Module 2 4 Technical Analysis
A complete, structured guide to reading markets, spotting patterns, and building trades 4
from the ground up. Based on Zerodha Varsity, this module spans 19 chapters across 177
pages, authored by Bhuvanesh R. Whether you are a beginner or brushing up for exams, this
breakdown gives you everything you need in one place.
ZERODHA VARSITY 19 CHAPTERS TECHNICAL ANALYSIS
What Is Technical Analysis? (Chapters 1–2)
Technical Analysis (TA) is the study of price charts to predict future market movement. Think of it like this: a food street vendor watches the crowd to decide what
to cook — more people at the biryani stall means biryani is selling well. TA does the same with markets — it reads crowd behaviour through price. Fundamental
Analysis, by contrast, digs deep into a company's financials, like researching a recipe in detail before cooking.
Three Core Assumptions of TA What TA Can (and Cannot) Do
Markets discount everything — all known information is already TA helps you set a complete trade — your entry price, exit target, stop-loss,
reflected in the current price and risk-reward ratio. It works on any asset with historical price data: stocks,
Prices move in trends — markets tend to move in a direction until commodities, forex, and futures.
something changes that direction
However, TA is not a crystal ball. It gives you probabilities, not guarantees. A
History repeats itself — human psychology drives price, and human good TA setup tells you what is likely, not what will definitely happen.
behaviour is predictable Managing expectations is as important as reading the chart.
TA works on any asset with OHLCV data — Open, High, Low, Close,
and Volume.
Reading Charts: The Building Blocks (Chapter 3)
Before you can spot patterns, you need to understand how price is displayed. Charts are the language of technical analysis. There are three main types, each with
a different level of detail.
1 2 3
Line Chart Bar Chart (OHLC) Japanese Candlestick
The simplest chart. It connects only the Each bar shows four prices: Open, High, Low, Invented in 18th-century Japan by rice trader
closing prices of each period with a single and Close. A vertical line shows the high-to- Munehisa Honma. Each candle shows the
line. Great for seeing the overall direction of a low range, with small horizontal ticks on the same OHLC data but in a more visual format.
trend, but it hides the intra-period highs and left (open) and right (close). More informative The thick part is the real body (open to close),
lows. Best used for a quick, high-level view. than a line chart, but slightly harder to read at and the thin lines are shadows (high and low).
a glance. Blue/hollow = bullish (close above open).
Red/filled = bearish (close below open).
Timeframes matter. The same stock can look bullish on a weekly chart and bearish on a daily chart. Beginners should start with End-of-Day (EOD) charts and
always check at least 6 months of historical data before making a decision.
Single Candlestick Patterns (Chapters 4–7)
Single candle patterns are the alphabet of candlestick reading. Each candle tells a story about the battle between buyers (bulls) and sellers (bears). The key rule:
always check the prior trend before interpreting a pattern. A bullish signal in a downtrend means something very different from the same candle in an uptrend.
Ì Marubozu ⚖ Spinning Top & Doji ☂ Paper Umbrella Family
No shadows at all — a candle with a full real Spinning Top: small body with long upper Small body with a long lower shadow.
body. A Bullish Marubozu (blue, open=low, and lower shadows — neither side won. Context decides meaning. In a downtrend =
close=high) signals strong buying. Enter at Signals indecision. In a downtrend, it may Hammer (bullish reversal — buy next candle's
close; stop-loss at the low. A Bearish hint at reversal; in an uptrend, buyer fatigue. close, stop-loss below the low). In an uptrend
Marubozu (red, open=high, close=low) signals Doji: open equals close — extreme indecision. = Hanging Man (bearish reversal — stop-loss
strong selling. Enter at close; stop-loss at the Four types: Common, Gravestone (long upper above the high). The Shooting Star is the
high. This is the strongest single-candle signal. shadow), Dragonfly (long lower shadow), and inverted version — long upper shadow in an
Long-legged (both shadows long). uptrend, bearish signal.
Trade Trap Alert: Never act on a single candle alone. Always wait for the next candle to confirm the signal before entering a trade.
Multiple Candlestick Patterns (Chapters 8–10)
When two or three candles form together, they create stronger, more reliable signals than single candles. These patterns capture shifts in momentum and
psychology over multiple sessions. The key is always location — a bullish pattern at the bottom of a downtrend is far more meaningful than one in the middle of
nowhere.
Two-Candle Patterns Three-Candle Patterns
Bullish Engulfing Bearish Engulfing Morning Star (Bullish) Evening Star (Bearish)
At the bottom of a downtrend. At the top of an uptrend. Day Long red candle → small- Long blue candle → small-
Day 2's blue candle completely 2's red candle engulfs Day 1's bodied candle (often gaps bodied candle (often gaps up)
engulfs Day 1's red candle. blue candle. Strong sell/short down) → long blue candle. → long red candle. Appears at
Strong buy signal. Enter at Day signal. Enter at Day 2 close. Appears at the bottom of a the top of an uptrend.
2 close. downtrend. Buy at close of Sell/short at close of Day 3.
Day 3. Stop-loss below the Stop-loss above the high of
low of the pattern. the pattern.
Piercing Pattern Dark Cloud Cover
Bullish. Day 2 opens with a gap Bearish. Day 2 opens gap up,
Gaps — when price opens significantly above or below the
down, then recovers to close then closes below the
previous close — are important in multi-candle patterns. They
above the midpoint of Day 1's midpoint of Day 1's blue
signal strong sentiment shifts and add weight to reversal signals.
red candle. candle.
Harami (Bullish &
Bearish)
Day 2's small candle is fully
contained inside Day 1's
body. Signals trend exhaustion
and possible reversal.
Support, Resistance & Volume (Chapters 11312)
Support & Resistance 4 The Floor and Ceiling Volume Analysis 4 The Truth Teller
Resistance is a price level above the current market price where sellers tend Price tells you what the market is doing. Volume tells you how convinced the
to dominate — it acts like a ceiling that price struggles to break through. market is about it. High volume on a breakout confirms the move; low
Support is a price level below where buyers tend to step in — it acts like a volume suggests weakness.
floor.
Price Direction Volume What It Means
How to draw them: Look for price levels where the market has reversed
multiple times in the past. The more times a level is tested and held, the
Up /
High Strong conviction
stronger and more reliable it becomes. Draw horizontal lines at these zones,
— bullish
not exact prices — think of them as areas, not pinpoints.
Integrate S&R with your candlestick patterns: a bullish pattern forming at a Up /
Low Weak move — be
cautious
support level is a much stronger signal than one forming in open space.
Down 0
High Strong selling —
bearish
Down 0
Low Weak selling —
watch for reversal
Volume should always be used as a confirmation tool. A candlestick signal +
S&R level + confirming volume = a high-quality trade setup. This three-layer
check becomes part of your trading checklist.
Moving Averages & Key Indicators (Chapters 13–15)
Indicators are mathematical calculations applied to price and volume data. They help confirm trends, spot momentum shifts, and identify overbought or
oversold conditions. Think of them as your second opinion — never the sole reason to take a trade.
SMA & EMA RSI — Relative Strength Index
SMA (Simple Moving Average) is the arithmetic average of closing prices over Developed by J. Welles Wilder. Oscillates between 0 and 100. Above 70 =
N days. Common periods: 50-day and 200-day. EMA (Exponential Moving overbought (price may fall). Below 30 = oversold (price may rise). Default
Average) gives more weight to recent prices, making it more responsive. Use a period is 14 days. Important caution: in strong trending markets, RSI can stay
single MA to identify trend direction — price above MA = uptrend. Use two MAs overbought or oversold for long periods — do not trade against a strong trend
for crossover signals: Golden Cross (50 crosses above 200 = buy) and Death based on RSI alone.
Cross (50 crosses below 200 = sell).
MACD Bollinger Bands
Developed by Gerald Appel. Shows the difference between the 12-day and Developed by John Bollinger. Consists of a 20-day SMA with two bands plotted
26-day EMA. A 9-day EMA of the MACD line acts as the signal line. When MACD at ±2 standard deviations. When price touches the upper band, the asset may
crosses above the signal line = bullish. When it crosses below = bearish. Also be overbought. When it touches the lower band, it may be oversold. A band
watch for divergence — when price makes a new high but MACD does not, it squeeze (bands coming close together) often precedes a big price move.
signals weakening momentum.
Fibonacci Retracement (Chapter 16)
What Is Fibonacci Retracement?
Fibonacci ratios 4 61.8%, 38.2%, and 23.6% 4 appear repeatedly in nature and in
financial markets. In a trending stock, price rarely moves in a straight line. It moves in
waves: a strong impulse, then a pullback, then another impulse. Fibonacci
retracement helps identify where that pullback is likely to end and the trend is likely
to resume.
How to draw it: Identify a clear swing low and swing high in an uptrend (or swing
high and swing low in a downtrend). Apply the Fibonacci tool from the start of the
move to the end. The retracement levels will automatically appear on your chart.
How to trade it: Wait for price to pull back to a key Fibonacci level (especially 61.8%
or 38.2%). Then look for a candlestick reversal signal at that level 4 a Hammer,
Bullish Engulfing, or Morning Star. The combination of a Fibonacci level + a
candlestick pattern = a high-probability entry point with a clear stop-loss just below
the next Fibonacci level.
Fibonacci works best in strongly trending markets. In sideways or choppy
markets, the levels are far less reliable.
Dow Theory & Advanced Patterns (Chapters 17–18)
Charles H. Dow's theory is the philosophical backbone of technical analysis. His nine principles, developed in the late 1800s, still guide how traders interpret
markets today. The theory classifies trends into three types: primary (major, lasting years), secondary (corrections within the primary trend), and minor (short-
term noise).
Accumulation Distribution
Smart money buys quietly while the market is still Smart money sells to late buyers. Price moves sideways
bearish. Price moves sideways. at the top.
1 2 3 4
Mark-Up Mark-Down
Public joins in. Prices rise steadily. This is the longest Selling accelerates. Prices fall. The bearish primary trend
phase — the main uptrend. is in force.
Key Dow Patterns Reward-to-Risk Ratio (RRR)
Double Bottom (W-Shape): Bullish reversal. Price tests a support level Before entering any trade, calculate your RRR: (Target − Entry) ÷ (Entry −
twice and bounces. Buy on break above the middle peak. Stop-Loss).
Double Top (M-Shape): Bearish reversal. Price tests resistance twice and
The module sets a minimum acceptable RRR of 1.5x. This means for every
fails. Sell on break below the middle trough.
₹1 you risk, you must stand to gain at least ₹1.50. A trade with poor RRR is
Triple Top/Bottom: Three tests at the same level — an even stronger not worth taking, even if the pattern looks perfect.
reversal signal.
Good traders are not right all the time — they simply make more on their
Trading Range: Sideways market with clear upper (resistance) and lower
winning trades than they lose on their losing ones.
(support) bounds. Trade bounces within the range.
Range Breakout: Price breaks above resistance or below support with
high volume. Trade in the breakout direction.
Flag Formation: Continuation pattern. A sharp move followed by a small
consolidation channel, then the trend resumes.
The Grand Checklist & Getting Started (Chapters 18–19)
All 18 chapters build toward one thing: a complete, repeatable trading process. The Grand Checklist is your final tool — a 6-point filter that every trade must
pass before you enter. Use it systematically, not selectively.
01 02
Candlestick Pattern Support or Resistance
Is there a valid, confirmed candlestick signal (single or multiple candle)? Check Is the pattern forming at a meaningful S&R level? Patterns at key levels are far
the prior trend context. stronger.
03 04
Volume Confirmation Indicator Check
Does volume support the move? High volume on breakouts and reversals Do RSI, MACD, or Moving Averages align with your trade direction? Use as a
confirms conviction. second opinion.
05 06
Reward-to-Risk Ratio Timeframe & Look-Back
Is your RRR at least 1.5x? Calculate (Target − Entry) ÷ (Entry − Stop-Loss) before Are you on the right timeframe (EOD recommended for beginners)? Have you
entering. scanned at least 6 months of data?
Ô The Scout (Positional) ⚡ The Scalper (Intraday)
Scan the market systematically using the Grand Checklist on EOD charts. Use shorter timeframes (5-min, 15-min) to find intraday setups. The same
Build a watchlist of stocks showing setups. Be patient — wait for all 6 checklist applies, but signals form and expire faster. Requires more screen
checklist items to align. This is a slower, higher-probability approach suited time, quicker decisions, and stricter discipline on stop-losses. Recommended
for beginners and positional traders. only after mastering the positional approach.
Recommended Tools: Use Zerodha Kite or TradingView for charting. Start with EOD charts, a minimum 6-month look-back, and build your watchlist
systematically. Consistency beats complexity — master the checklist before adding more indicators.