Technical traders read – instead of news and announcements – financial charts. They believe that all fundamental considerations are represented by the market’s reactions to the news and announcements; and since they are in the business of predicting market action, not following developing news, they prefer to look at the raw data rather than its perceived motivating forces.
The most basic information that a chart provides is the price of an asset at any given moment. However, to predict its development, one must seek a pattern in those prices. The primary components of such patterns are trends – rising trends, falling trends and any combination thereof.
Such trends will rarely be straightforward; rather, they will express themselves in a rising or falling series of peaks (highs) and troughs (lows). Thus, if we see a price action that is comprised of a jagged line, but its highs and lows form a rising or falling channel – fixed width, widening or narrowing – we have before us a trend.
These trends may be short-term or long-term, and chances are that if we cannot see a trend within a certain timeframe, we will find one if we zoom into a shorter timeframe or zoom out to a longer one.
Financial trading employs three types of charts, each of which can be personalized (color) and calibrated to show different time frames – from 30 seconds to yearly:
· Line charts are the simplest and most basic, showing only closing prices for the selected period.
· The bar chart shows also opening prices for the selected period, plus highest and lowest prices achieved. The open price extends leftward of the bar, the closing price – rightwards. Often the chart is also shaded to show bullish (usually green – left extension below right extension) and bearish (red – left extension above right extension) movements over bar’s timeframe.
· Candlestick charts – invented by Japanese rice traders in the 17th Century – show the same information as bar charts, but with a hollow body replacing the bar levels between open and closing prices. Thus, each candle’s body extends the width of a time frame, shows open on one side of the candle and close on the other, with two wicks or shadows extending beyond to show the highest and lowest prices achieved during the candle’s time period. Again, the body is shaded to show action direction – red for bearish, green for bullish. Short-bodied candles (dojis) indicate little price action and a possible consolidation. Longer candles indicate rising volatility.
One way to analyze a chart is by seeking specific patterns in the chartline or candlestick sequences. Thus, a Head & Shoulders pattern incorporates 3 peaks – the middle higher than the outer – and indicates a downward break out, after failing three ties to break through an upper price-range (resistance). Another way is using technical indicators – programmed functions that can be applied to a chart. These can show trading volume, noise-reduced trends, sentiment and strength oscillators, and much, much more.
If you haven’t yet done so, we strongly advise opening a demo account and ‘experimenting’ with these tools – even before you have learned how to use them. Technical indicators have no effect on the charts themselves or positions you may or may not open. There is very little the user can do that will produce any kind of lasting damage – except to use them incorrectly when making a live, money-laden trade…