Tutorial: Reading Charts

[Jopo-80]

Hello!

I´m myself totally new to trading and hence I wanted to start a tutorial thread for all newbies wanting to learn the trade. Hopefully we will get lots of pros here answering questions etc. I don´t know much yet about trading but incidentally I´m a teacher student so I know something about educational materials, theres my contribution to this thread, I hope I can ask the right questions and some pro will then answer them.

This tutorial is meant for those who do not yet fully know how to read charts and fully analyze them. Anyone is free to ask questions about charts in this thread and hopefully the pros will answer them.

To the charts...

Most likely anyone can read a basic line chart. The line goes up or down, thats easy, but the "candlestick" charts can be more tricky and they will be the first one to be dealt with. Attached is a picture of a candlestick chart. The pictured chart is in 5 minute sections, that is every bar represents a 5 minute time period. As far as I know the blue bars represent a rise in asset price and the red bars represent a fall, correct me if I´m wrong or if something is missing. Note that every bar begins at the end level of the last bar.

Here´s where I put forth the first question:

Q1: What do the thin black lines protruding up and down from every bar mean?

Everyone please number your questions and answers accordingly. Q1 is answered by A1 and so forth, just to keep it clear. Also, please add pictures to your questions and answers if at all you have them, pictures make it so much more clearer. "Remember, a picture is worth a 1000 words."

Hopefully we will get a good and informative thread on chart reading.

-Cheers from Finland!

 

[jd1888]

Hello!

I´m myself totally new to trading and hence I wanted to start a tutorial thread for all newbies wanting to learn the trade. Hopefully we will get lots of pros here answering questions etc. I don´t know much yet about trading but incidentally I´m a teacher student so I know something about educational materials, theres my contribution to this thread, I hope I can ask the right questions and some pro will then answer them.

This tutorial is meant for those who do not yet fully know how to read charts and fully analyze them. Anyone is free to ask questions about charts in this thread and hopefully the pros will answer them.

To the charts...

Most likely anyone can read a basic line chart. The line goes up or down, thats easy, but the "candlestick" charts can be more tricky and they will be the first one to be dealt with. Attached is a picture of a candlestick chart. The pictured chart is in 5 minute sections, that is every bar represents a 5 minute time period. As far as I know the blue bars represent a rise in asset price and the red bars represent a fall, correct me if I´m wrong or if something is missing. Note that every bar begins at the end level of the last bar.

Here´s where I put forth the first question:

Q1: What do the thin black lines protruding up and down from every bar mean?

Everyone please number your questions and answers accordingly. Q1 is answered by A1 and so forth, just to keep it clear. Also, please add pictures to your questions and answers if at all you have them, pictures make it so much more clearer. "Remember, a picture is worth a 1000 words."

Hopefully we will get a good and informative thread on chart reading.

-Cheers from Finland!

Hi Jopo 80

I am no pro but I can help you with your first question. So here goes........

A1. The lines protruding the top and bottom of a candle are called the wicks, some people may refer to them as the shadow. They are how far the bulls have pushed price for that period for the top wick and how far the bears have pushed the price for the bottom wick

Below is a few pictures showing how a candle is made up.

As you will see for a bull candle the close is higher than the open and for a bear candle the close is lower than the open. The colour is not really important.

 

[igetfx]

Hi Jopo 80

I am no pro but I can help you with your first question. So here goes........

A1. The lines protruding the top and bottom of a candle are called the wicks, some people may refer to them as the shadow. They are how far the bulls have pushed price for that period for the top wick and how far the bears have pushed the price for the bottom wick

Below is a few pictures showing how a candle is made up.

As you will see for a bull candle the close is higher than the open and for a bear candle the close is lower than the open. The colour is not really important.

Nice explanation...

 

[Jopo-80]

Thank you for jd1888 for a speedy and good answer.
So to clarify, the shadows in a bar represent peaks or bottoms during the period indicated by the bar, the colored portion shows the current or closing price.

The next issue that is important in reading charts is the concept of SUPPORT and RESISTANCE. For this purpose I will quote a useful booklet called Charting made Easy by John J. Murphy, this booklet is available for free on the internet in .pdf format:

"There are two terms that define the peaks and troughs
on the chart.A previous trough usually forms a support
level. Support is a level below the market where buying
pressure exceeds selling pressure and a decline is halted.
Resistance is marked by a previous market peak. Resistance is a
level above the market where selling pressure exceeds buying
pressure and a rally is halted (See Figure 4-1).
Support and resistance levels reverse roles once they are
decisively broken. That is to say, a broken support level under
the market becomes a resistance level above the market. A
broken resistance level over the market functions as support
below the market.The more recently the support or resistance
level has been formed,the more power it exerts on subsequent
market action.This is because many of the trades that helped
form those support and resistance levels have not been liquidated
and are more likely to influence future trading decisions."

So, Support is present whenever the market price is below the average line and gets stronger as price continues to fall eventually forcing the price to go back up again until such time as the previous peak level is reached at which point the resistance starts to kick in and grows until the rise is stopped and a fall begins.

In other words and as far as I can understand you can expect a rise to have support until such time as it reaches the previous peak that is, at least in general, sometimes this does not occur at once, you will have smaller peaks and falls before the previous big peak is reached. For example. the EUR/JPY was at one of its highest peaks around 1980 at which point it was around 350 Yens per Euro, that peak has not been reached in 30 years, instead we have had smaller peaks and falls. Also as the attached graph shows the lowest bottom was around 2001 at around 90 Yens per Euro and now towards the end of 2010 we are at around 110 Yens per Euro. We are nearing the previous low point, so we can expect the fall to stop around then or sooner. That is because the lowest point occurred some 9 years ago and in the mean time we have had several low points which are higher and are more recent so they have more effect. So anyone who is awaiting for the EUR/JPY rate to go back to the 1980 level or higher to sell might have to wait for a long time to do so as the trend has been for a weaker Euro for 30 years and as it says in the booklet " Two basic premises of chart analysis are that markets trend
and that trends tend to persist."

So the time is for another few questions:

Q2: If a rise has support up to the previous peak then does a fall likewise have "support" to it, for example is the fall likely to continue until the previous bottom is reached before turning to rise again?

Q3: Why do smaller peaks and falls occur and can they be predicted? For example a rise is cut short of reaching the previous peak and turns to a fall before doing so, WHY? Can such occurrences be predicted and if so HOW?

Theres a few more questions for pros to answer. :smart: :idea:

Cheers!

PS. Here´s a few pictures about resistance and support and the role reversal of broken support and resistance levels. Also a picture of a trendline Taken from the booklet.

Also a quote about trend lines:

"The trendline is perhaps the simplest and most valuable tool
available to the chartist.An up trendline is a straight line drawn
up and to the right, connecting successive rising market bottoms.
The line is drawn in such a way that all of the price action is above the trendline.A down trendline is drawn down and
to the right, connecting the successive declining market highs.
The line is drawn in such a way that all of the price action is
below the trendline. An up trendline, for example, is drawn
when at least two rising reaction lows (or troughs) are visible.
However, while it takes two points to draw a trendline, a third
point is necessary to identify the line as a valid trend line. If
prices in an uptrend dip back down to the trendline a third
time and bounce off it, a valid up trendline is confirmed."

"Trendlines have two major uses.They allow identification of
support and resistance levels that can be used, while a market
is trending, to initiate new positions. As a rule, the longer a
trendline has been in effect and the more times it has been tested,
the more significant it becomes.The violation of a trendline
is often the best warning of a change in trend."

Also about channels with a picture :

"Channel lines are straight lines that are drawn parallel to
basic trendlines. A rising channel line would be drawn above
the price action and parallel to the basic trendline (which is
below the price action). A declining channel line would be
drawn below the price action and parallel to the down trendline
(which is above the price action).Markets often trend within
these channels.When this is the case,the chartist can use that
knowledge to great advantage by knowing in advance where
support and resistance are likely to function."

 

[jd1888]

Hi Jopo

I take it you know that you are no longer talking about candles?

 

[Jopo-80]

Yes, well candlestick charts were explained already, so I moved to the next subject, support and resistance which is present in all charts I guess. All the info should be relevant in all types of charts, correct?

 

[mabrurahmed]

Please also discuss about the factors helps to understand the market..............for example FTSE100......