How to Read Trading Charts
So, what are Trading Charts?
Traders generally use trading charts as an effective tool to track the stock markets and in the process anticipate price movements of stocks or instruments they choose to invest in. Trading Charts are very informative and come with a lot of information based on the volumes, yields, price levels, highs, lows and a lot of valuable historic data. Careful analysis of this information helps you shortlist trading options. If you invest short term, you need to track markets for short-term trend changes to stay ahead of the game.
Trading Charts help you to determine price levels to when you make entry and exit strategies. To be honest, a stock chart can be very confusing for a person looking at it for the very first time. However, it is a lot less complex than what it seems as first.
Looks scary, right?
Understanding a Trading Chart
A stock chart is a graphical representation of stock prices over a fixed period of time you wish to track. Following are the parts of a trading chart explained:
Trading charts can be differently illustrated, and the central graph determines the type of chart. The graphics can be represented in the forms of bar, line or candlestick chart.
Chart Types
Bar Charts
A bar chart is a graphical representation that is used in depicting stock segments. Bar representations are bases on time lines and an individual bar may represent a day, a week, a month or even an hour. It is a trader’s requirement of the time frame that graphically defines the bar. If you looking for a daily chart one bar will represent the price change for a day and for a weekly chart a bar would represent a week price change for a week. On the right side is an example of a bar. A series of them forms a bar chart.
Line Charts
Line charts are used only to determine closing prices. An interesting fact is that most historical price representations are made only on the basis of using line charts. For traders who don’t concentrate on open, close, high and low prices a line chart representation would be the only graphical representation to derive close price representations. A disadvantage of line charts is that as it only concentrates on the close price and fails to inform a trader of the trading levels and volumes of trade for the day. It fails to depict any volatility within the instrument or display the difference in volumes of purchase and sales within the very instrument. Therefore a line chart would ideally be more suited for a long-term investor.
Candlestick Charts
This is a very detailed stock trading representation and had its origin in Japan in the 17th Century to predict fluctuations in the price of rice. Today the same methodology is applicable and widely used in the financial markets. Also, it is the type represented in the first illustration.
This is a very detailed stock trading representation and had its origin in Japan in the 17th Century to predict fluctuations in the price of rice. Today the same methodology is applicable and widely used in the financial markets. Also, it is the type represented in the first illustration.
To create a candlestick you would need an open, close, low and high prices. The information displayed on a candlestick chart is similar to a bar representation but the only advantage being a clearly defined representation of price action – if the inside of the stick is white or green, it means the closing price was higher than the opening, or that the current trading price is higher than the opening price. If the inside of the stick is black or red, the opposite is true: the price dropped.
The graph on the first page is an example of a candlestick chart.
Instrument Name and Symbol
Instrument name and its symbol are useful because traders more often use symbols to refer to different financial instruments rather than names, because the symbol is shorter and is comprised of several letters, rather than a full company name, for instance.
Volume
Volume traded is a very important indicator for two reasons. First reason is that you want to make sure you have enough traders on supply and demand side for an instrument in order to be able to buy and sell it at the desired moment. On the other hand, if the instrument’s traded volume rapidly increases, it means that many people and institutions are buying and selling it for some reason, and it’s possible that this will affect the price. A good trader can earn big money on these price fluctuations.
Volume can be measured in two ways. For stocks, it is measured as a number of stocks traded.
In the FOREX market, it is measured in ticks. Ticks are a change in price. So, every tick is counted, and the total number of price changes is the actual volume traded. Many consider it a not so useful indicator, and it is rarely used.
Price and price change
Price shows the current trading price, based on the last completed trade. It is not the price you are buying and selling the instrument for, because your broker is paid a small amount for completing the transaction. If you are buying (going long), the price is a little higher, and if you are selling (going short), the price is a little lower. The difference between the two is called spread, and it is the amount a broker charges for their services. The exact prices for buying and selling are presented on the instrument pages.
Price change represents the difference between the current price and the closing price of the previous trading period. A price change could also be the overall increase or decrease in price for over the period of a week, month or more. In the following table, it refers to the price change over the period of one month.
The price change helps us understand what kind of phase the instrument is entering into. If the script is constantly moving upwards and reaching all new time high levels, this clearly indicates a positive and upwards movement in the instrument and vice-versa if it is following a downwards trend. You can make another interesting observation – when a stock is reaching a level and constantly declines on reaching the same level – this would indicate a level of resistance in the instrument. The price level indicators are very important factors that help investors to channel their purchase and sales strategies.
Time Frame
Time frame depends on the amount of time you want to track your instrument of interest. For short terms investors it could be a week or a couple of weeks. Some investors and financial institutions track their preferred instruments for 3-6 months on a stretch or even gather data for stock price movements for years combined.
Conclusion
With the stock markets getting more volatile by the day, it is very important for all traders to be well prepared and do a lot of homework at any point of time before making investments. Using trade charts is definitely the solution as it is very informative and suggestive. As a trader, you could understand market sentiment and determine the trends of an instrument you choose to invest in just based on certain facts and figures. Correct and timely interpretation of trading charts could definitely put you in a win-win situation.
