How to read a trading chart
- How to read forex charts
- Understanding trends
- Types of trading charts
- Candlestick charts details
- Graphical Analysis
- Using Indicators and Studies on Your Chart
How to Read Forex Charts
Identifying trends, whether they are moving up, down or across and also knowing when they are about to reverse is really key to your Forex trading.
No matter what asset you are trading, you need to know how to follow charts. The ability to read trading charts is part and parcel of trading, and the more you understand about technical analysis, the better a trader you can become.
Practice your chart reading skills on a demo account or utilize them on a real trading account!
Like all things in life, the more you practice, the more you enhance your skills. This article aims to kick you off on your journey to understanding and using charts to enhance your trades.
Traders that use charts are known as technical traders. They prefer to follow the predictive powers of charting tools and indicators to identify peaking trends and price points, in order to guide them when to enter and exit the markets.
On the other hand, fundamental traders prefer to follow news sources that offer information on economic growth, oil supply, employment data, interest rate changes and geopolitical drivers like war and political instability.
Let’s start by understanding what a trading chart is, before zooming in on patterns and indicators. In short, a chart is a depiction of exchange rates that happen between two financial instruments that are plotted and illustrated on a graph.
When you hear of a Bullish trend, you are looking at an overall upwards trend (imagine a bull charging) and a Bearish trend is a sequence of descending lows and highs (imagine a bear hiding in the woods). There is a third kind of trend that is known as the sideways, flat or horizontal trend, which moves across.
A ranging market is when the price of the asset hits the same highs (resistance line) and lows (support line) at least three times in succession. It is said to be trading in a range.
To learn more about identifying trends and the duration of trends, skip across to our Trend Trading Guide.
Types of trading charts
There are three main chart types that are popular among trading circles. Each chart type offers a variety of different information according to the traders’ individual skill level:
Line Chart – This is the most basic of trading charts, and the stepping stone for the beginner trader. This chart represents only a closing price over a period of time. The closing price is often considered the most important element in analysing data. This is in essence, how the line chart is formed: by connecting the closing prices over a set time frame. There is no visual information or trading range, meaning no highs and lows and nothing on opening prices.
Bar Chart – Expanding in more detail on the line chart, the bar chart includes several more key fragments of information that are added to each data point on the graph. Made up of a sequence of vertical lines where each line is a representation of trading information. They do represent the highs and low of the trading period as well as the open and closing price. The open and the close price are represented by a horizontal shorter line.
The open price is the ‘dash’ that is located on the left side of the vertical bar and conversely the close price indicated by a similar horizontal line, to the right side of the bar. Understanding this trading chart is simple, if the left dash (which is open price) is lower than the right dash (closing price) then the bar will be shaded in green, black or blue and represents a price increase and the instrument gained in value. The opposite is true and the decreased value of the stock is indicated in red.
Candlestick Chart – Once you have mastered the line and bar charts, you can move on to the candlestick chart, which is similar to the bar chart. The vertical lines of both charts illustrate the trading period’s price ranges, while the body of the candle uses different colours to represent the market changes of that time period.
Candlestick Charts in Detail
Dating as far back as the 17th century, the Japanese began using technical analysis to trade on rice. Hence, the Japanese Candlesticks commonly in use today.
The data relayed from the candlestick includes the highs, lows, open and close prices.
The ‘hollow’ and the ‘coloured’ portions are called the body. The long thin lines above and below the ‘body’ represent the high or low ranges and are also referred to as either shadows, wicks or tails.
Should the lines be placed at the top of the body this will tell you the high and close price, while the line at the bottom of the graph indicates the low and the low’s close price.
The colours of the candle body do vary from broker to broker, however they are usually green, illustrating a price increase, or red being a decrease in price.
A hollow candlestick is where the close price is higher than the open price, which will indicate to traders to BUY. Filled / coloured candlesticks where the close price is less than the open will indicate a SELL position.
Long versus short bodies will indicate the BUY or SELL pressure among traders. Short bodies represent very little price movement and are often treated as a consolidation pattern, known as Doji.
Doji is an important facet of the candlestick chart as they provide information in a number of candlestick patterns. These form when the instruments open and close prices are virtually equal and there’s not much price difference.
The relevance of Doji candles are to show traders that after a long green candlestick the buying pressure is starting to weaken, or after a solid red candle that the selling pressure is starting to decrease and the supply and demand are starting to even out.
There are a variety of patterns you can identify just by looking at the chart. The nature of chart patterns is based on the fact that human psychology does not easily change and therefore history tends to repeat itself.
They give you clues as to the potential direction the trend will follow. They are at the heart of all important price moves that form a connection between trends. You can use chart patterns as a self-contained strategy for your trading.
Some of the most important patterns to know include Triangles, a continuation pattern which shows a battle taking place between a rising and falling price. This means the price is eventually expected to continue in the direction it was travelling before the pattern was identified.
Another key pattern to know is the double top, which shows the price making two highs and indicates a reversal in the bullish trend to a bearish trend. Its converse – the double bottom – identifies a trend reversal from bearish to bullish, meaning an impending uptrend.
From these examples you can understand just how important being able to identify patterns is to your trading outcome.
Using Indicators and Studies on Your Chart
As you grow more comfortable reading and examining the charts, you will then learn how to add other tools such as technical indicators to measure the rate of market volatility and changes in value.
These technical indicators will help you learn when markets are ‘oversold’ or ‘overbought’. When a market is oversold or overbought, it is struggling to maintain its direction, and often suggests a reversal is imminent.
Other forms of analysis will help you identify when to enter or exit a trade, such as the Bollinger Bands.
Trend line indicators like the Moving Average simply help you identify which way a trend is moving, by cutting out all of the noise of the smaller price movements.
With these indicators, you can use a few in tandem to confirm your signal. They all feature on most trading platforms. Visit your AvaTrade platform now and take a look.
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How to read trading charts main FAQs
What information is on a trading chart?
Traders use a variety of indicators to read a trading chart, but at its core it contains two vital pieces of information – price and volume. Anything else besides the historical price and volume information is nothing more than speculation. And yet these two pieces of information are vitally important to forecasting future market moves. Changes in volume are often overlooked, but increasing volume shows a much stronger move, one that’s likely to continue, while falling volume shows a lack of conviction among traders.
What should I be looking for on the trading chart?
The very first line that most technicians plot when considering a trading chart is the trend line. Of course, markets are not always trending and you might not see an obvious trend line. You might need to look at a wider time frame to distinguish what the trend is. A close kin to the trend line are the support and resistance levels, and these might be the next thing you look for on your chart. Again, it can make sense to zoom out, where you might discover long-term support and resistance levels that can be extremely important.
What is the most important indicator when reading a trading chart?
It’s difficult to pinpoint the most important indicator on any chart. Certainly, the trend line and support/resistance levels are something that’s critically important, and some traders who rely on these levels when trading would consider them to be the most important. As far as indicators, the moving average in all its different time frames may be the most important indicator simply because so many traders are using them to base trades off of, particularly the 50 and 200 period moving averages.
We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.
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