Finance

A Basic Guide on How to Read Trading Charts

Trading Charts

Do you sometimes get frustrated when trying to read stock and trading charts? If so, don’t feel alone because many active traders are often stumped when confronted with bar, candlestick, line, and other kinds of charting graphics. Ironically, charts are supposed to make it easier to understand what’s happening in the markets, not more difficult. The good news is that if you review the basics of how each of the charting styles works, you’ll be in a much better position to gain lots of information just by glancing at a charted stock price.

To begin, it’s imperative to know what charts are capable of, namely the kinds of information they can display to the viewer. While there are dozens of chart types, the three main ones are candlesticks, bar, and line versions. Next, explore the concept of charting in order to understand what they are incapable of doing. Finally, if you want to round out your knowledge, read a short listing of the pros and cons of line, bar, and candlestick charting. Each type comes with its own unique set of upsides and downsides. It’s good to know the strengths and weaknesses of each before choosing the style of graphic information you prefer working with.

What Charts Show

If you’re new to the subject of charting, you’ll likely be surprised at how much information a line, candlestick, or bar can pack into a very small space. For the most part, regardless of the style you prefer, charts attempt to convey data about opening, closing, high, and low price levels, past performance, and graphical representations over differing time frames.

Different Kinds of Charts

Before delving into the details about how to read charted graphs of securities, it’s crucial to understand that there are three main kinds of them. One of the most common used in financial and mathematical studies is the line chart. As its name implies, it consists of one piece of data per time period. While it is lacking in detail, it offers a clear view of prices for investors. As you learn more about trading charts, you’ll gain an understanding of how to spot various types of price trends for any kind of asset.

Additionally, bar charts offer more information while also including some of the simplicity of their lined cousins. Using bars on a stock price graph can show OHLC (open, high, low, and close), is very easy to use, and is a good way for new traders to identify particular price movement patterns. One disadvantage is that bars can be a bit tricky to read because of the way they’re designed. You have to know the structure before you can gain any insightful information from them.

The third and a favorite among many intermediate and advanced traders is the candlestick chart. Invented in Japan more than a century ago, the name comes from the way the graphical points appear. They look like candles, with wicks and long bodies. Candles convey a lot of information, are favored by people who take part in day trading, and offer an easy way to spot trends within any given timeframe.

How to Read and Decipher Charts’ Information

Candles show OHLC, direction and range of prices for any time period you choose. For instance, a red candle means prices closed below the open. Green means the opposite. The size of the candle’s widebody indicates the open and closing values. The small wick indicates the high and low for the day. One look at a candlestick, and you can instantly figure out how the day’s pricing activity behaved. Line charts are the simplest. In most cases, the point indicates the closing-price of the day, though some will indicate other values. Bar charts convey a good amount of data, but you have to know how to read the tick marks. The bar represents the range for the day, and the left tick is the opening. The right tick is the close.

What They Don’t Show

While learning to read all the different kinds of graphical representations of stock prices, it’s critical to remember that charting has limitations. The main drawback is that you’re only looking at historical data, so it’s tempting to assume past performance will tell future movement. What you won’t see on a graph is a company’s decision to expand, the upcoming settlement of a pending lawsuit, or future economic events that are completely out of the company’s control. One example is inflation. A chart’s historical graph might show an upward pricing cycle, but a month into the future, the company could suffer considerable losses due to retail inflation. Overall, charts are an excellent way to spot patterns and understand price action.

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