The Basics of Financial Charts
Learn to Spot Trends and Understand Price Movements
Financial charts and graphs are visual aids used by investors to better understand changes in price over time. Price charts plot a sequence of prices over a specific period of time.
These are otherwise known as time series plots. If you take a look at any price charts, they contain an X axis – the horizontal axis, and a Y axis – the vertical axis. Price is always represented on the vertical axis and the X axis represents the time frame.
By moving across the chart from left to right, you can see how an underlying security, such as a stock, has performed over time. Invaluable information can be gleaned from reading charts, such as highs and lows, trends, and turning points.
Technical Analysts and Fundamental Analysts Use Charts
Technical analysts utilize charts on a daily basis. By viewing the past performance of stocks, commodities, indices or currency pairs, it is possible to map out trends and forecast future price movements.
Charts and graphs offer a visual and quantifiable means of evaluating market data. Provided there is a time frame and an associated price, any series of (X,Y) points can be plotted to form a graph.
Fundamental analysts also use graphs in their daily routine, as do casual traders looking to spot the obvious and not so obvious features of an underlying asset’s performance. You can infer interesting data from analyzing charts, such as the effect of major market announcements that may appear to be unrelated to the performance of the asset under observation.
When viewing charts, it is vital to pick a time frame that is best suited to the underlying asset. There are many different data compressions you can view, including annual data, quarterly data, monthly data, weekly data, daily data and intraday data.
The latter time frames are especially useful in Forex trading, where minor movements (represented by pips) routinely impact currency pairs. Short-term price movements are associated with weekly, daily and intraday trading charts, while long-term price movements are best suited to monthly, quarterly and yearly charts.
Different Types of Charts
There are several popular charts used for displaying time and price data:
Arguably the most popular of all the charts used in the financial world with highs and lows reflected by the tops and bottoms of the vertical bars. The close of day is represented by a horizontal bar crossing the vertical bar to the right-hand side, and the day’s opening price is represented by a horizontal bar crossing the vertical bar to the left.
This basic chart consists of a series of data points connected by lines. In the financial field it is often used to represent a series of past prices.
These are some of the most popular charts used by Forex, stock, commodity and index traders. Invented in Japan in the 1700s, candlestick charts have gained tremendous popularity in recent years.
To form a candlestick chart, it is necessary to have the low, the open price, the close price and the high price of the underlying asset over a defined period of time. If you are looking at a weekly candlestick chart, the open price will be Monday’s opening price and the closing price will be Friday’s closing price.
Bullish candlesticks (green) are formed when the closing price is higher than the opening price (bullish movement) and bearish candlesticks (red) are formed when the closing price is lower than the opening price (bearish movement). The top and bottom of the candle indicates opening and closing prices; the wicks represent maximum and minimum prices during the described period.
Spotting Trends with Charts
As a currency trader and CFD trader, it is important to be able to spot uptrends, downtrends and horizontal trends. Regardless of the type of graphs or charts that you are looking at, the gradient of an uptrend is always slanting upwards from left to right; the gradient of a downtrend is slanting downward from left to right; and a horizontal trend remains relatively flat from left to right across the chart.
To understand whether you are seeing a trend, you should start on the left-hand side of the chart and move across to the right-hand side of the chart. Any noticeable trends will easily be seen, including turning points. In trading, trend spotting has no relation to what the hottest currencies are on the market; it is purely geared towards forecasting the direction in which a development is currently taking place.
What may appear to be a horizontal movement in a weekly review or daily market analysis chart may actually be part of a much larger downtrend when viewed from the perspective of a quarterly or annual chart.
As a Forex trader, you generally want to trade with the trend – not against it. While analysing charts and graphs, be careful not to fall into the trap of over analysis leading to paralysis – sometimes you simply have to use the market indicators available to you and trade accordingly.
Chart reading should feature as part and parcel of your daily trading regimen. Successful Forex and CFD traders routinely utilize charts to gain a better understanding of price movements. Important elements like support levels and resistance levels can easily be seen with charts, as can peaks, troughs, breakouts and daily highs and lows.