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.
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 ForexLive.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).