How to Read and Understand Day Trading ChartsApril 18, 2022
Whether you are entering the markets for the first time, or you are a trader with several years of experience under your belt, knowing exactly how to read trading charts and being able to properly identify trends is a key part of any trading career.
No matter what type of asset you are trading, it is vital that you fully get to grips with following day trading charts. In this article, we will outline the most popular charts and explain how best to read them, as we go over some of the key things you need to know – before making your market move.
What are Trading Charts?
Day trading charts feature a sequence of prices drawn over a certain period of time. They consist of a vertical axis (the y-axis), which signifies the price scale, and a horizontal axis (the x-axis), representing the time scale.
On the chart, the prices are typically illustrated from left to right across the horizontal axis, featuring the most recent price movement on the far right hand side. A chart will usually display details about trading volume, price changes, historical lows and highs, dividends, and the current trading price, among other related financial details.
Understanding how to read charts is one of the best ways to get an idea of the performance of a particular stock or asset, as they help you attempt to figure out how a stock is likely to perform, as well as ascertain what is going on in the market more broadly.
Types of Day Trading Charts
There are various different types of trading charts at the disposal of market traders via the award-winning Trading Central provider, but the top three most popular ones consist of line, bar, and candlestick charts.
Each of these widely used chart types will be examined in more detail below, in order to give a better understanding of what they are and how they can be best utilised.
- Line Charts
A line chart is possibly the simplest type, as it represents the price via a single, continuous line, which illustrates the closing price as the single input across different timescale points.
As well as being the original 2D chart type used within the financial markets, it reduces price volatility throughout the day because it offers a clear overall picture of the daily closing rate, due to the fact that it only depicts the closing price of an asset.
One key advantage of a line chart is its simplicity, meaning that traders of all experience levels – from beginners to advanced operators – are able to quickly grasp the concepts and trends that the chart is demonstrating.
- Bar Charts
While line charts only provide the opening and closing prices, bar charts give out much more information to the traders who use them, as they plot the opening, highest, lowest, and closing prices for a specific time frame. Here, the vertical axis represents the price, while the horizontal axis illustrates the time.
There are two types of bars that can appear on this type of chart. A popular way of classifying the vertical bars is to show the relationships between the opening and closing prices within a single time interval as either bull (rising) or bear (falling) bars.
In contrast, range bar charts are different from time-based charts because each new bar in a range bar is based on price movement, rather than units of time. In this case, the range is calculated as the difference between the highest and lowest price on a bar.
- Candlestick Charts
Candlestick charts are very similar to bar charts, as they also plot the highest, lowest, opening, and closing prices. However, they differ in the way that they are much more visually expressive, and they indicate the extent to which the price movement over a given time period is positive or negative.
Each individual candlestick consists of a body and wicks, with the body representing the opening and closing prices. The top wick illustrates the highest price and the bottom wick highlights the lowest price.
These charts tend to illustrate price trends and volatility in a much clearer and more effective way than bar charts. Moreover, the shape and colour of the candles also present clues as to the potential market movement going forward.
How to Read Trading Charts
Support and Resistance
Identifying support and resistance on a chart is one of the first things you should get your head around when looking at charts, as they refer to the price levels that prevent the price of an asset from getting pushed in a certain direction.
Support occurs when a stock or asset’s downtrend is expected to pause, due to an increase in demand and buying interest at a particular level, while resistance is where there are price points which represent a concentrated selling interest, leading to a temporary pause during an uptrend.
In the case of an uptrend, a line is drawn using the lowest and next-lowest point in a specified time frame of a stock, with levels touching this trendline viewed as support. On the other hand, if the price is experiencing a downtrend, you should pay close attention to a series of declining peaks and map this decline by connecting them together with a trendline.
A moving average is a simple but helpful technical analysis tool that evens out price data through the creation of a constantly updated average price, popular among investors as a way of identifying trend direction, as well as to chart support and resistance levels.
They can be constructed in a number of ways, such as to anticipate moves to the upside when price lines surpass a key moving average, or to exit trades when the price falls below a moving average.
Moving averages are favoured by many because they simplify the content of a chart by cutting out irrelevant underlying trends or periods of short-term volatility that do little to affect or influence the overall trend.
Trading charts are not as difficult to read as they look, and once you have managed to learn the basics, they can help to boost your overall trading plan, as they can give you a valuable look at the price and volume action at specific, time-sensitive moments.
Understanding exactly what charts have to offer has the potential to benefit you and your chosen trading strategy, enabling you to access a wealth of useful market information and data. Well-designed charts will help to enhance your market analysis.
As with any trading-related activity, it is important to properly study these charts, alongside using them correctly, as this will help you to minimise the potential for trading losses.