How to read a trading chart

How to read a trading chart

How to read a trading chart

When you look at a chart and find a grouping of data plotted in a general direction, you can figure out the overall direction that the instrument is moving, ie. up, down or across. Every chart is different depending on the asset and the timeframe. On most charts, the trend can be determined quite easily, and on some, it can be a little more complex to understand which way the trend is moving. One thing is for sure, “the trend is your friend” as the saying goes, and understanding how an asset’s price or value is moving is really the first principle in understanding how to trade.

How to read forex charts in UK

There are many different kinds of assets you can trade at brokers like AvaTrade, which include forex currency pairs as well as commodities trading however, the principle is the same, no matter what instrument you choose to trade.. Traders that use charts are labelled as technical traders. They follow data, and they use charting tools and indicators to identify peaking trends, price points for market entry and exit and they can also generate trading signals and understand when the market is likely to reverse. Conversely, fundamental traders prefer to follow news sources or events that offer actual information on economic growth, employment situations, political threats, company data and interest rates.

AvaTrade UK can guide you in reading price charts and teach you how to use them to trade. To help you feel more comfortable about trading you can download mt4 OR download MT5 and take them for a spin before you commit real capital to trading. To help you launch your trading career we outline below a few tips to help you understand and read charts.

Firstly, one needs to know what a chart is before attempting to dissect the information presented. In summary, a chart is a depiction of exchange rates that happen between financial instruments that are plotted and illustrated on a graph. The ability to read charts is part and parcel of trading, as it allows you not only to keep track of your current trades but helps to detect a developing trend line for your future trades.

Understanding trends

Trends generally move in a series of peaks and valleys (highs and lows). When you refer to a Bullish trend you are looking at a succession of mounting highs and lows and a Bearish trend is a sequence of descending lows and highs. There is another trend that is known as the sideways, flat or horizontal trend. This is depicted when the forces of supply and demand are equal, so there is more of a straight line then a view of valleys and peaks.

Trends are not only classified by their direction of movement, but also by the time duration the trend is taking place, eg. The timeframe. There are long-term, short-term and intermediate trends that coexist and may have the same, as well as the opposite directions. They are pretty self-explanatory as they are time-based and are part of the trendline you see when reading a chart.

Types of trading charts UK

line chart
bar chart

Time to learn and understand what the chart is trying to tell you. When you engage in online trading there are three main chart types that are most popular among trading circles. Each chart has its own level of information contained inside, according to the traders’ individual skill level:

Line Chart  The most basic of charts, and the stepping stone for the beginner trader. This chart represents just a closing price over a period of time. The closing price is often considered the most important element in analysing data. This is in essence, how the line chart is formed: by connecting the closing prices over a set time frame. There is no visual information or trading range, meaning no highs and lows and nothing on opening prices.

Bar Chart – Expanding in more detail on the line chart, the bar chart includes several more key fragments of information that are added to each data point on the graph – made up of a sequence of vertical lines where each line is a representation of trading information. They do represent the highs and lows of the trading period as well as the opening and closing price. The open and the close price are represented by a horizontal shorter line.

Japanese candlesticks chart

The open price is the ‘dash’ that is located on the left side of the vertical bar, and conversely, the close price indicated by a similar horizontal line to the right side of the bar. Understanding this chart is simple, if the left dash (which is the open price) is lower than the right dash (closing price) then the bar will be shaded in green, black or blue and represents a price increase and shows that the instrument gained in value over the timeframe. The opposite is true if the asset price decreased in value, meaning the bar will be red.
Candlestick Chart – Once you have mastered the line and bar charts, you can graduate to the candlestick chart, which is fairly similar to the bar chart, yet it shows more information. The vertical lines of both charts illustrate the trading period’s price ranges, while the body of the candle uses different colours to represent the market changes over that time period (what is known as the wick of the candle).

Candlestick charts detail

Dating as far back as the 17th century, the Japanese began using the technical analysis to trade on rice, although quiet different to the US version created around the 1900s their principles are similar.

candlestick elements

In order to start creating and reading a candlestick chart, one should know that the data contains highs, lows, open and close prices.

The ‘hollow’ and the ‘coloured’ portions are called the body. The long thin lines above and below the ‘body’ represent the high or low ranges and are also referred to as either shadows, wicks or tails. Should the lines be placed at the top of the body, this will tell you the high and close price, while the line at the bottom of the graph indicates the low and the low’s close price. The colours of the candle body do vary from broker to broker, where they could either be green or blue, illustrating a price increase or red being a decrease in price, or hollow candlesticks is where the close price is higher than the open price which can indicate to UK traders to BUY. Filled/coloured candlesticks where the close price is less than the open can indicate a SELL position, depending on the trader’s strategy.

doji candles

Long versus short bodies will indicate the buy or sell pressure among traders. Short bodies represent there was very little price movement and are often treated as a consolidation pattern, known as doji.

Doji is an important facet of the candlestick trading charts, as they provide information in a number of patterns. These form when the instruments open and close prices are virtually equal and there’s not much price difference. The relevance of Doji candles is to show traders that either after a long white or green candlestick the buying pressure is starting to weaken, or after a solid long (blue or black) candle that the selling pressure is starting to decrease, and the supply and demand are starting to even out.

Graphical Analysis

head and shoulders pattern

One of the most popular and reliable patterns of graphical analysis is the head and shoulders pattern.
This pattern is a reversal pattern, and when it is formed will be a sign that the current trend will see a reversal soon. There are two versions of the head and shoulders pattern:

  1. Head and shoulders Top: Generally formed at the peak of an upward trend and signals that the asset’s price is set to fall once the pattern is completed.
  2. Head and shoulders Bottom (or Reverse Head and Shoulders): Usually forming during a downward trend, the head and shoulders bottom pattern signals that the asset’s price is set to rise.

Both have similar visual construction as each contains four main elements: two shoulders, a head and a neckline. Patterns are formed when the neckline (support and resistance) is broken and a second shoulder is formed. Heads and shoulders are formed by peaks and valleys on a graph. There are many other formations that UK traders turn to for analysing trade setup including Double top/bottom, triple top/bottom, Pinocchio, bullish/bearish engulfment, and more. It is worth being able to identify the main patterns as these can help confirm price action.

Incorporating a technical analysis tools into your charts

As you grow more comfortable reading and examining the charts you will learn how to add other tools, such as technical indicators and studies to measure the rate of market volatility and changes in value. These technical indicators can assist you in clarifying the exact market information that could be missed with some stocks trading or currencies that are commonly labelled as ‘oversold’ or ‘overbought’.

In essence, technical indicators incorporated into your live charts like volume indicators, trend lines, Fibonacci levels, stochastic oscillators etc., can block out the market noise, forming a better picture of the markets and trends that lie ahead.

Here at AvaTrade UK, we have written this in-depth guide in order for you to understand how some of the core technical analysis tools are applied by professional traders and can be really helpful in your trading.

How to read trading charts main FAQs

  • What information is on a trading chart?

    There are a variety of chart types; the main ones traders use being Line Chart, Bar Chart and Candlestick Chart. They show market prices, closing and opening and in the case of Candlestick volume of buyers and sellers. Anything else besides the historical price and volume information is nothing more than speculation. And yet these two pieces of information are vitally important to forecasting future market moves. Changes in volume are often overlooked, but increasing volume shows a much stronger move, one that’s likely to continue, while falling volume shows a lack of conviction among traders.

     
  • What should I be looking for on the trading chart?

    The very first line that most technicians plot when considering a trading chart is the trend line. Of course, markets are not always trending and you might not see an obvious trend line. You might need to look at a wider time frame to distinguish what the trend is. A close kin to the trend line are the support and resistance levels, and these might be the next thing you look for on your chart. Again, it can make sense to zoom out, where you might discover long-term support and resistance levels that can be extremely important.

     
  • What is the most important indicator when reading a trading chart?

    It’s difficult to pinpoint the most important indicator on any chart. Certainly, the trend line and support/resistance levels are something that’s critically important, and some traders who rely on these levels when trading would consider them to be the most important. As far as indicators, the moving average in all its different time frames may be the most important indicator simply because so many traders are using them to base trades off of, particularly the 50 and 200 period moving averages. Others use the RSI indicator, which shows when a market is overbought or oversold, meaning due a correction in direction any time soon.