Technical Analysis Glossary: Chart Patterns, RSI, MACD, ATR and Trends
Technical analysis is the systematic or discretionary interpretation of historical market prices, volume and related indicators. It uses terms such as trend, support, resistance, RSI, MACD and ATR to describe price behaviour, but no indicator can eliminate uncertainty about what the market will do next.
This technical analysis glossary defines the language found on charts and explains the differences between descriptive patterns, calculated indicators and tested trading rules. Examples use hypothetical prices and do not constitute trading signals.
Technical analysis glossary: chart patterns and indicators
Accumulation
A label sometimes applied to a period in which positions appear to be built gradually. Price and volume alone cannot identify every participant’s intention, so the interpretation should remain a hypothesis.
Average directional index
ADX is an indicator intended to describe trend strength rather than direction. It is derived from directional movement calculations and should not be read as a probability that a trend will continue.
Average true range
ATR summarises recent price ranges while accounting for gaps from the prior close. It is expressed in instrument price units, not a guaranteed stop distance or a statement about expected return.
Bollinger Bands
A common chart construction placing bands around a moving average using a multiple of observed price dispersion. The bands depend on window and standard deviation convention; touching a band is not automatically a reversal signal.
Breakout
A move beyond a prior range, threshold or pattern boundary under a chosen definition. Its significance depends on the market regime, price acceptance, liquidity and whether the reference was selected before the move occurred.
Candlestick body
The region between a bar’s open and close. Its height shows the net open-to-close movement for the period; it says little about the full order flow inside the interval.
Candlestick wick
The line representing movement from the candle body toward the bar’s high or low. Wicks describe extremes but cannot reveal exact sequence or market intent without more detailed data.
Chart interval
The duration or construction rule used to group market observations into bars. Five-minute and daily charts may describe the same market differently, and indicator settings must be interpreted in the chosen units.
Confluence
An informal term for several observations aligning, such as trend and a key level. Related indicators may all derive from the same price data, so multiple confirmations are not necessarily independent evidence.
Consolidation
A relatively bounded period of price movement compared with a chosen previous interval. The boundaries and duration are analyst-dependent; a consolidation can precede either continuation or reversal.
Correction
A decline within a broader rising trend or a retracement from a recent peak, depending on context. Common numerical thresholds are conventions and are not universal across markets.
Cross-over
An event in which one time series, such as a short moving average, crosses another. A crossover can occur after most of a move and may generate repeated false changes in sideways markets.
Divergence
A disagreement between price action and an indicator, such as a new price high alongside a lower momentum reading. Divergence is conditional and can persist without a reversal.
Double top
A visual formation in which price visits a similar high twice with an intervening retreat. Pattern classification is subjective, and the market can break above the area rather than reverse.
Drawdown
A peak-to-trough loss measured from an earlier high. In technical strategy research it is important for evaluating the full path, not just isolated entry and exit signals.
Exponential moving average
A moving average that assigns greater weight to recent observations under an exponential smoothing scheme. Its apparent responsiveness comes with sensitivity to noise; results depend on length and starting method.
False breakout
A move beyond a reference level that subsequently retreats under a stated confirmation rule. Calling an event false only after the outcome is known risks retrospective selection bias.
Fibonacci retracement
A set of chart reference levels derived from chosen ratios and a selected price swing. The mathematical ratios are exact, but the selection of swing points and their predictive value require evidence.
Flag pattern
A short consolidation sometimes classified as a flag after a directional price move. Pattern labels can be applied inconsistently and do not guarantee that the original trend resumes.
Gap
A difference between successive tradable prices without intervening reported transactions at the instrument’s relevant venue. Gaps can change both chart interpretation and the feasibility of stop exits.
Head and shoulders
A visual reversal pattern involving three high areas with a central peak, under common definitions. Its boundaries and confirmation rules require advance specification to avoid hindsight bias.
Higher high and higher low
Terms describing successive price swing points that exceed earlier highs and lows. Identifying meaningful swings depends on the lookback and chosen sensitivity rather than on a single universally accepted rule.
Indicator lag
The delay caused when an indicator relies on historical data or smoothing. A signal that appears clear after a move may have been much less useful in real time.
Look-ahead bias
Use of information in a historical test before it would have been available. A signal using a completed closing candle cannot necessarily be executed at that same completed close.
MACD
Moving average convergence divergence is commonly constructed from the difference between two exponential moving averages and a signal average. Its settings change responsiveness, and crossovers do not establish trading expectancy.
Mean reversion
A hypothesis that a defined price or statistical measure tends to return toward a reference. A strategy based on it can be severely hurt when trends persist or the reference level changes structurally.
Momentum
The tendency or measurement of price change over a lookback interval. Positive momentum describes past movement and may be influenced by volatility, market structure and changing regimes.
Moving average
A mathematical smoothing of past observations. Simple and exponential methods weight earlier prices differently, but neither contains information about the future beyond the historical input.
Multi-timeframe analysis
Reviewing the same instrument at different horizons to assess broader structure and local execution. Short-horizon patterns need not agree with long-horizon trends, and agreement is not a guarantee.
On-balance volume
A cumulative indicator adding or subtracting reported volume according to the direction of price changes. Its interpretation is sensitive to data coverage, adjustment methods and the instrument’s volume reporting.
Overbought
An informal description of a relatively high indicator reading or unusually extended price. It does not mean that price must fall; strong trends can remain in an overbought condition.
Oversold
A label for relatively low oscillator readings or extended price declines. It should not be treated as proof of a bargain or that downside is exhausted.
Pivot point
A reference price calculated from prior high, low and close observations under a selected formula. Different variants produce different levels; their usefulness is empirical, not automatic.
Price action
The study of historical price movements without necessarily relying heavily on derived indicators. It still requires explicit definitions and testable assumptions to avoid subjective hindsight.
Relative strength index
RSI is an oscillator based on relative average gains and losses over a selected period. Its scale is bounded, but a high or low value does not by itself predict the next move.
Repainting
The revision or removal of previously displayed signals as a chart or indicator receives later data. Backtests using final historic plots can overstate achievable real-time precision.
Resistance
An area where prior selling or supply appeared important. It is a reference zone, not a price barrier guaranteed to repel future trading.
Simple moving average
An average of a fixed number of prior observations with equal weight. It smooths short-term noise but necessarily loses information about intraperiod events and lags changes.
Stochastic oscillator
An indicator comparing a closing price with a chosen recent high–low range. It measures location within that range, not the likelihood of a profitable reversal.
Stop distance
The price difference between an entry reference and a planned exit trigger. Position size must also reflect tick value, contract size, gap and slippage exposure.
Support
An area associated with past buying interest or lower price reactions. Its precise boundary and persistence are uncertain and should be described conditionally.
Trend
A directional tendency in a selected price series and timeframe. Trends can be defined using swings, returns, averages or other rules, with different definitions producing conflicting results.
Trendline
A line connecting selected chart points to visualise a direction or boundary. Choice of points is subjective, so analysts should avoid repeatedly redrawing it to fit a preferred story.
Volatility
The observed dispersion or changing magnitude of returns. Price patterns can look more impressive simply because overall volatility is high; scale and risk adjustment matter.
Volume profile
A distribution of trading activity across price levels during a selected interval. Its shape can depend on sampling, market coverage and estimation rather than a single definitive global record.
VWAP
Volume-weighted average price over a selected period. As a technical reference it summarises historical transactions but does not establish a natural support or resistance level.
Whipsaw
A sequence in which a trading signal reverses repeatedly as prices oscillate, often causing small losses in trend-following rules. It highlights why transaction costs and regime selection matter.
Worked example: a moving-average trend rule
Consider a hypothetical equity series that closes at £100 on a date when its 20-session simple moving average is £97. A trader might describe the price as being above its short-term average, which is an observable relationship. That does not demonstrate positive forward returns. The average reflects a window of historical closing prices, and different lookbacks can produce different trend classifications.
If a rule enters only after a candle closes above the average, a backtest must not assume the order filled at the completed close before the signal became known. A realistic evaluation chooses an achievable later execution point and includes spreads, slippage and fees. A simple strategy may look profitable because the entire market rose rather than because the particular indicator contributed useful information.
Worked example: RSI and an ‘overbought’ market
Suppose a 14-period RSI rises above a popular threshold such as 70 during a strong advance. The reading indicates that recent upward changes are large relative to downward changes under the indicator’s calculation. It does not imply that the instrument is too expensive based on earnings or cash flows, or that a decline must begin immediately. Strong directional markets can maintain high RSI readings for extended periods.
Likewise, an RSI reading below 30 may coincide with severe negative news, falling liquidity or a structural earnings shock. Labelling a chart ‘oversold’ is not an analysis of the underlying catalyst. An investigator should ask how the threshold performed across independent market regimes, whether reversals were economically meaningful after costs and how adverse moves were controlled.
Worked example: support, resistance and stop placement
Imagine that a fictional asset has repeatedly traded near £80 before rebounding. An analyst might call £80 a support zone. That description is a summary of past transactions, not evidence that enough future demand must remain there. Price could trade to £79.90 briefly, or a major announcement could shift perceived value dramatically lower. A stop order placed just below a chart line is an order instruction, not a guarantee of execution at a selected loss.
Because volatility changes, a fixed £1 stop may represent very different market significance across calm and turbulent periods. ATR can help describe recent price ranges, while position sizing can translate a contemplated price move into account-level exposure. Neither tool can ensure that a sudden gap or market outage remains inside the assumed boundary.
Patterns, confirmation and hindsight bias
Technical patterns often appear persuasive in completed historical charts. A ‘double top’ might be obvious after a decline, yet its second high may have been indistinguishable from a normal consolidation at the moment. To assess whether a pattern provides information, define the swing identification, confirmation threshold, order timing and exit rules before checking the result. Record how many patterns failed to materialise as well as how many appeared successful.
Indicator confluence creates a related trap. RSI, MACD and moving averages all derive heavily from price history. If they agree, the information may still be highly redundant rather than three independent confirmations. Research should compare against simpler alternatives and check whether the added complexity improves out-of-sample outcomes.
Volume and price need market-specific interpretation
On a centralised futures exchange, contract volume and open interest can be defined by exchange reporting rules. In the decentralised spot FX market, a retail chart’s volume indicator may count ticks rather than represent all global transactions. For a stock, consolidated trading data can differ from an individual venue’s prints. Therefore, a claim that a breakout has ‘record volume’ is incomplete unless the data source, instrument and period are specified.
Volume profile and VWAP can provide useful descriptive benchmarks but do not mechanically create turning points. Large historical activity at a price can reflect prior agreement, forced liquidation or temporary flow. Whether that price remains important depends on new information and the behaviour of future market participants.
Risk controls that complement technical vocabulary
Start by distinguishing a market hypothesis from an execution rule. Identify the instrument and timeframe, then specify the evidence that would weaken the hypothesis. Convert the contemplated exit distance into cash risk with the correct contract multiplier and account currency. Estimate entry and exit costs during the actual trading session rather than using theoretical midpoint prices.
Evaluate the full distribution of outcomes rather than selected screenshots. A technical signal can have many small gains but occasional large losses, especially when traders fade strong trends or use leveraged products. Drawdown duration, exposure concentration and market impact can matter more than headline win rate. No chart indicator replaces position sizing or broad portfolio risk awareness.
Common mistakes with technical indicators
Changing indicator settings until a chart fits a known outcome creates overfitting. Treating a candle high as an achievable exit for the full position ignores liquidity. Combining indicators with identical underlying price inputs can exaggerate the appearance of independent evidence. Calling a level support only after a rebound introduces hindsight. Ignoring the economic calendar exposes a strategy to gaps that exceed recent chart-based volatility estimates.
Chart time zones and corporate-action adjustments also matter. A daily candle produced by one vendor may open and close at different times from another; two moving averages can therefore disagree despite nominally identical settings. Use defined and reproducible data rather than relying on the visual appeal of a pattern.
Explore related glossary guides
Definitions are most useful when connected to neighbouring concepts. See Trading Glossary A–Z, Market Data, Trading Risk Management, Macroeconomic Trading for complementary market terms, risk considerations and examples.
Frequently asked questions
Does technical analysis work in every market?
Price-based calculations can be applied to many markets, but their usefulness depends on market structure, costs, the period tested and whether a genuine repeatable relationship exists. No indicator is universally reliable.
What is the difference between RSI and MACD?
RSI summarises relative recent gains and losses in a bounded oscillator, while MACD commonly uses differences between exponential moving averages. They capture related but not identical aspects of past price behaviour.
Is support a guaranteed price floor?
No. It is an analyst-defined reference based on previous trading behaviour. New information, forced selling and liquidity changes can cause price to move through it rapidly.
What makes a breakout false?
A false breakout is a move beyond a specified level followed by a reversal under a defined rule. The rule must be stated before observing the full outcome to avoid hindsight-based classification.
Why can a backtested chart signal disappoint live?
Common causes include look-ahead bias, spread and slippage, unrealistic fill assumptions, overfitting, market-regime shifts and differences in source data. Historical pattern recognition is not a promise of future returns.
Related Education guides
Read Trading Strategy Backtesting, Trend Following and Momentum and Market Liquidity and Slippage.
External terminology reference
For market-data and contract context, consult the CME Group glossary. For order mechanics and investor-facing definitions, see the SEC investor glossary.
Educational information only. Technical indicators and chart patterns are not guaranteed forecasts or personal investment recommendations.