How To Improve Your Understanding Of The Trading Chart

When it comes to financial trading, price charts play a crucial role in finding your trading edge and making profits. By analyzing prices' past behavior, technical traders try to make sense of price movements and react to ongoing trends. However, it is important to understand the basics of charts before you can analyze prices comprehensively and start making profits in trading. This guide will offer all the basics you will ever need for success in price analysis

Understanding the basics of charts

The first thing you see after opening a trading platform is a chart. Price charts can be in several ways, be it bars, candles, or line charts. Many traders love to use various indicators to analyze charts more efficiently. Moving averages are especially popular, which follow prices and continuously show the average price for a certain period.

A ZigZag indicator in FX trading is also very useful for detecting trends and breakouts. But before you delve into the amazing world of technical indicators, you need to understand what charts are, their types, and timeframes. Let’s now explain three of the most essential concepts when learning charts.

Types of charts

The three most common types of charts are bar charts, line charts, and candlestick charts. The candlestick charts are wildly popular because they show important information about prices clearly and concisely. The candle consists of the body, upper wick, and lower wick. The body itself ranges between open and close price for the time frame, or period the candle was open.

Types of charts

Understanding the candlestick charts is the first step for any newbie trying to learn price analysis in financial trading. 

Chart components

The primary components of the chart include the price axis (vertical), showing price levels, the time axis (horizontal), displaying the selected time frame, and volume bars. Volume bars are optional and depending on the platform may not be included in the default settings of the chart. For example, the MT5 chart typically shows volume bars, while MT4 does not.

Chart components

Time frames

Timeframes are critical for analyzing markets. For example, when the time frame is 1 hour, each candle on the chart represents high, low, open, and close prices for the past 1 hour. Time frames can significantly impact analysis, as shorter time frames are for intraday trading or scalping strategies, and long time frames (daily, weekly) are better for long-term trend identification. 

The choice of a timeframe solely depends on the trader’s trading style and the trading goals. Scalpers opt for lower timeframes, while swing traders typically use 1 hour and above.

Technical indicators to enhance chart analysis

Traders can be divided into two groups when it comes to market analysis, technical analysis, and fundamental analysis. Technical analysis employs various price analysis techniques including technical indicators, drawing tools for support and resistance analysis, and various tools such as Fibonacci levels.

Technical analysis is very popular among Forex traders, especially for intraday traders who are speculating on markets for intraday time frames. The primary tools for technical analysis include technical indicators. The most popular indicators are moving averages, volume indicators, and momentum indicators like MAC, and RSI.

In the end, every trader should select their favorable market analysis methods to align with their personality traits. Fundamental analysis includes analyzing global economic factors and defining what the asset is expected to do in the future according to key economic indicators such as interest rates, inflation, employment rates, and more. 

Practical tips for improving chart analysis skills

As we can see, price charts are not easy to grasp and require considerable time and practice to master completely.

Here are tips to learn charts quickly and efficiently:

Practice with historical data

Historical data is essential to analyze charts and familiarize yourself with basic chart layouts. It also offers trailers with valuable information to analyze and potentially predict future tendencies. 

Use a demo accounts

A demo account is where you can analyze historical data without risking real money. A demo account also provides real-time price data, which is critical for forward testing your strategies. Opening a demo account, and starting to learn charts quickly.

Another important thing to remember is to learn continuously as financial trading is not an easy task, It requires strong discipline and dedication together with content practice.

Advanced chart types and when to use them

Besides candlesticks, line charts, and bar charts, there are several other more advanced chart types to choose from. These chart types include Heiken Ashi, Renko, and Point & Figure charts, each of them offering unique perspectives on price movements. These charts typically smooth out volatility and highlight trends more clearly. 

Heiken Ashi

Heiken Ashi charts are very useful for identifying trending periods and can be used to stay in trades while the trend continues. It offers a smoothed view of price movements as it filters out minor fluctuations. Heiken Ashi uses average price data to create a clearer view of market movement and displays candles that blend the current period’s price with the previous candle’s data.

Heiken Ashi

This chart type clearly indicates the overall market direction and enables traders to stay in profitable positions until reversals happen. Green candles are typically used for uptrend and red ones indicate bear markets. The New Heiken Ashi candle always opens in the middle point of the previous candle and is very useful for detecting and following trends. Surely, only a chart type is never enough to initiate a trading position and traders are advised to use multiple other confirmations. 

Renko charts

Renko charts are only focused on price movements and completely disregard the time. This type of chart is constructed using bricks rather than candles, which represent a fixed price movement, regardless of how long it takes for such a move to occur. Each Renko price brick is placed at a 45-degree angle from the previous one. 

Renko Charts

New bricks are only formed when the price moves by a predetermined amount and help traders filter price noise and only see significant price movements. Renko charts are useful for providing a clever picture of the market’s trend and potential support and resistance levels. 

Point & figure charts

Point and figure charts are the most intriguing concept, as they emphasize significant price changes and ignore minor fluctuations and the passage of time. This charting method uses columns of Xs and Os to represent upward and downward price movements.

Point & Figure charts

The new column of the Point and figure chart is started when the price moves in the opposite direction by a predetermined amount and is known as the box size. P&F charts are useful for identifying clear support and resistance levels, trends, and potential breakout points. This chart type enables traders to focus solely on price action and not time-based indicators.

All the alternative chart types must be used solely for gaining insights about price direction and its current status, and not as a sole trading strategy. These chart types provide some useful data, especially Heiken Ashi can be used to detect ongoing trends and used as a confirmation for trading strategies. 

Decoding candlestick patterns for better predictions

Let’s get to the most popular chart type, candlestick. This chart is used widely for a reason, as it offers the most value by providing all important data about the price clearly without compromising the important aspect of time. By the arrangement of candles on the chart, traders deduct the likelihood of possible price movements. 

Candlestick patterns are such arrangements, and they come in many shapes and sizes. The most popular candlestick patterns include doji, hammer, and engulfing patterns. A doji indicates indecision among bulls and bears, a.k.a. traders, and often precedes reversals. Hammers signal bullish reversals when appearing in bear trends. Engulfing patterns are when a large candle fully engulfs the previous one.

Engulfing candles can be both bullish and bearish depending on their color and indicate reversals. If there is a large bullish candle that engulfs the previous bearish candle then the price might reverse upwards and vice versa. As with everything in financial trading, candlestick patterns alone won’t provide a profitable strategy unless combined with other confirmations. 

Decoding candlestick patterns for better predictions

Using volume and Fibonacci retracements in chart analysis

Volume is a powerful indicator that is built into all advanced trading platforms and can be used to confirm trends and signal potential reversals. Bullish price movements with high volume suggest strong buyer interest, indicating a robust trend.

The Opposite is true for bear trends. If the price is rising, but volume is low, then traders must be extremely cautious not to get caught in fake breakouts. Analysis of volume patterns alongside price movements can provide a deeper understanding of market dynamics and enable traders to gauge the strength of trends and predict changes in momentum. 

Fibonacci retracement is a powerful tool built into almost every advanced platform. It helps traders identify potential support resistance and reversals based on previous price movements. By drawing Fibonacci lines between significant high and low points, traders can identify where the market may reverse. 

These levels often coincide with key psychological price points on the chart and provide opportunities for both entry and exit. Traders will have to learn how to properly apply Fibonacci retracements on the price to use its full potential to predict potential market movements and improve their trading strategies. 

Integrating technical and fundamental analysis

When using charts and tools to analyze markets technically, traders have to remember that there are macroeconomic forces affecting price movements and volatility. This is why it is a good idea to combine technical analysis (price chart analysis) with fundamental analysis. The most simple method for achieving this is to use the economic calendar and track important news releases. 

Economic calendars are typically free and traders can filter news based on their impact level. This combination of fundamental and technical analysis methods allows traders to understand broader market conditions behind price movements and vastly improve their decision-making. 

About the Author Peter K.

Peter K. is an experienced digital marketer with a decade of expertise in driving business growth through innovative strategies. His data-driven approach and deep understanding of SEO, PPC, social media, and content marketing have propelled brands to new heights. With a client-centric mindset, Peter builds strong relationships and aligns strategies with business goals. A sought-after thought leader and speaker, his insights have helped professionals navigate the digital landscape. Trust Peter to elevate your brand and achieve success in the digital era.

Peter K.

April 4, 2024