Charting Basics
Charting is a subset of technical analysis, and involves finding patterns on charts that indicate future price direction. It is a favourite activity of traders, that is why you see so many price charts on the Internet. This article discusses basics of charting to help you get started.
There are two types of charts that are commonly published: HLCO charts (high-low-close-open) and candlesticks. Both types of charts use high, low, close and open data for a particular time period.
HLCO charts comprise a series of vertical lines, with the high and low indicated by the length of the line, and the open and close indicated by horizontal tick marks at the left and right of the line respectively.
Candlesticks are coloured white or black, depending on whether the price movement from the open is up or down. The lower wick shows the low, while the upper wick shows the high. The length of the body shows the open and close.
Irrespective of the type of chart you prefer, the most important thing to be able to do is to determine future price direction, rather than just see what has happened. There are a lot of patterns that are meant to give an indication, such as “head and shoulders” – where there is a peak, surrounded by lower peaks (indicating downward price movement), pennants and many others. Generally we don’t use these because it is often difficult to use the pattern in real time.
What we mainly use is interruptions in the trend (indicating a change in trend), and support and resistance.
To draw a trend line on a chart, we recommend the approach outlined by Victor Sperandeo “Trader Vic”. If the trend is up, he draws the trend line from the lowest recent low to the lowest low. The line should be under the uptrend on the chart, and never cross the chart. The trend line is always a straight line. If the trend is downwards, he joins the highest recent high and the highest high. When the prices cross the trend line, that indicates a change in trend.
Support and resistance is what occurs when prices move up or down to a certain point, but don’t pass through it. If the price movement was up, the point is a resistance point, if the price movement was down, the point is a support point. Once a support or resistance point is defined, this is often repeated. The more often it is repeated, the stronger the indicator is. Prices may also fluctuate between support and resistance points, and this defines a channel. You would buy at the bottom of the channel and sell at the top.
If you have a look at the price of an asset over time, you can practise identifying trend lines and also looking for support and resistance points. Irrespective of whether you intend to trade futures, stocks, forex or options, you will always see similar looking patterns. It is useful to do this while paper trading in order to develop the skills you require before putting your money into the market.
