As a beginner, you may find it extremely hard to understand the trading world. You will be taken aback by the amount of data that you come across over different forums and websites. So, would it not be helpful to learn the basics of trading. This most important of all is to learn how to read the trading charts. Whether you are involved in trading of currency, cryptocurrency, options, or conventional stocks, and no matter whether you are a short term investor or a long term investor, you will encounter numerous charts. Understanding these charts for what they are is your very first step to making an informed decision. Discussed below are a few significant types of trading charts and how they should be analyzed.
The line chart
This is the most basic kind of chart out there and denotes a series of data through a line. This chart is most appropriate for closely monitoring the current cryptocurrency prices and those of other currencies and stocks. Basically, the line chart represents the price movement of stocks and underlying assets over a period. Even the most experienced traders may find it hard to understand a chart that contains a lot of information, simply referred to as ‘paralysis by analysis’. Since line charts only indicate the closing price, there is not a lot to interpret that can lead to confusion and complication. This is the main reason why line charts continue to be highly popular among traders.
OHLC Chart shares a similarity with the line chart. Like the Line Chart, it also denotes the closing prices of different stocks and currencies. However, they are different from line charts in the sense that they also show the opening price and the highs and lows for each period. An OHLC chart features two horizontal lines that mark a vertical line on both sides. The vertical line’s height depicts the intraday range of the said period. The highest and lowest price of the period are denoted by the high point and low point on the vertical line, respectively. The horizontal lines that move to left and right represent the opening and closing price of the period, respectively. Collectively, this constitutes a price bar. This chart is highly useful in the trading world because it shows rising or declining momentum. Buy or sell decisions are mostly based on this particular chart.
Besides depicting the opening, high, low, and closing price of the day, this chart also represents the price range between the opening and closing price for that particular day. If the area appears to be filled, it means that the closing price was less than the opening price. The empty space denotes that the closing price was higher than the opening price. Traders have the option to change the color of these areas to represent their emotions.
Trading charts can be highly volatile; they can rapidly change from one day to another due to numerous factors. A few of these factors may not even relate to the industry, but world politics, and change in economic reforms. By adding a moving average trend line to the trading chart, you can analyze the prices by canceling the noise. Moving average is also used for carrying our technical analysis to predict future price movements.
Support and resistance
The concept of support and resistance are crucial to understanding the various trading charts as far as technical analysis is concerned. These terms are commonly used by traders to denote those price levels on charts that are acting as obstacles restraining the price of an asset from rising or slumping.
- Support is said to occur when a downward trend is expected to stop. This mainly happens because of increased demand.
- Resistance is said to strike when an upward trend is anticipated to halt for a short duration. This mainly happens when there is excessive supply.
Trading charts tell us about a lot more than just the prices of stocks and currencies. They are also indicative of future prices and trends. Based on these charts, traders can make informed purchases or sales decisions. We hope that based on the information mentioned above, you will be able to your chart reading and analysis.