How do I Use Trading Charts?

How do I Use Trading Charts?

Charts are the essentials of technical analysis; this is because they revolve around looking at the previous pricing fluctuation, in order to determine [possible] future market behavior. After all, charts provide a quick glimpse of how a financial instrument is faring, along with the technical indicators which also provide indications as to whether or not price will possibly go up or down.

If the trader in question is a beginner, then looking at price chart with a bundle of waves/lines will be a bit overwhelming; below is a quick guide to follow when trying to learn about charts:

 

Types of trading charts

Firstly, have a glimpse at the various types of charts which are available; including without limitation to:

  • Line charts
  • Bar charts
  • Candlestick charts

 

The line chart is the easiest to understand from the three listed above, as it draws a line from a closing price, to another; this is used to indicate the general movement of the asset in question, over a period of time.

 

Such charts are useful in seeing if the price of an instrument (or other) is up-trending, down-trending, or moving sideways and ranging; However, this basic chart does very little in helping the trader to figure out where the price could next be at.

 

A bar chart incorporates more elements into the analysis, as it also indicates the high and low of price fluctuation, as well as the open & close for a specified period of time. Specifically, a single bar has the following components:

  • Right tick (open)
  • Left tick (close)
  • Top of the vertical line (high)
  • Bottom of the vertical line (low)
  • And the body.

 

Due to such factors, bar charts are also referred to as the OHLC charts (Open-High-Low-Close). This can provide more dimension to your analysis because it gives a bit more insight to traders on whether buyers or sellers are winning the race of price in a specific direction. For instance, an open price which is higher than a closing price defines sellers as the strong suit in that time. Also, a long bar with a horizontal line in the middle indicates that buyers, and sellers tried to push price in both directions, but ended up pushing just as hard as each other, with the open being equal to the close.

 

Lastly, candlestick charts create a more positive visual appeal, as they feature a colored body which provides the trader with an image of the price action in a quick glance, rather than having to absorb numbers and calculations.

 

Bullish candles are those which have closed lower than they opened, and are colored black, or red. Due to this, traders can have a general gist of how the market players are behaving, simply by looking at the colors, as well as lengths of the candles.

 

Candle stick charts also involve patterns that may allow a trader to predict the price move that is coming up; For example:

 

Three consecutive, long, green candles show increased bullish momentum, due to buyers constantly pushing for prices which were significantly higher than the open of the last three instances; These [candlestick] patterns, which will be further discussed in more details in another section, were created by a Japanese rice trader, centuries ago, but yet are still being used by traders to this day, because of its function in understanding market psychology.

 

Chart time frames

Now that the basics have been discussed, it is time to make things more interesting by looking at different instances; the timeframes which are incorporated in the recording of the open, close, high and low of a price action.

For example, a 1 hour chart means that these factors were recorded over the 1.00pm to 2.00pm time period. A daily chart represents the candlestick formations (including the open, close, high and low) which occurred over the past 24 hours. This can be viewed all the way from 1 minute, up to monthly and even sometimes yearly.

 

Why would a trader want to observe such durations of time? The simple answer is that they expect to limit their analysis to one or two timeframes, though it would be helpful to have multiple options. After-all, traders have different trading strategies at the end of the day. Some prefer to look mostly at shorter-term time frames, or longer-term ones, while on the other hand, others look at long-term charts for trends, and short-term charts to pinpoint potential entry, as well as exit levels.

 

If all of the above sounds too complicated, no need to worry; the trader needs to draft a trading plan first, or put different trading strategies to the test on a demo account, before identifying which time frames are suitable for them. If this is something that you haven’t done before, just be sure that even the most experienced traders refine their strategies and make adjustments to such time-frames when deemed necessary.

 

The bottom line is that there is no clear-cut formula in determining what the best time frames are to look at; this comes down to the strategy-types which the trader choses, as well as the preference of risk and the personality which the trader has.

 

To aid your beginning, here is a run-down of the advantages and disadvantages of various time frames which can be analyzed:

 

Longer-term charts may aid in the identification of strong market trends (or weak ones), which may carry on as such, rather than reversing; the downside is that these charts do not provide a view of intraday price action, which usually contains early signals on possible reversal(s). Trading on long-term charts may prove to be very beneficial, if the trader is able to catch and stay in a strong trend, though rollover and interest may impact profits (or losses) if held on to for too long (usually weeks-months).

 

Short-term charts may be useful in intraday trading, which means that is provides more opportunity to make quick trades through the use of inflection points, or breakouts. However, this may mean that the trader should be able to handle sharp price changes during session overlaps, or new releases – which may just as quickly affect profits, turning them into losses.

 

Also, please note: Transaction costs are usually higher, the larger the trade is.

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