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Trends & Analysis
News
Mastercard’s shares decline despite upbeat results
News
Tesla’s stock surges after upbeat Q4 print
News
Is there a golden opportunity with Shopify?
News
Investors unimpressed by Microsoft’s earnings beat
News
How should you play the NASDAQ 100’s moment of truth?
News
Baker Hughes shares decline amid weak Q4 print

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02. The Beginner’s Guide to Charts in Trading

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

 

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A huge assortment of market information is available for traders to find, understand, analyse and predict future market movements. All this info can get confusing. Charts are an organised way of representing this information, making it easier to understand past price movements and potential future price direction. They can be used for all types of online trading and all instruments, including stocks, forex, commodities, options, CFDs and cryptocurrencies.

 

Historical price, volume and volatility data are applied on charts across different timeframes, such as 1 minute, 5 minutes, 15 minutes, 60 minutes, 1 day or 1 week, to derive signals for informed trading decisions.

 

Did you know?

The first known line, pie, and bar charts were invented by the Scottish political economist William Playfair at the end of the 18th century. Of these, line and bar charts are still used in trading today.

 

The 3 Types of Trading Charts

Every asset has an opening and a closing price for every trading session. In addition, there are high and low prices for each session. These price points are plotted on the charts and joined in different ways to make the different types of charts. There are 3 types of charts used in online trading.

 

1. Line Chart

Line charts are constructed by joining only the closing prices of an asset over a specific timeframe. These charts are believed to cut out noise that may corrupt the data and hence the analysis. An important observation here is that line charts completely ignore the opening positions or the direction in which the price moved before reaching the closing point.
For a trading chart, any kind of information not helpful in plotting the chart or deducing signals from it, is called noise.

2. Bar Chart

Bar charts help in identifying the high and low points of an asset’s price, along with where the open and close prices. This gives insight into how the price moved for the chosen timeframe. The closing prices reflect whether buyers or sellers had more influence on the asset at the end of the specific duration.

How is a Bar Chart Constructed?

The highest and lowest prices are connected with a line. The opening price is marked with a bar on the left and closing price is marked with a bar on the right side of the vertical line.

3. Candlestick Chart

Munehisa Homma, a Japanese rice trader, invented a method of recording rice price action, which is today known as the candlestick chart. He used these candlesticks to predict future rice prices and became the most successful futures trader in the 18th century, at the Dojima Rice Exchange of Osaka, the world’s first futures exchange.

Today, candlestick charts are the most widely used charts for online trading across the financial markets, including stocks, forex, commodities, cryptocurrencies and more. Technical indicators or signals are generated by studying the patterns made by candlesticks.

A Candle

A candle represents a period of time with its top and bottom wicks (or shadows) representing the high and low price of the asset. The body of the candle represents the opening and closing price points.

 

Candle Colour

A red (bearish) candlestick means the price closed lower that its opening price and a green (bullish) candle represents a higher closing price than the opening.

 

Common Candlestick Patterns

Placing one candlestick after the other on the chart generates patterns. These patterns help in identifying price direction, buying or selling pressure in the market, bull or bear runs, etc. Based on this, traders can identify entry and exit points.

 

Trendlines

A line indicating the direction of price movement is called a trendline. It’s like an outer line around the candlestick to express the market behaviour over a certain time period. They help in forming patterns and also indicate the resistance and support areas for the price.

 

 

Did you know?

Candlestick patterns can be used to identify bearish and bullish trends, as well as trend continuation. Some of the most popular chart patterns are the Doji, Hammer, Head and Shoulders, Morning/Evening Star and Hanging Man.

Chart Patterns and What They Mean

There are three main types of chart patterns:

 

1. Reversal Chart Pattern

Reversal patterns indicate that the market is going to change direction. This means a bearish market is leaning towards turning bullish and vice versa. The six most common indicators of a reversal are double top/bottom, head and shoulders, inverse head and shoulders, and rising and falling wedge patterns.

 

 

2. Continuation Chart Pattern

These chart patterns indicate that the current market trend is likely to continue. Also known as consolidation patterns, they may not move in a straight line though. They could move sideways, then correct and then regain the trend momentum. The most common continuation patterns are rectangle, wedge and pennant.

 

 

 

3. Bilateral Chart Pattern

These indicate that the price could move in either direction. Therefore, experienced traders use other indicators in combination with bilateral patterns to assess the appropriate entry and exit points. Bilateral charts tend to form triangular patterns, such as ascending, descending and symmetrical triangles.

 

 

 

Informed trading is based on the science of understanding signals and predicting future market moves. There is no one magic signal that will always give successful results. Based on the asset being traded, market sentiment, news around the asset or the economy, indicators should be carefully chosen. Historical analysis and indicator accuracy studies help traders decide which indicators would be most suitable for the type of trade they want to participate in.

Key Takeaways

  • For a given timeframe, a chart aggregates every buy and sell transaction of a specific financial instrument.
  • Charting helps traders gain a broad view of the price action movement over a specific period of time.
  • Line, Bar, and Candlestick are the three major charts used in trading.
  • Candlestick charts are the most comprehensive and widely used trading charts.
  • Chart patterns are used to deduce signals to make trading decisions.

 

Open a live account with ADSS to gain access to powerful charts and other tools of technical analysis.

Learn. Explore. Pursue more.

 

Join our trading community to access our free weekly webinars, and our library of tutorial videos and how-to guides. Designed to help you navigate the index, forex, equities, cryptocurrency and commodities markets, analyse the latest news and insights and become a better trader.

 

01. The Difference between Technical and Fundamental Analysis

 

Technical and fundamental analysis are the foundations of informed trading. Here’s what you need to know about them.

02. The Beginner’s Guide to Charts in Trading
 

Charts are an excellent way to gain insight into the markets at a single glance. They are powerful tools for online trading.

03. Things to know before placing a trade on MT4
 

Ready to start your trading journey with our bespoke version of the award-winning platform?

04. How does CFD trading actually work?
 

Why is CFD trading so popular? Learn how to use Contracts for Difference for trading equities, FX and more.

05. What are Indices and How Do You Trade Them?
 

Not sure what stocks to trade? Start with an index such as the Dax instead and trade a variety of them at the same time.

06. The basics of FX: six things to know when you start
 

Want to trade CFDs on forex pairs? Not sure where to start? Check out our beginner’s guide.

07. Apple? Tesla? Meta? How to start trading stocks
 

Want to know how to trade equities? Check out our simple guide on trading CFDs on some of the biggest companies in the world.

08. The Beginner’s Guide to Trading Commodities
 

Interested in trading gold, oil, silver and more? Learn about safe haven assets and more with our guide.

09. Four Things to Consider Before You Begin Crypto Trading
 

Planning on adding cryptos to your portfolio? Here’s our guide to navigating those notoriously volatile digital coins.

10. The Ultimate Trading Checklist: Pro tips to save you time
 

Ready to start trading? Learn about investing responsibly with our comprehensive guide.


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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.

The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.

ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.