforced the importance of volume analysis.
Downtrend
A series of lower highs and lower lows, indicating that sellers are progressively pushing price lower over time. A downtrend continues until the pattern of lower highs and lower lows breaks—for example, when price fails to make a new lower low. Traders interpret downtrends as opportunities to sell short or avoid buying. A stock in a downtrend from $100 to $50 might see bounces at $90, $75, and $60, each bounce lower than the previous one.
Efficient Market Hypothesis
A theory stating that all available information is already reflected in price, making it impossible to consistently outperform the market. The EMH questions whether technical analysis or fundamental analysis can beat the market consistently, though many traders and academics dispute this view. Technical analysis itself assumes market inefficiencies exist and can be exploited. The debate between EMH proponents and traders has stimulated decades of research into market behavior.
Elliott Wave
A form of technical analysis dividing price movement into five waves up (impulsive) and three waves down (corrective) that repeat at different time scales. Elliott Wave practitioners assign labels to price swings and use the structure to forecast targets and turning points. The theory is complex and subjective, as counting waves correctly requires experience and can be interpreted multiple ways. A trader might identify an impulsive five-wave rise and use it to target where the subsequent three-wave correction will end.
Engulfing Pattern
A two-candle reversal pattern where the second candle's body completely contains the first candle's body, signaling a potential trend reversal. A bullish engulfing occurs when a red candle is followed by a larger green candle that opens below the red candle's low and closes above its high. The pattern indicates a sudden shift in momentum from sellers to buyers (bullish) or vice versa (bearish). An engulfing pattern at a major support level often marks a bottom and the start of a new uptrend.
Exponential Moving Average
A moving average that weights recent prices more heavily than older prices, making it more responsive to recent price action than a simple moving average. The EMA is calculated using a smoothing factor that emphasizes the most recent bars, making it better for identifying trend changes quickly. A 12-period EMA reacts faster to price changes than a 200-period EMA. Many traders use EMA crossovers (such as the 12 EMA crossing above the 26 EMA) as signals for trend shifts.
Fibonacci Retracement
A tool marking likely support or resistance levels at 23.6%, 38.2%, 50%, 61.8%, and 78.6% of a prior price swing. Traders draw Fibonacci lines from the low to the high of a trend move and watch for bounces at the retracement levels. The 61.8% level, called the "golden ratio," often acts as the most significant support or resistance during corrections. A stock rallying from $50 to $100 might find support at $80.90 (the 61.8% retracement) before resuming the uptrend.
Gap
A discontinuous jump in price where the close of one bar does not overlap with the open of the next bar, leaving a void on the chart. Gaps often occur at the open of a new trading session or after significant news. Traders watch for gap fills—price eventually returning to fill the gap—or gap breakaways that signal strong directional moves. A stock closing at $50.00 and opening at $52.50 the next day has gapped up and may find resistance at $50.00 if buyers weaken.
Golden Cross
A bullish indicator where the 50-day moving average crosses above the 200-day moving average, suggesting a shift to long-term upward momentum. The golden cross is the opposite of the death cross and often precedes sustained rallies in major indices and stocks. This signal is widely followed by institutional traders and can trigger buying when it occurs. The S&P 500 golden cross in early 2009 marked the start of a multi-year bull market.
Hammer
A bullish reversal candlestick with a small body at the top and a long lower wick, resembling a hammer, often found at support after a downtrend. The hammer's long lower wick shows that sellers pushed price down but buyers reclaimed losses by the close, indicating a reversal in momentum. A hammer at a support level or major trendline acts as a strong reversal signal. A stock falling sharply to test support and forming a hammer often marks a bottom and reversal point.
Head and Shoulders
A major reversal pattern consisting of three peaks—a high (left shoulder), a higher peak (head), and a lower peak (right shoulder)—with a neckline connecting the valleys. Head and shoulders patterns are among the most reliable reversal patterns, signaling a shift from uptrend to downtrend. The pattern is confirmed when price breaks below the neckline, with a target equal to the distance from head to neckline. A stock rallying to a new high, pulling back, rallying higher, pulling back further, and then rallying less forms this pattern before declining.
MACD
Moving Average Convergence Divergence combines two exponential moving averages (12-period and 26-period) and a signal line to identify momentum and trend changes. MACD turns positive when the faster EMA crosses above the slower EMA, signaling upward momentum; it turns negative on the opposite cross. Traders also watch MACD histograms—the difference between MACD and its signal line—for momentum divergences. A MACD crossover above zero often confirms the start of a new uptrend.
Momentum
The rate of change of price over time; in technical analysis, momentum indicators measure how fast or strong price moves are accelerating or decelerating. Momentum oscillators like RSI, Stochastic, and CCI quantify whether moves are accelerating or slowing. Rising momentum alongside rising price signals strength; rising momentum alongside falling price signals weakness (bearish divergence). A stock rallying on rising MACD histogram has positive momentum; falling histogram despite rising price shows momentum divergence.
Moving Average
A calculation that averages price over a set number of periods, smoothing price data to reveal underlying trend direction. Moving averages lag price but provide clear trend identification—price above a moving average is bullish, price below is bearish. Longer moving averages (like 200-period) identify long-term trends; shorter ones (like 20-period) identify short-term trends. Traders often enter long positions when price crosses above a moving average and the moving average itself is rising.
Oscillator
A momentum indicator that fluctuates between two extremes or around a center line, helping traders identify overbought/oversold conditions and divergences. Oscillators include RSI, Stochastic, MACD, and CCI; they are bounded (like RSI at 0–100) or unbounded (like MACD). Oscillators peak at highs and bottoms at lows, making them useful for spotting trend reversals through divergence. An oscillator dropping to extreme lows suggests oversold conditions and a potential bounce.
Overbought
A condition when price has risen sharply and momentum oscillators show extreme high readings, suggesting a pullback or reversal may follow. RSI above 70 or Stochastic above 80 are common overbought readings; however, overbought conditions can persist in strong uptrends. Overbought does not automatically signal a sell; it indicates caution and potential resistance. A stock rallying with RSI at 85 is overbought but may continue higher if momentum remains strong.
Oversold
A condition when price has fallen sharply and momentum oscillators show extreme low readings, suggesting a bounce or reversal may follow. RSI below 30 or Stochastic below 20 are common oversold readings; however, oversold conditions can persist in strong downtrends. Oversold signals opportunity for long entries at support but should be confirmed by other factors. A stock declining sharply with RSI at 15 is oversold and often bounces at nearby support.
Pivot Point
A technical level calculated from the prior period's high, low, and close; used as dynamic support and resistance for the current period. Pivot points are calculated as (H + L + C) ÷ 3, with additional resistance levels above and support levels below. Day traders often use pivot points as key levels to watch for breakouts or reversals during the session. A stock at the daily pivot point may hesitate, reverse, or break through depending on the strength of the trend.
Random Walk
A theory proposing that price changes are random and unpredictable, implying that neither technical nor fundamental analysis can provide an edge. The random walk hypothesis is related to the efficient market hypothesis and argues that price charts resemble noise with no exploitable patterns. Many traders and researchers dispute this view, pointing to persistent inefficiencies and behavioral biases. Whether price is truly random or contains exploitable patterns remains a central debate in finance.
Resistance
A price level where selling pressure historically emerges, preventing or slowing further price rises and often causing reversals. Resistance forms where prior sellers entered (at prior highs) or where large supply of shares exists. A stock repeatedly bouncing down from $100 shows $100 as resistance; breaking above it signals a shift in momentum. Multiple touches of resistance strengthen it; breaking above on heavy volume often signals a breakout.
RSI
Relative Strength Index measures momentum on a scale of 0 to 100, comparing average gains to average losses over a set period (typically 14 bars). RSI above 70 indicates overbought conditions; below 30 indicates oversold. Divergences—where RSI fails to confirm a new price high or low—often precede reversals. A stock rallying to a new high while RSI fails to exceed its prior high shows bearish divergence and warns of a potential pullback.
Stochastic Oscillator
A momentum indicator comparing the closing price to the price range over a look-back period, oscillating between 0 and 100 to identify overbought/oversold levels. The Stochastic has two lines: %K (the main line) and %D (a moving average of %K). Readings above 80 suggest overbought; below 20 suggest oversold. A stock with Stochastic above 80 at resistance often reverses; below 20 at support often bounces.
Stop-Loss
A predetermined price level at which a trader closes a losing position to limit loss and manage risk. Setting stop-losses is essential risk management—a trader might enter a long position at $100 with a stop at $95, risking $5 per share. Stop-losses prevent emotional decisions and define the maximum loss before entry. A trader using a 2% stop-loss will exit any position that declines 2% from entry.
Support
A price level where buying pressure historically emerges, preventing or slowing further price declines and often causing reversals or bounces. Support forms where prior buyers entered (at prior lows) or where demand is concentrated. A stock repeatedly bouncing up from $50 shows $50 as support; breaking below it signals a shift in momentum to sellers. Multiple tests of support strengthen it; breaking below on heavy volume signals a breakdown.
Trend
The overall direction of price movement over time—uptrend (higher highs and higher lows), downtrend (lower highs and lower lows), or sideways (choppy). Identifying the trend is fundamental to technical analysis; the trend is your friend, and trading with it increases win rates. A stock in a strong uptrend provides more long opportunities than short opportunities. Trends can last years (primary), months (secondary), or days (tertiary).
Trendline
A diagonal line drawn through consecutive highs (downtrend line) or lows (uptrend line) to visualize the trend and identify potential support or resistance. Trendlines help traders see when a trend is weakening (when price closes below an uptrend line) or accelerating. A rising trendline in an uptrend acts as dynamic support; bounces off it signal trend continuation. Breaking a long-standing trendline often signals a trend change.
Triangle
A consolidation pattern with converging upper and lower boundaries, representing a period of shrinking range before a breakout. Triangles are classified as ascending (rising lower lows), descending (falling upper highs), or symmetrical (both sides converging). Most triangles resolve with a breakout in the direction of the prior trend. A stock consolidating in a narrowing range between $98 and $102 eventually breaks above or below, triggering a move.
VIX
The Volatility Index measures implied volatility of S&P 500 options, often called the "fear gauge" because it spikes during market stress. VIX above 20 indicates heightened volatility and often market downturns; below 15 suggests calm markets. When VIX spikes sharply, it often marks near-term panic lows where reversals occur. The VIX inverts to the S&P 500—as stocks fall, VIX typically rises sharply.
Volatility
The degree of price fluctuation; high volatility means large price swings, while low volatility means small swings. Volatility is measured by ATR, standard deviation (used in Bollinger Bands), or the VIX for broad market volatility. High volatility creates both greater risk and greater opportunity; low volatility creates choppy, frustrating trades. Volatility often increases before major announcements and decreases during quiet periods.
Volume
The number of shares (or contracts) traded during a period; used to confirm the strength of price moves and identify reversals. High volume on a breakout confirms its strength; low volume breakouts often fail. Volume declining into a top suggests selling momentum is weakening; rising volume confirms selling strength. A stock breaking above resistance on three times its average volume is a stronger signal than breaking on light volume.
VWAP
Volume-Weighted Average Price calculates the average price paid, weighted by the volume traded at each price level during the session. VWAP is useful for intraday trading; price above VWAP shows strength, price below shows weakness. Many institutions use VWAP as a reference for execution; large blocks often trade near VWAP. A stock opening at $100 with VWAP at $99.50 and rising shows intraday strength if it trades above VWAP.
Wedge
A pattern formed by two converging trendlines with price moving between them, often preceding breakouts in the direction of the prior trend. Wedges look like triangles but have a slight slope in one direction, giving them directional bias. A rising wedge in a downtrend often precedes a break to the downside; a falling wedge in an uptrend precedes a break upward. Wedges tend to resolve sharply, making them high-probability setups.
Whipsaw
A sharp, sudden reversal where price moves strongly in one direction, hits a stop-loss, and then moves in the opposite direction. Whipsaws occur when price triggers stop-losses (causing panic) and then reverses, catching traders on the wrong side. They are common around support and resistance levels where many stops cluster. A stock gapping down below a support level, hitting stops, and then rallying above support creates a whipsaw.