Master the Trading Chart: Candlesticks, Trends, Support and Resistance
Educational note: This article is for general educational purposes only. Online trading involves substantial risk, and losses are possible. No strategy guarantees profit.
Introduction
This article takes you through chart reading one step at a time.
Candlesticks: The Language of the Market
All candlesticks show the open, high, low and close for a chosen period of time. The body of the candlestick shows how far the open and close of a time period are apart. The upper and lower wicks are the reach of the price in a time period.
If the body is long it may be signifying a large move within that period. If the body is small it may have a small move or uncertain move. The surrounding candles are important because a solo candle in the market is rarely enough to establish a clear trading decision.
Bullish and Bearish Candles
A candle that closes higher than it opened is generally known as bullish. A candle that closes lower than it opened is generally known as bearish. Different systems use different colors so look at the relationship between the open and close.
A series of upward candles indicate buying pressure during that time frame but it does not guarantee that the next candle will also go higher.
Time frames
One minute, five minute, hourly, daily- what can seem like similar time frames may show a market in very different lights. Sometimes a longer time frame can give more information and sometimes a shorter one can present more detail.
Beginners should not change time frames just to find a chart that proves their point.
How to Recognize Trends
Rising or uptrend: where the highs are becoming higher, and the lows are becoming higher. Falling or downtrend: where the lows are becoming lower, and the lows are becoming lower. Ranging: where there is no clear sustainable direction.
The main point here is that the markets may or may not be trending. But if you know the nature of the market - trending or sideways - you can choose the right way to deal with it.
Support
Support is a price level where buying interest has shown up in the past. It is better thought of as a support zone rather than a support line.
Price is supporting through support. So support becomes a support level to be aware of rather than concrete support.
Resistance
The Resistance As the name implies, resistance is a price that prices have had difficulty falling below. Resistance, like support, is a zone, not a specific price.
Price might punch through resistance and continue to advance. Expect traders to look for confirmation instead of assuming that a reversal will happen.
Trend lines
A trend line connects the important swing points and is used to identify the direction of prices. Don't think of a trend line as cast in stone. Price can break a trendline temporarily or permanently.
Use trend lines and structure of market together, rather than a plain line.
Volume
Volume denotes trading volume; however, volume data is not always available or reliable. If volume is available and accurate, a rising volume trend with a price movement can sometimes be a useful clue.
Volume should be considered in relation to price as well as the characteristics of the market. It is not to be taken as any type of sure buy or sell indication.
Moving Averages
A moving average smooths out price data. The further the moving average is, the more sluggish it is.
Averages may also help highlight the overall trend or areas of dynamic interest. Averages are computed from previous data, and cannot be guaranteed to project the future.
RSI
The RSI is a momentum indicator that is often plotted in a range of 0 to 100. Investors also look for context on high and low readings.
A strong trend can remain at extreme readings for an extended period. 18. A high RSI does not have to mean price must fall, and a low RSI does not have to mean price must rise.
Breakouts
A breakout occurs when the price breaks out of a key level or range. Some breakouts have momentum and will continue but others will fail and return to the previous range.
Novices should understand about confirmation, market circumstances and threat prior to attempting out breakout approaches.
Pullbacks
What is a pullback? A pullback is a temporary move that counter the most recent trend. If the market is up, it can fall temporarily, and test higher levels again. If the market is down, it can move up-tick temporarily and test lower levels again.
Of course, if a pullback is evolving into a reversal, then a trader needs a set of rules that will let him know it's not.
Putting the Chart Together
A simple chart reading routine involves: identifying the time frame, looking at the market condition, drawing in support and resistance levels, observing price action, and waiting for a set up that you have already defined.
Don't jump in just because a candle looks exciting. Don't do anything just because there is a reason for doing so. There should be a reason, a risk and an exit for everything you do.
Practice Exercise
On a demo chart, try to find ten up trends, ten downtrends, and ten sideways markets. Find several support and resistance zones. Identify breakouts and failed breakouts. Then, study what happened next.
All I want is to make your eyes sharper not to demonstrate that every pattern can predict the future.
Conclusion
This is a method that is all about reading charts, with price data laid out in a convenient fashion. Candles, trends, support, resistance, and indicators may or may not be helpful, but no tool can predict the future.
Part 3 will be where we turn our knowledge of the chart into practice setups and trades.
Frequently Asked Questions
1. Do indicators predict price? No.
2. Is support guaranteed to hold? No.
3. Can RSI alone tell me when to buy? No.
4. Which time frame is best?
There is no universal best time frame.
5. Should I use many indicators?
Beginners usually benefit from understanding a few tools well rather than using a crowded chart.
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