TOPIC FOUR
Reading Charts
Interpreting charts is a key driver to decision making for many traders when choosing entry and exit points.
Topic One
Topic Five
Topic Nine
Topic Thirteen
Topic Two
Topic Six
Topic Ten
Topic Fourteen
Topic Three
Topic Seven
Topic Eleven
Topic Fifteen
READING CHARTS
Topic Four
Topic Eight
Topic Twelve
Topic Sixteen
​Charting has come a very long way within the financial market space and add to the glitz and glamour of the industry. Reading charts is often one of the first things a trader does before placing a trade. Success is in the preparation with eyes wide open.
Charts show a historical picture and history has seen to repeat itself many times over. Trading is not an exact science, however by applying strong risk management alongside good strategies, the probability can slant in your favour.
The main role of a chart is to show current and previous price levels of a security. They can be represented by line charts, bar charts or candlesticks. Bar and candlestick charts are very popular because they provide more information.
The colours used on charts can vary however it is common that red represents a fall in price and green represents a rise in price. If a bar is green, this means that the price for that time frame is or has closed higher than the price when it opened (for the period of that candle/bar).
Bar charts
Bar charts for each period/bar show an open level, a vertical line and a close level. They show 4 key pieces of information for that period: open level, the high, the low and closing level. Platforms allow you to select what time frame each bar represents.
The direction of the bar, whether it went up or down, is not only represented by the colour, but where the open and close is. The open (always shown on the left side), is lower than the close (the green bar in the diagram below) if the market went up (close price is higher than open price).
​
​
Candlestick charts
Candlesticks are effectively the same as bar charts as they show the same information. The only difference is that they are shaped in a way to have a body, a head and a tail. The two tails show the high and the low levels while the body shows the open and the close.
Candlesticks are easier on the eye with the fuller body. A single colourless candle on its own however would not be able to show which end of the body is the open or close.
​
​
Line charts
Line charts are good for seeing general direction but are much less informative for each period. They can be selected to show the market price points of the mid, high and low of the trading period and are used to indicate an easier view of the overall trend of the market.
​
Line charts are drawn as a single solid line and used to make it easier to see the direction of the price levels. As you can see below, they don’t show nearly as much information for each period as the candle or bar charts.
​
​
​
Interpreting candlestick & bar charts
​
​
It can be useful to understand how the shape of a candlestick or bar represents what the market buyers and sellers are doing throughout the period.
​
Long vs short bodies
The size of the candlestick tells a small story. Generally speaking, the longer the bar/candlestick, the stronger the buying or selling pressure has been to driving the price to spike or plummet. Alternatively, a short body indicates very little price change in that time frame.
Using green and red for up or down, the longer a green body is the further the close is above the open for that period. This shows that price has moved upwards significantly and buyers are more aggressive than sellers.
Also, a large single upward spike does not necessarily mean the overall market is bullish, as it could be a one off movement (as the image here shows). A strong move upwards was quickly extinguished by a falling price.
Long vs short tails
Long and short tails (or shadows as they are sometimes called), like the bodies can give more insight to indecisive movements in the market.
If the tails are quite short, the price hasn't move too far away from the open and close levels and most of the trading was done within the open and close levels. Alternatively, quite long tails indicate the trading levels for that time frame was quite volatile, however closed near its open.
A long upper tail means at some point buyers were dominant and drove the price upwards. Later in the session sellers were more aggressive and drove the price back down (vice versa for a long lower tail and short upper tail).
Different names are given to certain candle formations such as spinning tops, doji or morning stars. Traders can sometimes use a candle structure to determine if the market is about to turn or poised for a bigger move.
​
Using different time frames
​
​
Selecting the best time frame to use can be difficult as they can all relate to differing strategies. There is no one right or wrong time frame to look at.
If a trader selected a daily chart, each bar will show the open, high, low and close of that day. 5 bars in a row represent 5 trading days in a row. The open level shows the price when the day began (the first price traded that day), the high shows the highest price traded of the day, the low shows the lowest price traded of the day and the close shows the closing price (last price before day or trading session ended) that day. Similarly, if you select the charts for a one hour time frame, each bar will show those levels in that hour and five in a row will represent five hours.
The charts below all show the same market at the same time, however each candle represents different time periods starting from a long dated weekly view where each candle represents an entire week, and narrowing down into daily and hourly charts.
​
​GBPUSD Weekly Time Frame (each stick represents a week)
GBPUSD Daily Time Frame
(each stick represents a day)
GBPUSD Hourly Time Frame (each stick represents an hour)
​
Best time-frames to trade
All time-frames should be used in order to get the full picture and see the pattern of historic price movements. There is no correct answer for which one to use. It has been generally accepted that short term trading should use shorter time frames to find entry/exit points. Looking at longer time frames can still be useful to see overall trends.
A daily chart could be showing a downward trend while the hourly indicates an up-ward trend for a day or more. Building your strategy is important around this. Incorporating longer time frames allows view of the bigger picture and general trend. Shorter time frames can be used to find ideal entry points. Using multiple time frames captures multiple vantage points when looking to trade.
Using multiple time frames
The bigger picture is seen by the monthly, weekly, daily and hourly time frames to look for an overall trend. Zoom out as much as you can initially to see where the price has been and where it may be going. Once this is clear, delving into the daily, 4 hourly and hourly to depict a shorter time frame could be useful.
​​
-
Weekly/monthly: Identifies the main longer term trend of the market
-
Hourly/daily: Medium term trend and areas to find the ideal entry points
-
5min to 30min: Short term view to pinpoint entry points and a stop-loss for the trade
Swing traders often use 4 hour charts after grading the trend from the daily. Clear support and resistance opportunities, trend lines as well as other useful patterns for entry can be seen from longer times.
​
Traders who like to operate quickly may work with the 5-minute charts, allowing for more opportunities to enter and exit. Entry points based on daily/weekly time frames might have to wait longer to confirm their direction.