Trading charts, also referred to as technical analysis charts, are important for traders who want to use technical analysis to solve problems for financial markets like stocks, Forex, commodities, or crypto. Trading charts are visual representations of price data and help traders spot trends and predict price actions, including possible entry and exit points.
Traders can evaluate historical price actions, trading volume, and patterns to assess sentiment towards a company from a fundamental perspective (or lack thereof).
"Types of charts" and "stock chart patterns" are extremely important for today's traders. Regardless of a trader's skill level, navigating trading opportunities and managing trading risks will be much easier. This guide will cover essential uses for technical charts, other stock chart patterns, and even stock chart patterns that signal reversals or continuations in price actions.
Importance of Trading Technical Charts
Technical Charts are important for price movements and trends. They provide an overall picture of a stock's price. They are a more effective tool than fundamental analysis. Fundamental analysis focuses more on data such as a company's earnings, revenue, and reports and economic information. Technical analysis focuses more on price and what the given price suggests. Two buy and sell interactions help shape charts. In doing so, they help traders predict movements.
Benefits of Technical Charts include:
- Tracking price movements and trends (uptrends, downtrends, and sideways movement).
- Support and resistance levels.
- Timing of entry and exit for price movements and reversals.
- Confirmation using indicators such as moving averages, RSI, and MACD.
Technical charts can also be used for different types of investing, whether it is day trading, swing trading, or long-term investing. They can also be used for different types of charts such as line, bar, or candlestick charts. Each of them provides different types of information and insights.
Types of Line Charts in Trading
In technical analysis, there are multiple types of line charts. However, for the majority of traders, three specific types are the most commonly used.
1. Line Charts
Line charts are also one of the simplest trading charts and one of the easiest trading charts available. They cumulatively connect line prices and form a set line. In each given time period, they measure the closing price and filter out the fluctuations that happen in between. They also show overall trends.
Goal- Evaluating long-term trends in relation to support/resistance levels. They are also great for novices as they are aesthetically simple. Mainly used in higher time frames (daily, weekly) to evaluate the overall direction of the market.
Pros- Visually easy to assess, less chaotic.
Cons- They neglect the open, high, low, and close prices, so they do not capture the complete picture of volatility.
The use of line charts can also be beneficial when you are looking for just an overview.
2. Bar Chart(Open-High-Low-Close)
In terms of detail, these charts are less 'bare' than line charts. Each bar corresponds to a certain time period (e.g. 1 day, 1 hour), and within each of them, you can see:
- A vertical line indicating the high and low,
- A tick to the left for the open price, and
- A tick to the right for the close price.
Examples of bar colours show that bars are often green to indicate an 'up' period (when the close price is greater than the open price) and red for the opposite (when the close price is less than the open price).
Goal- Having a complete overview of short-term volatility and price ranges (for example, in one day). Identifying levels where the price has reversed (i.e. high and low levels) and using them in combination with volume to confirm breakouts.
Pros- They show complete price action.
Cons- Massive amounts of bars and clutter on short time frames.
Just right between simplicity and detail, bar charts are a great option for almost any trader.
3. Candlestick Charts
Many traders today rely on candlestick charts for technical analysis. Candlestick charts are able to tell the trader the open, close, high, and low prices for a selected time frame. Each "candlestick" visually represents the open, high, low, and close prices for a certain selected time frame.
The "body" of the candlestick represents the open-to-close range, and the wick of the candlestick represents the high and low prices.
Traditionally, the body of the candle is green (or white) when bullish (close is higher than open), and red (or black) when bearish (close is lower than open). Each candlestick chart can serve a multitude of purposes, including:
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quickly reading market sentiment (who is in control: buyers or sellers?).
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determining possible reversal signals with 1 or more candlesticks (ex: doji, hammer, or engulfing candle).
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making predictions on short term moves and spotting patterns.
Advantages: Highly effective for visualising momentum shifts and people's emotions.
Disadvantages: Not everyone sees and interprets candlesticks the same way.
More than any other chart type, candlestick charts are able to show more details of the actions of buyers and sellers.
Some other chart types you may come across include: Heikin Ashi (smoothed candlesticks for trends), Renko (bricks based on price that leave out time), and Point and Figure.
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Stock Chart Patterns: Uncovering Price Movement
Price action on technical charts can create certain patterns that can repeat over time, known as reversal, continuation, or bilateral patterns.
Reversal Patterns
This signals a potential change in the trend.
- Head and Shoulders (and Inverse): One of the most notable patterns of bearish reversal has three peaks: the middle (head) being the tallest, then a neckline breakout confirming a shift to a downtrend. The Inverse patterns signal a bullish reversal.
- Double Top/Bottom: The bearish double-top pattern occurs as an upward-moving trend "M," and for a bullish double-bottom pattern, it occurs as a downward-moving trend "W". A breakout occurs below/above the neckline to confirm.
Continuation Patterns
These patterns indicate the trend will continue after a short pause.
- Triangles: These can be ascending (bullish, flat top, rising bottoms), descending (bearish, flat bottom, falling tops), and symmetrical (neutral, converging lines).
- Flags and Pennants: These indicate a short consolidation period occurring after a strong move. A bullish flag slopes against the uptrend, while a pennant forms a small triangle.
How to approach trading stock charting patterns
- Wait for things to break out with volume to confirm.
- For longs, stop-loss will be below support, for shorts, above resistance.
- Targets should be measured with the breakout point.
- Use patterns with other tools like indicators or candlestick confirmations.
Choosing the Right Technical Charts for Your Strategy
Select trading tools based on time frame and style.
- Candlestick and Bar charts on the 5-15 min are what day traders go for,
- Swing traders aim for daily charts with candlesticks or Bars,
- For long-term investing, Weekly line charts are the way to go.
Backtesting and practising on demo accounts will help you develop confidence.
Final Thoughts
Trading relies on stock chart patterns, different types of stock charts, and technical charting skills. Observing the charts using technical analysis tools and learning how to analyse the underlying psychology of the market will help you identify the patterns that are likely to set up and analyse the possible outcomes of the scenarios with confidence.
Use candlestick charts to distinguish patterns and implement appropriate measures for the risk you are taking. The more you apply yourself to learning the tools of this trade, the better you will become at navigating the ups and downs of any market.
DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.
