The Basics

Chart Types

 

Charts represent the price data fluctuations cause by varying market forces. Information can be drawn from these charts to identify trading signals for future price movements. The vast majority of financial charts will plot data using Price on the Y axis and Time on the X axis. The three most common chart types used in the industry are

 

 

• Line Chart
• Bar Chart
• Candlestick Chart

 

 

Line Chart

 

This is a very basic format for displaying data. At the end of each time increment a point is plotted on the chart at the price which the product trading at that specific time. All the points are then simply connected in sequence with a line. The problem with this format is that the chart gives you no information on how the price has fluctuated in the time that has elapsed between each time interval. These charts are usually reserved for when an analyst wants to get a view of the bigger picture using a line chart to view price fluctuations over a very long time period. This is generally not the best method for analysing price movement over short time periods.

 

Bar Chart

 

Instead of a point being plotted at the end of each time interval as above, a bar is plotted which represents the whole of each time period. Four pieces of information can then be processed from the price action during the whole of each time period.

 

 

High - The top point of the vertical bar indicating the highest price traded during each time period

 

Low - The bottom point of the vertical bar indicating the lowest price traded during each time period

 

Open - The price that was trading at the start of that time period

 

Close - The price trading at the end of each time period

 

 

 

 

Candlestick Chart

 

The candlestick chart is similar to the bar chart in that it also consists of the same four primary pieces of information - High, Low, Open and Closing prices. However, the candlestick chart is often considered easier to view and analyse than its bar and line chart contemporaries.

 

 

 

 

The body of the candlestick indicates the difference between the opening and the closing price during that time period. If the closing price is higher than the opening price then the body of the candlestick is blue to indicate a price increase. If the closing price is lower then a price decrease is indicated by a red candlestick. The lines above and below the body of the candlestick (named the upper and lower shadows) indicate any price movement outside of the open and close prices during that time period. The upper shadow protrudes from the top of the candlestick's body and indicates the high price and visa versa for the lower shadow.

 

 

Trends

The trend denotes the overall direction of the market at a given time over a given scope giving the trader a general indication of the direction of change in market prices. There are three types of trends Upwards, Downward and Sideways. However, it is important to point out that any number of smaller trends can occur within larger trends.

An upward trend denotes that generally the price rises more than it falls over a given time period. This does not mean that the price never recedes during this time but merely the overall picture denotes a rising market. A theoretical sketch can be seen to the right where an upwards trend channel has been drawn - These are the two parallel lines that emphasise the market moving in an upwards direction.

 

 

A downward trend denotes that generally the price drops more than it rises over a given time period. This does not mean that the price never rises during this time but merely the overall picture denotes a falling market. A theoretical sketch can be seen to the right where an downwards trend channel has been drawn - These are the two parallel lines that emphasise the market moving in an downwards direction.

 

A Sideways trend denotes there is no significant price change between the beginning and the end of a time period. This is otherwise known as a ranging or flat market. The price of the market over a given time period is ranging between an area of support (bottom horizontal line) and an area of resistance (top horizontal line).

 

 

Support and Resistance

 

 

Trends do not move in straight lines; they zigzag in a general direction forming progressive higher (or lower) peaks and lows.

 

In a market that is in an upwards trend it is obvious to say that there are more buyers of that particular financial product than there are sellers - It is a simple supply and demand equation. There will inevitably come a point where the difference in the number of buyers compared to the number of sellers will decrease to zero - There will be a certain price or a small range of prices when the number of sellers begin to outweigh the buyers and this will signify the top of the upwards momentum. We term this eventuality simply as the market has reached a level of resistance or a ceiling. An example of this can be seen in the chart below.

 

 

Conversely, when a downwards trend is in place, the price will eventually reach a point where buyers are attracted back into the market to the extent that they outweigh the sellers and the downwards momentum is halted. Here we say the market has met some support or a floor.

 

 

 

Trend line Penetrations

 

 

Trend Line penetrations, also known as violations or breaks, are key technical signals in determining the market's future direction. They can mean that an existing trend is ready to reverse or change its characteristics.

 

It is important to monitor market volume during a trend line penetration - High volume on a trend line penetration can indicate the market's determination to break out of or even reverse a trend.

 

 

 

Support turns into Resistance or Resistance turns into Support

 

 

Upon a market penetrating below a firm line of support, the market often chooses to take that same level of support as its new line of resistance. An example of this can be seen in the chart below.

 

 

 

 

 

The reverse is also true where previous lines of resistance form new lines of support. The same can also be said for trend lines.  For example if the trend line is upwards sloping and there is a clear downward trend line break, the old trend line that had been acting as a support line can turn into a line of resistance.