How do I read trading charts?
When you begin your trading journey, you may feel more comfortable sticking to safe options, e.g. major currencies, blue chips etc. Many online brokers even provide a tool allowing you to copy successful experienced traders. Safe options carry less risk but they also reduce your chances of substantial profit. If trading is something you want to explore further, you need to be able to understand what analysts say, what trends they create with their expectations and how these can be tracked on a chart.
In our basic trading vocabulary , we mentioned two types of analysis: technical and fundamental. The former focuses on chart patterns and is based on the principle that historical pricing data is enough to help you predict future trends. Fundamental analysis looks at the bigger picture and how politics and macroeconomics can affect markets. Both are important tools and they’re even better when they’re combined. This is the job of analysts who take all the information, filter it through their expert knowledge of instruments and produce estimates of what will happen next. Each analyst will come up with a slightly different approach so look out for the highest and lowest price point expected and calculate an average for your trading decisions.
From analysis to trend to decision making
Markets don’t work on cold hard figures alone. Sometimes, analysts create expectations which move the markets before indicators are even announced. Effectively, market sentiment creates a momentum which feeds itself: when prices rise, people expect them to rise further and buy, thus increasing prices. When resistance (high) and support (low) thresholds are breached , traders operate on adrenaline.
And how would you even know which way the market is moving? This is where chart reading comes in. There are three main types of charts: Line charts trace the closing price of an instrument and connect the dots with straight lines. They’re very easy to understand but they only give you one price point and the direction the market is moving in. Bar charts show you the opening and closing price as well as the highest and lowest price point during a session or specified timeframe. Candlestick charts are very popular because they have as much info as bar charts and they’re easier to read. The main body of a candlestick shows you the opening and closing price whereas the straight line that goes through the candlestick shows you the highest and lowest price. A green candlestick indicates the price is increasing (bullish) and a red candlestick that it’s dropping (bearish).
When you look at a chart, you’re trying to identify trends, i.e. where the price is going so you can buy or sell. Is it going up or down and can you see any swing points which, based on previous patterns, indicate that the trend will reverse? Swing points are what most traders are after and there are, indeed, some patterns you can trace. E.g. you may hear of
- double tops, where the price rises up to a certain point, then drops and then rises again until it reaches the same resistance threshold which it can’t break through and falls back down.
- double bottoms happens when a price repeatedly drops to a support threshold (low) which it can’t break through.
- pennants are plateaus where a price consolidates on its way up or down before continuing on the same trend.
- triangles form when a price hits a series of ever-decreasing highs until the resistance line hits the support line or a series of ever-increasing lows until the support line meets the resistance line.
Seeing these patterns helps you predict with some confidence what might happen next.
So, what does this all mean for you? Ask yourself: how much time can I reasonably spend tracking reports and trends? If the answer is not much, go for medium to long-term trading, ignore the hourly changes in prices and adjust your charts to reflect daily or even monthly changes. If you’re a dedicated trader and you can enter and exit regularly during the day, set your charts to monitor hourly price moves.
Your trading strategy shouldn’t be about what other people do but about your capital, risk tolerance , goals and time commitment.
Bitesize basics
- Analysts collate information and produce estimates of where the market is going. Technical analysis focuses on past pricing patterns and charts whereas fundamental analysis focuses on macroeconomics and political decisions which may affect the markets.
- Estimates drive market sentiment creating a momentum which is sometimes not entirely founded on reality.
- A trader should learn to read charts and identify trends, in order to ride on these trends and pick up swing points where price direction is about to reverse.
- Your trading strategy should be driven by how much capital you can risk, what your goals are and how much time you can commit to watching the market.
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