A Chart is a Chart
A Chart is a Chart
When it comes down to any kind of trading, be it Technical, Fundamental or a mixture of both, the serious speculator would be lost without charts. To the seasoned professional trader, the price charts tell the story of the markets, highlighting trend, strength, weakness and emotion, all in one simple package. Personally, I regard my charts as pretty much the most important weapon in my trading toolbox and when we learn to read price in a truly objective fashion, we can witness and observe the footprints of the smart money players, to give us clues of where to find the lowest risk, highest reward buy and sell opportunities.
Following the trend of technical indicators and chart patterns, there are a variety of different methods to chart prices. As a trader myself, I have tried various forms of charting and found each to have its own unique characteristics which can be both a blessing or curse if not used in conjunction with solid planning, discipline and risk management practices. For this article, I have chosen three of the most popular to take a look at:
By far the most basic and probably the earliest form of charting is the Line Chart. Remember that in the earliest forms of charting, it was more practical and of course easier to plot the larger time frames like Daily, Weekly and Monthly charts as these would have been fashioned by hand drawing. The Line chart is easily plotted by marking each successive period's closing value with a dot, and then simply joining them together to form a rising, falling or static line:
I have found this style of chart to be very useful in identifying trend in a clear manner and there can be little confusion when analyzing strength and weakness in the price action. While this method could be regarded as a little too simple for some analytical tastes, I have always been a fan of the simplistic approach to trading, and the Line chart shows a high degree of clarity for the objective speculator. As I have marked on the chart example above, we can also easily identify areas of price support and resistance and I mentioned earlier, these zones often offer trades with low risk and potentially high profit capabilities. Especially useful for the longer term trader, the Line chart can also be the ideal tool for cross-market analysis studies, when one wishes to compare relative strength and price action analysis across multiple instruments or say, currency pairs.
The Bar Chart takes the Line Chart to the next level completely by actually showing traders the price action within each individual period, and it gained in popularity with the rise of computer generated charting software. It comprises of a bar with a range showing the Highs of the period, the Lows, the Opening and finally the Closing values. This extra level of detail is a useful aspect of the Bar method and gained favor with the shorter term Swing and Intraday Trader. Opening prices are always plotted on the left side of the vertical High and Low bar, with the closing value being plotted on the right-hand side of the vertical bar, as shown below:
Like the previous example, I have plotted a 4-hour chart of the GBPUSD over pretty much the same date range. Once again, the Bars clearly highlight the highest probability support and resistance trades available to the disciplined trader, but we can see a deeper level of price action. Pivot highs and lows are easy to distinguish and Parabolic moves in price action which often lead to great reversals are easy to see. For the trader who seeks a little more detail but not an overload, the traditional Bar chart is a fine choice to be made.
Finally, we move onto Candlestick charts, which have risen quickly to become by far the most popular of charting techniques. Candlestick charts are thought to have been developed in the 18th century by Japanese rice trader, Homma Munehisa. The charts gave Homma and others an overview of open, high, low, and close market prices over a certain period and much like the Bar chart, this style of charting is very useful due to the level of ease in reading and understanding the graphs. The method was picked up by Charles Dow around 1900 and remains in common use by today's traders of financial instruments. Useful to traders and investors across all styles of speculation, the Candlestick chart is easy on the eye and tells many stories if one looks closer. Like the Bar chart, we can see the open, high, low and close of each period, but the candles form solid bodies between the open and closing prices, with the highs and lows creating wicks above and below the body, hence, the term "candlestick."
Whole books have been written about the shapes and patterns formed by each candle and these methods of reading price action have gained huge respect for evolving a whole technique of technical analysis in and of themselves. We have Bullish and Bearish Engulfing candles, Speed Bars during momentum moves and key signs or potential price changes with such formations as the Doji, Hammer and Shooting Star formations. Used in the correct manner, these candle patterns can become powerful tools in the trader's arsenal, if combined with objective price observation at all times. However, this advantage also comes with its own cons, too, especially considering that Bullish candles are generally colored in green, and Bearish ones in red. Novice traders often react to the colors rather than the price in the early stages of their careers, killing off accounts very quickly. Combine this with trying to remember the numerous candle patterns which are forming on the fly, and the unprepared speculator can easily run into trouble fast. Yet, if we manage to keep the analysis simple, the candles can offer a unique insight into current price behavior and compliment a solid understanding of the supply and demand dynamic, as we can see from the above example.
In closing, you are probably wondering which is best for you, and to be honest, I always tell my students that they should always work with the tools that feel most comfortable to them. Consistency, planning and risk control are the main factors in successful trading after all. Look for what the chart is objectively showing you first, and the rest will come naturally. Hope this helped.
Until next time, take care,
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