How to read stock graphs
What are trading charts?
Trading charts are graphical representations of the prices of assets. These include stocks, bonds, commodities, and currency pairs, among others. The prices of these assets are displayed on a time axis and consequently represent the price development within a certain period. How long a period is depends on the setting of the trading chart. It is possible to show the courses of an hour or a day, up to several months and even years.
The larger the viewer chooses the time horizon, the longer the period for which a price is in the chart. The smallest period length is a tick, which means that every single price that comes about is displayed in the graph. With a length of one day, on the other hand, the closing price (possibly more) of one day is shown on the time axis.
What are trading charts for?
For example, if you want to buy shares, you need an orientation for entry and exit. There are two fundamentally different analysis methods for this. With fundamental analysis, companies or other assets are examined for their true value. This requires a pronounced economic understanding, a lot of time and a high level of methodological competence. It is also used by private investors, but above all by institutional traders. These are also known as fundamental traders and, in addition to company balance sheets, also use news and economic indicators.
In online trading, on the other hand, technical chart analysis is more widespread. The reason for this is that the instruments are initially easy to understand and promise quick success. But that doesn't mean that technical analysis is only for beginners' trading. Even professionals make use of it to have additional guidance. Trading charts are therefore mainly used by technical traders in the context of chart technology.
Chart technical analysis
The technical analysis of the chart assumes that there is a lot of information in the historical prices. Accordingly, certain formations contain statements about the current market sentiment and future price development. In order to choose times for entry and exit, the trading charts of a whole range of assets are viewed and analyzed. There are many different formations that can occur and which are given a certain meaning. If a trader finds what they are looking for and sees a trading opportunity, they will enter the market with a long or short position.
How to Read Forex Charts
The forex market is the most liquid in the world and is therefore particularly popular with traders. With CFDs, warrants or certificates, traders rely on the development of prices and often use chart technology for their analyzes. It is particularly hard to imagine intraday trading without it. Although some traders also indulge in trading important news (event trading), the vast majority of private investors will use technical indicators.
As in other markets, candlestick charts are the most popular type of chart in forex trading because of their information content and their focus on net movement. A candle represents the course of the exchange rate between two currencies within a period of time. You can find more about the different chart types in the following section.
What trading charts are there?
Clarity and complete understanding of the content and information that a chart displays is essential to trading. There are essentially three types of charts that are popular among traders. Each of these charts shows a different amount of information.
The line chart
The most basic type of trading chart and the first step in a trader's life is the line chart. It only shows the closing prices for a specified unit of time, as the closing price is often seen as the most important element in analyzing data. The line chart is created in the following way: In a certain period of time, the closing prices of many time intervals are plotted on the time axis. For example, if you look at a chart over five years, one data point could represent the closing price of a month. The entered price data are then connected with each other so that a continuous line results.
The bar chart
The bar chart shows a little more information than the line chart. It consists of a sequence of vertical lines, where each line stands for a time interval, for example again for a month. While the line chart only reveals the closing price of a month, the bar chart also reveals the opening price as well as the high and low price in this period. The opening and closing prices are shown with a horizontal, shorter line.
The opening price is symbolized by a line on the left side of the vertical bar and the closing price is accordingly a similar horizontal line on the right side of the bar. It is very easy to understand such a chart. If the left line (the opening price) is below the right line (closing price), this bar is displayed in green, black or blue and thus shows a price increase for the asset. If the opposite happens, the bar will turn red and the financial instrument will lose value.
The candle chart
When you have mastered the line and bar charts, you can move on to the candlestick charts. They are very similar to the bar chart. However, the focus here is on the net movement within the time period. Because the thick body of the candle shows exactly this: the difference between the opening and closing price. At first glance, a candlestick chart should therefore appear a little less volatile than the bar chart. The price range can also be recognized here, namely by the thin vertical lines above and below the candle body, as the next section explains in more detail.
Use of candlestick charts
As early as the 17th century, technical analysis was used in Japan in the rice trade and although it was quite different from the US version, which was developed around 1900, the principles remain the same. As explained above, the candles contain Highs, lows, openings- and Closing prices.
The hollow and colored parts are called bodies. Above is the wick that shows the highest price. In contrast, the fuse can be seen under the body, which represents the lowest price. Sometimes wick and fuse are also referred to as the upper and lower shadow. The colors of the candle are determined by the broker and can differ from one another. Most of the time, however, they are green or white when prices rise and red or black when prices fall.
What is a doji?
It can also happen that the prices fluctuate relatively strongly within a period without the closing price deviating significantly from the opening price. In such a case the candle has a very short body while the shadows are relatively long. They are often viewed as consolidation patterns also called dojis.
Dojis are an important aspect of the candlestick charts as they can display important information. After a long green candle, the pressure to buy begins to decrease when a doji occurs. Conversely, after a long, red candle, the pressure to sell decreases and supply and demand begin to equalize.
In addition to the individual candles - however they may be pronounced - trends and patterns inherit from which traders try to draw conclusions about future developments. It doesn't matter which market you are active in. The technical analysis tools are the same in all markets. However, they work differently well. That said, forex traders may use different chart signals than Nikkei 225 traders or CAC 40 traders. You have to be particularly careful with exotic or illiquid (rarely traded) assets. It is not certain that the technical analysis works as well as with crypto currencies, e.g. in Bitcoin trading.
What are trends
If you look at a live chart, such as the DAX Live Chart, and the prices move in a certain direction over time, then one speaks of a trend. Trends usually consist of a wave-like movement in which highs and lows alternate.
A bullish trend (also called a bull market) is a series of rising highs and lows, while a bearish trend (also known as a bear market) is a series of falling highs and lows. There is also the sideways trend that arises when the forces of supply and demand are roughly balanced. Then all highs and lows of a longer period can be found within a certain range.
However, trends are not only defined on the basis of their direction, but also on the basis of their length over time. There are long-term, short-term and medium-term trends that coexist and point in the same or opposite direction. For example, all upward moves are made up of a series of shorter term upward and downward trends.
What is a shoulder-head-shoulder formation?
One of the most popular patterns in charting technique is the head-and-shoulder pattern. It is a reversal pattern that indicates that a current trend is about to end. There are two versions of a shoulder, head and shoulders formation.
- Head and Shoulders Up: This pattern usually forms at the top of an uptrend, as seen on the Nasdaq 100 graph above. It signals that the price of the asset will fall when the pattern is complete. To do this, the neckline must be broken downwards.
- Head and Shoulders Down (or Reverse Head and Shoulders): This pattern usually forms at the top of a downtrend and indicates that the price of the asset will rise.
Both have the same structure as there are the same four elements in each pattern: two shoulders, a head and a neckline. There are many more patterns used in technical analysis such as double top / bottom, triple top / bottom, pinocchio, bullish / bearish engulfment and many more.
Integration of technical analysis tools in your charts
After reading and analyzing technical trading charts for a while, there are other indicators that you can familiarize yourself with. For example, you can dive into other classes of indicators with the help of our training opportunities. For example, oscillating indicators such as the Relative Strength Index (RSI) can be used to estimate whether a security is “overbought” or “oversold”.
Volume indicators or the so-called Fibonacci retracements can also help you to make price or direction forecasts. Of course, none of these instruments offer security. In addition, the admissibility of the conclusions of the technical analysis is disputed.
The AvaTrade demo account makes it easy for you to get started
AvaTrade wrote this in-depth guide to help you understand how some of the basic technical analysis is applied by professional traders. Now learn to apply this knowledge with a free demo account and test the tools that are available to you in our highly developed trading platforms. If at some point you feel well enough prepared and equipped with sufficient knowledge, then you can also open a real money account with AvaTrade. Our customer service will be at your side 24/5 in several languages with words and deeds.
If the chart technique becomes too time-consuming for you at some point, you can switch to auto trading or copy trading as soon as you download Metatrader 4. For this you can purchase an Expert Advisor in the shop or you can program one yourself. You can have your trading strategy run automatically, provided you are convinced of its success.
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