How to read a chart?
Charts visually display past and current price data. There are various types
of charts like the line chart, the bars chart or the most popular one, the
candlesticks chart.
The live line chart displays the closing price for any given
timeframe. So, if you open a line chart and you want to see the price on a
1-hour timeframe, then you will see a line that connects the closing price
every hour.
The live bars chart shows not only the closing price but also the
high and the low that the price reached on any given timeframe. So, if you
open for example a 1-hour bars chart, you will see the open price of the bar
(the segment on the left), the closing price (the segment on the right), the
highest price reached in that timeframe (which will be above the open price)
and the lowest price reached in that timeframe (which will be below the open
price).
If the bar closes above the open price, then you will see it as green and if
it closes below the open price, you will see it as red. Note that you can
choose any colour you want for your charts, but the green and red are
generally the most used ones because they visually show if the bar closed
positive compared to the open price (green) or negative (red).
The candlesticks live chart is the most popular one and you will see
it everywhere in the financial world. It’s basically an evolution of the
bars chart and it makes it even easier to look at the price. It shows the
same data as the bars chart, that is the open, the highest, the lowest and
the closing price, but instead of being displayed in the form of bars that
can be hard to look at, it’s in the form of candlesticks.
You have the body of the candlestick that shows the open and the closing
price and the wicks showing the highest and the lowest price reached on the
timeframe you selected. When the closing price is above the open price you
will see a green candle and when it’s below the open price it will be red.
As previously mentioned, you can use any colour you prefer for the
candlesticks.
The last thing you need to know about charts is that they are plotted on two
axes. The horizontal axis shows you the time and the vertical axis shows you
the price. The price always goes to the right, and you look left when you
want to see past price data. When the price is rising it’s called a bullish
price action and when the price is falling it’s called a bearish price
action.
What time frames should I use on my live charts?
When you open a price chart there are multiple timeframes you can choose
from that range from 1 minute to even monthly. The most popular timeframes
are the 5 minutes, the 15 minutes, the 1 hour, the 4 hour, the daily, the
weekly and the monthly. What timeframe to use depends on you and on the type
of trading opportunities you want to take.
Let’s say for example you want to take short term trades, in this case you
want to look at faster timeframes like the 5 minutes, the 15 minutes or the
1 hour charts. This is because you will see the price action more in real
time than let’s say a weekly timeframe. If you are someone that doesn’t have
time to look at such fast timeframes or you are just someone who wants to
take more long term trades, then timeframes from 1 hour to daily would be a
better choice.
Generally, the lower time frames are noisier because you will see the price
react to different daily drivers like news, rumours, economic data, central
bank speeches, reports, geopolitical developments and so on. Most of those
drivers may not be important for the market in the bigger picture, but in
the short term they may cause the price to spike here and there. This
doesn’t mean you can’t trade those events, but you should be more wary and
nimble.
On the other hand, the higher time frames are less prone to such noisy price
action because it takes more time for a candlestick to close. This fact kind
of smoothens the price action and lets the trader to focus more on the
bigger picture without getting distracted by spikes or daily ups and downs
that may induce to some emotional mistake like entering a trade just because
the price starts to move in a certain direction quickly and you don’t want
to miss the move.
How to use a chart to identify a trend?
In technical analysis
a trend is identified by a series of swing highs and swing lows. In
an uptrend the price makes higher highs (swing high) and higher lows (swing
low) while in a downtrend the price prints lower lows (swing low) and lower
highs (swing high).
It may look easy from the chart above but not only the swing highs and swing
lows can be subjective, but you can also find different trends on different
timeframes. For example, you may have an uptrend on a 5 minutes chart but a
downtrend on a 1 hour chart. Generally, the higher timeframe is regarded as
stronger than the lower one. So, if you have a downtrend on a 1 hour chart
and an uptrend on a 5 minutes chart, technical analysts will look at signs
of the uptrend on a 5 minutes chart fading before calling a resumption of
the higher timeframe downtrend.
Another way technical analysts identify trends on charts is via moving
averages. A moving average is a technical indicator that smooths out the
price action and plots a constantly updated average price with a line. If
for example you want to use a 50 period moving average, then the indicator
will take the previous 50 closing prices and divide by 50 to get the average
price. Every time there’s a new closing price the indicator will update the
average price and so on giving you a line of average prices.
The most popular moving averages are the EMA20 (exponential moving average
of the last 20 bars), followed by SMA (Simple moving average) of 20, 50, the
100 and 200 period moving averages. When the price is above the moving
average then it is said to be in an uptrend, and when it’s below the moving
average, it is said to be in a downtrend. So, you can either just look at
the swing highs and swing lows by eye, use the moving averages or combine
both methods to better identify different trends.
How to use indicators?
Indicators can help technical analysts to better navigate the noise in the
markets. Technical indicators take data from the price and, depending on the
indicator, they can show if the price is trending or ranging, if it’s too
much stretched to one side or if the momentum is fading.
Indicators should not be used on their own but as an extra confluence to the
overall analysis. The most popular indicators are the moving averages and
the oscillators like the RSI or MACD. They serve different purposes, but the
ultimate goal is to better make sense of the price action.
Moving averages are used to identify trends and to provide dynamic support
and resistance for the price. For example, if the price is above a moving
average, then it is said to be in an uptrend and generally the technical
analyst will look at possible points on the chart where the price may
pullback to and then bounce off of. Most often it’s the moving average
itself that can provide support for the price.
Oscillators are used to identify momentum and possible turning points. The
most used ones are the RSI and the MACD. The Relative Strength Index (RSI)
tries to gauge the strength or weakness of the price based on a formula. The
RSI is measured on a scale from 0 to 100 and a default period of 14 most
recent closing prices.
The RSI is also said to be in overbought or oversold territory whether it
crosses the 70 or 30 levels respectively on the scale. The idea behind it is
that the price can’t sustain the momentum at such extreme levels and, even
if it doesn’t mean a change in trend, the price may be bound to a pullback
so a trader may want to wait before entering at such extreme levels or even
take a counter-trend trade.
The Moving Average Convergence/Divergence (MACD) is used to gauge the price
momentum and trend. The MACD is composed of three indicators: the MACD line,
the signal line and the histogram. The signal line is a faster moving
average compared to the MACD line and it’s used with the MACD line to gauge
the trend direction when the two lines cross to the upside or downside.
When the MACD line crosses the Signal line to the upside it can indicate the
beginning of an uptrend momentum and when it crosses the Signal line to the
downside it may signal the start of a downtrend momentum. The histogram
visually displays the magnitude of the distance between the MACD line and
the signal line. The histogram can signal overbought or oversold conditions
when the two lines diverge too much.
When the histogram rises well above the baseline at 0, the price momentum
may fade a bit as it becomes overstretched and prone to a pullback and vice
versa when the histogram falls too much below the 0 baseline.
MACD line (blue), Signal line (yellow) and Histogram (green and red
bars)
Popular chart patterns
A chart pattern is a recognizable configuration of price movement that is
identified using a series of trendlines or support and resistance levels.
Chart patterns can signal reversals or continuation of trends.
There are many timeframes that can be used and there can be many patterns at
any given time that can make all the process confusing. You should look at
chart patterns as if they were a reflection of current market
sentiment/momentum. If you see, for example, price consolidating after a
bull run caused by a fundamental catalyst giving you a flag pattern, you
know that that can signal a further bullish momentum once the flag gets
broken.
Chart patterns can help a technical analyst to identify possible future
price moves. Remember though that patterns will rarely look like textbook
examples, because there’s a lot of noise in the market and you will often
see spikes or “ugly” price behaviour that may make spotting patterns harder
for you, so always be open-minded and don’t follow strict rigid rules like a
robot, you always have to adapt.
DOUBLE TOP/BOTTOM CHART PATTERN
Double tops or bottoms can signal areas where the market has made two
unsuccessful attempts to break through. Double tops look like an “M”, while
double bottoms look like a “W”. You can even find triple tops or triple
bottoms that have the same psychology behind them as for double tops and
bottoms. These patterns are considered reversal patterns, meaning that the
price upon successful completion of the pattern goes the opposite way
reversing the previous trend.
Generally, once the price breaks the neckline it confirms the pattern and it
can either continue on its way or come back to the neckline for a retest and
then continue again the new trend. Sometimes the price may even hover near
the neckline before making the real move.
HEAD AND SHOULDERS CHART PATTERN
The head and shoulders pattern signals a weakening momentum where price
cannot sustain a further push to the upside breaking the previous high or
low and just drops through the neckline. The base created by the previous
swing (blue line) is called “the neckline” and once broken it “confirms” the
validity of the H&S pattern.
Once the price breaks the neckline it can either continue in the new
direction or come back for a retest of the neckline before continuing again.
TRIANGLES CHART PATTERN
Triangles are continuation patterns. Triangles signal a consolidation due to
indecision or lack of fundamental drivers in the market. A symmetrical
triangle can be broken on either side and it can help showing where the
price wants to go. A descending triangle generally breaks to the downside as
the price keeps pushing against the support and then breaches it.
An ascending triangle usually breaks to the upside as the price tries
multiple times to break the resistance and eventually succeeds. Note though
that even descending and ascending triangles can break on either side.
Beware not to be too carried away by the price action when spotting
triangles as they can be prone to spikes that look like false breaks.
FLAGS CHART PATTERN
Flags are a short-term consolidation type of pattern and generally they
signal a continuation of the underlying trend. The price generally makes the
first impulsive move and then goes into a slow consolidation that looks like
a flag. Once the price breaks out of the flag it starts to run.
WEDGE CHART PATTERN
Wedges signal a weakening momentum. They are considered a reversal pattern.
The psychology behind it is that the price keeps on pushing in a certain
direction but with less and less strength and at some point it just can’t
sustain it anymore and goes in the other direction.
How to become a better chart analyst!
A good technical analyst thinks in probabilities. When you make your chart
analysis using the tools you have learnt, you should always have more
possible outcomes. A chart doesn’t tell you where the prices will go, but it
can show you different scenarios that may play out based on your analysis.
For example, if you see the price at a support level you know that the price
may either bounce from it or break down and keep falling. You have two
possible outcomes, and you can prepare for both of them.
If you see that the price has come to a spot where there are multiple
technical tools suggesting a bounce from there, then you know that you have
higher probabilities that the price indeed bounces from there, but if it
doesn’t then it means that the momentum is so strong that not even such a
good spot can hold the price. It tells you that it’s more probable now that
the price continues up because it had the strength to break that strong
spot.
Being a good chart analyst requires knowledge, experience, and open
mindedness. Your job is to manage risk, and this implies being aware of
different situations in order to better prepare for each scenario. This kind
of planning will increase your chances of success and your skills as a chart
analyst.
Technical Analysis Examples? We got ‘em!
Last but not least, a good way is to follow the
investingLive.com Technical Analysis
section where we analyze currencies, stocks, crypto, futures (Nasdaq,
Russell, S&P, Dow Jones) commodities and other asset classes. This could be
a good way for practical learning as well as get some trade education and
possible ideas (always trade at your own risk).
