02.09.2022
Musicians need notes, architects can’t work without schemes, and traders are paralyzed without… charts. What makes trading charts so confusing for a newbie? Why are they different instead of being standardized? Why do people use candlestick charts instead of simple line charts? The answers are below in this article. Let’s learn how chart reading knowledge will drive you closer to a trading shark.
A chart is a graphical representation of price action. It is one of the primary and most important technical analysis tools. By studying charts, traders try to identify patterns that can provide clues about future price movements.
A chart example
Here is a screenshot from Grand Capital WebTrader. Let’s examine general chart elements in this example.
Like every other chart, it has two axes: horizontal (time) and vertical (price level). The interceptions of these axes represent the price action.
On the bottom left, you can see the timeframe selection bar (1D, 7D, 1M, etc.). Timeframe stands for your chart’s scale, allowing you to select a time period.
The top left corner shows an asset the chart represents. In this case, it is EUR/USD currency pair.
Last but not least — candlesticks. This screenshot is a decent candlestick chart example, which is crucial to study if you strive to understand trading graphs clearly.
There are several types of charts. The most popular ones are line charts and candlestick charts. Although line charts are straightforward to read and understand, professional traders usually incline toward candlesticks. And there are several reasons for this:
A candlestick chart shows much more information compared to lines
A line chart
Line charts are intuitively simple. They may be relevant when you only need to understand price moves in the big picture, but they are uninformative. All they do is show the price level at a specific time. That’s it.
The Candlestick chart shows plenty of necessary indications. It is essential to learn the concept of candlesticks to understand how to read charts, so we made a picture for you to put it easier:
Candlesticks in a nutshell
As seen above, candlesticks indicate open, close, minimum, and maximum levels. The candlestick is green or red, depending on whether the price went up or down in a certain period. Such a volume of information gives traders much space for market analysis.
Candles are handy in technical analysis
One candle tells us much about what happened with an asset within the chosen timeframe. Several candles may predict the future. How is that possible?
An example of a candlestick chart with technical analysis visualization
You see, candlesticks form quite distinctive patterns. These patterns then are easy to interpret with technical analysis. In simple words, technical analysis is a method of market move prediction based on previous price changes and chart pattern identification.
What we see above is a candlestick chart of the Mexican peso against the dollar forming a so-called “triple bottom” pattern. The meaning of this specific figure is that it signals a soon bullish trend start.
Triple bottom closeup
In this picture, the trader has outlined the “triple bottom” pattern with a green line and showed their expectation of a bullish wave with a blue spike in the end. Such patterns and their visualization are game-changers in chart understanding.
Candlestick charts display trading flow in a convenient, discrete way
Selecting a timeframe is always an option regardless of what software or website you prefer to use to view charts.
Timeframe selection menu (on the bottom)
It is crucial to use an appropriate timeframe. It should suit your trading strategy. Short-term trading styles like scalping require a narrow one-day timeframe, while long-term strategies like position trading are challenging to use with a timeframe shorter than six months.
How does it relate to candlesticks? When you change your timeframe, a candle’s scale shifts accordingly. The one-day timeframe implies five-minute candlesticks, while each candle is four hours long in the one-month timeframe. Please, consider this difference when you select a timeframe!
Technical analysis is a vast topic we aren’t going to study in this material. However, trading signals frequently go along with indicators displayed on the graph. Let’s look at a basic example:
A chart with technical visualization
What we see above is an NZD/USD chart with several technical indicators applied.
Awesome Oscillator and Stochastic Oscillator
On the bottom, there are two bars with graphs. The top one with a gray-blue wave is Awesome Oscillator, and the bottom two curves are Stochastic Oscillator. These indicators are standard tools to identify oversold/overbought conditions, thus predicting trend shifts.
Moving average closeup
The thin red curve striking through the main candlestick flow is a moving average. Traders use it to identify the current trend. If we were to explain it briefly, we’d say it is a smoothed expression of the graph that filters out and averages small fluctuations.
Target levels
There are also three green lines with price levels. These are target levels — the supposed positive points that identify where a take-profit should be placed.
The last group of elements here is these green and blue lines that stand for the price direction and channels — the trader has manually added these indications.
We hope you learned something new about trading charts and understand them better now! Subscribe to Grand Capital’s Telegram channel to keep in touch with the following articles!
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