What are charts and trends?
Technical analysis is the attempt to understand market behaviour from past prices and trading volume. Where fundamental analysis looks at a company’s revenue, profit and debt, technical analysis looks mainly at charts. Along the bottom of a chart is time (days, weeks, months); up the side is price.
A trend is the general direction of prices. In an uptrend each rise goes higher than the last, and each dip stops higher than the last. In a downtrend it is the reverse: each peak and each low is below the one before. When there is no clear direction, the market is called sideways.
Say a share’s price moves like this over two weeks: from Tk 50 up to 53, down to 51, up to 56, down to 54, up to 59. The peaks (53, 56, 59) are higher each time, and so are the lows (51, 54). A chart reader would call this an uptrend. But it only describes these two weeks; it is no promise about next week. The numbers are only an example.
Why it matters to an investor
- To understand market talk: words like “trend”, “chart” and “candle” are everywhere in the news, at brokerage houses and on social media. Knowing what they mean lets you check what someone is actually claiming.
- To see today’s price in context: one day’s price on its own says very little. A chart shows where that price has been over the past months or years.
- To see swings with your own eyes: a chart shows at a glance which shares move calmly and which jump around.
- To separate description from prediction: a chart describes the past well. Whether it can tell the future is a separate question, and the evidence on that is mixed.
Kinds of chart
- Line chart: each day’s closing price joined in a single line. The simplest kind, and good for seeing the long-term picture.
- Bar chart: one vertical bar per day, its top the day’s highest price and its bottom the lowest; small ticks on the side show the opening and closing prices.
- Candlestick chart: the same four prices, but the part between open and close is drawn as a thick “body”. If the close is above the open it is usually green or hollow; if below, red or filled. Thin “wicks” above and below show the day’s high and low.
- Volume: many charts show, in small bars along the bottom, how many shares traded that day. Chart analysts give more weight to price moves that come with heavy trading.
- Time frame: the same share can look like it is rising on a daily chart and falling on a monthly one. Always check which time frame you are looking at.
How trends are identified
Reading trends from charts is an old idea. Charles Dow (1851–1902), founding editor of The Wall Street Journal, split market movements into three levels in his editorials: the long-term primary trend, medium swings lasting weeks to months, and small day-to-day moves. After his death others organised these ideas into what became known as “Dow theory”.
Today chart analysts identify trends in two main ways. One is a trendline: a straight line joining the lows in an uptrend, or the peaks in a downtrend. The other is a moving average: the average price over the last few days, which moves forward each day by adding the newest price and dropping the oldest. When the price is above its average, many treat it as a sign of an upward trend.
Worked example
- Say the closing prices over five days are Tk 100, 102, 101, 105 and 107. They add up to 515; divided by 5 that is Tk 103. This is today’s 5-day moving average.
- The next day the price is Tk 110. Drop the oldest (100), add the newest (110): 102 + 101 + 105 + 107 + 110 = 525; divided by 5 that is Tk 105.
- The price (110) is above the average (105), and the average itself is rising. Chart analysts would call this a sign of an uptrend.
Result: a moving average smooths out daily jumps so the trend is easier to see. But it is built only from past prices, so it always lags: the average turns only after the price has already turned.
Common mistakes
- Treating a trend as a promise. “It has been rising, so it will keep rising” describes the past; it does not guarantee the future.
- Picking the time frame that fits the story you already like, and not looking at the others.
- Taking fright at a sudden “drop” in price after a bonus or rights issue. The price adjusts because there are more shares; some charts correct for this and some do not.
- Reading the chart of a thinly traded share as the combined view of many people. There, just a few trades can change how the chart looks.
A chart tells you where the price has been and how it has moved; it does not tell you for certain where it will go.