The trading charts display all the valuable information you need to determine when to enter or exit a trade. Several types of trading charts are available online, each contributing to the trading process differently.
Traders use various charts to analyze the market and access the necessary data they need to make profitable decisions.
If you are wondering how trading the charts works, this article discusses each type of chart and what they offer for the user. So, let’s get started!
Trading the Charts
Several kinds of trading charts provide detailed information about potential trade signals when the market is active. The traders use bar charts, line charts, candlesticks, points and figures, and a market profile.
Different Kinds of Charts
Bar chart
The bar chart is a fundamental type of chart and a useful tool that can help you understand market data. The bar charts are very easy to read and interpret and are a representation of a trading range in a specific time period.
In more simple words, the bar chart displays the opening and closing prices and the highs and lows in a certain time period. A bar chart is much more informative than a line chart, which is in the form of a vertical line with two horizontal lines protruding on each side.
While the bottom of the bar displays the lowest traded price for the chosen period of time, the top is the highest price that was paid. Aside from prices, a bar chart shows market volatility which is essential when trading.
Even though there is a black-and-white bar chart version, most traders prefer using a colored version. The color-coded version lets the traders see the prices, the price movements, and the trading trends.
When the bar is green, it means that the closing price is above the open price and has increased in price during that time period. If the bar is red, the closing price is below the opening price, and the price has lowered during the time period.
How to read the bar charts
The bar charts are also known as OHLC charts because they consist of open, high, low, and close prices for that particular stock. The open refers to the price at which the stock trades at the start of the day and is displayed as a horizontal line on the left side of the bar.
The high indicates the highest price that is traded during the day and is shown at the top of the vertical bar.
Correspondingly, the low is the lowest price at which the stock is traded during a certain time period and is represented at the bottom of the vertical bar.
Finally, the closing price is the last price the stock is traded for throughout the day and is indicated as a horizontal line on the right side of the bar.
Line charts
In comparison to the other trading charts, the line chart doesn't offer much detail. That said, these types of charts are excellent for long-term trades.
The line connects a series of prices of a financial asset and is a graphical representation of the asset's historical price action. The series of prices include open, close, high, and lows which help the traders spot a formation of an upcoming trend.
How to read the line charts
As mentioned, the line chart gives little detail when trading. However, it makes it possible to identify chart patterns in market movement in the near term.
With a line chart, you can identify bullish and bearish continuation patterns and determine whether the price will likely go higher or lower.
Generally, the horizontal axis of a line chart is usually a time scale, while the vertical axis shows daily earnings over the course of several days. There are several types of trading charts: a simple line chart, a multiple line chart, and a compound line chart.
The simple line chart is represented with only one line and shows the relationship between two variables.
On the other hand, the multiple-line chart is used to show multiple variables that change over the time period. The compound line chart expands the simple line chart showing different data types.
The line charts are ideal for beginner traders, given they are much simpler than other types of charts. However, due to their simplicity, they might not fully capture trading patterns or trades.
Candlesticks
The candlestick chart combines a line chart and a bar graph. This is a commonly used trading chart due to the information it provides for traders. Each candlestick displays four vital pieces of information: starting price, market high, ending price, and market low.
Compared to traditional bar charts, candlestick charts are more visually appealing and much easier to interpret.
How to read the candlesticks charts
Regarding candlesticks, the red and green colors are excellent indicators of the market direction. The stick's length displays the direction in which the market is going but represents only a small portion of the trading period.
A short candlestick displays little movement in the market, and a long one a large price movement throughout the trading period.
On the other hand, a short wick shows that most trading happened close to the starting price, while a long wick shows that the price has moved significantly.
A Doji shows that the beginning and ending prices were identical. In contrast, a dragonfly Doji displays that the trading period's opening, closing, and highest prices were nearly identical.
Point and figure
The point and figure charts are crafted for long-term investments. They are commonly used for determining entry and exit points when trading. This is an open-close/high-low chart that shows price movement over time.
The emphasis when it comes to point and figure charts is on the closing price rather than the minor up-and-down movements on the market. On such a chart, there is no axis for the time but only the price.
How to read point and figure charts
The point and figure charts show columns consisting of stacked X's or O's, each representing a set amount of price movement. The X’s on the chart displays the rising prices, whereas the O’s refer to the falling prices.
These point and figure charts point to technical analysis and show different trade signals. The line of X’s continues in the same column, provided the price continues to rise and doesn't affect the predetermined reversal amount.
The same applies to the column of O’s in a market that is declining and continues until the stock reaches the reversal amount. At that point, a new column of X's begins.
A reversal occurs when the price is not moving enough to put another X or O in the current column, and then the price moves at least three box sizes in the opposite direction.
Market profile
The market profile chart is suitable for both short-term and long-term traders. They display market activity, price, volume, and a time frame on a single chart.
Compared to other charts, a market profile displays a combination of colors and letters, giving it a unique look.
How to read market profile charts
By understanding how to read a market profile, you will be able to execute trades on a daily basis. It can help traders to identify trading patterns and have a better understanding of market sentiment.
On the market profile chart, the price is on the vertical scale, whereas the volume is on the horizontal scale. The price is displayed the same way as other trading charts, while the price scale occurs on the right side of the chart.
Regarding the market volume, it is represented as a horizontal histogram, and the longest horizontal lines show the biggest trading volume. The letter and color combination represents a particular time frame when it comes to trading time.
Using the information on the market profiles, the traders have a thorough understanding of how each market performs on a daily basis, allowing them to place more successful trades.
Begin Trading Successfully
Now that you are more familiar with the different types of charts, you can start trading the charts to receive great returns. To help you in the process, you can subscribe to a service such as Foolproof and get insights about trading from professional Wall Street Veterans.
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When it comes to trading, it is crucial to execute the right moves at the right time, so following the trading charts and using a trading service can be very beneficial for a successful trading experience.
Conclusion
The trading charts are necessary tools during the trading process, helping the traders identify patterns and, as a result, have a good understanding of the activity on the market.
Trading the charts involves technical analysis of the market, meaning the traders use the charts to help them view past market activity, spot trading trends, and take advantage of the market opportunities in order to capitalize.