How To Use Trading Charts
How to Use Charts
Charting, or technical analysis, is one of the main ways to spot trading opportunities.
It involves looking for trends on price charts and trying to trade in the right direction by following them.
Charts Overview
These charts are built from the bid price quotes made by Tradefair Spreads on its trading platform.
Most of the chart functionality is self explanatory and you will find that you learn more about its possibilities (and limitations) with practice.
Opening a Chart
To open a chart in the desired market you just click on the chart icon (circled in red below) next to the order button and this will open the default chart selection in the desired market.
This default setting is currently a 10 minute chart with no technical analysis attached until you select the options you want.
Settings
Click ‘Settings’ to get to the technical analysis tools (shown opposite). By filling in the various boxes, your desired analysis will immediately appear on the screen. These settings can be saved as either an individual chart save or the individual analytical tools can be saved by clicking on the save icon.
Technical Analysis Available With the Charts
Moving Averages (MA)
Moving averages are one of the most popular and easy to use tools available to the technically minded trader. They help make a period of market data easier to read in terms of being able to spot trends, something that is especially helpful in volatile markets. They also form the foundations for many other technical indicators and theories.
Moving averages are used to highlight the direction of a trend and to smooth out price and volume fluctuations, or “market noise”. For example an upward movement is confirmed when a short-term average, say 15 days crosses above a longer-term average, say 50 days.
Figure 1
This can be seen in the example of the FTSE (figure 1) where the short (15 day - orange line) moving average crosses the longterm moving average (50 day - pink line) from underneath at the start of the uptrend(shown on the chart as point a).
If you had placed a trade at the crossover point in this example and held the trade until the end of July you would have made a tidy £300 profit.
Bollinger Bands
As you have probably worked out by now financial markets move in trends - up and down - roughly two-thirds of the time.
We’ve just gone through some points on moving averages, however you can get even more out of moving averages by putting some bands around them.
However strongly a price is rising or falling, it usually strays only so far from a moving average before snapping back.
You can see in this chart of the sterling-dollar exchange rate that the rate repeatedly shoots upwards from its orange moving average line and then retreats towards it again. You’ll also notice that it seldom gets much further than the upper of the two blue lines (as shown on the chart at points a and b).
These blue lines on either side of the orange moving average are called “Bollinger bands.” The calculations behind them aim to capture 95 per cent of price activity around the moving average.
Figure 2
If a price is touching one of its bands or is outside it, it is often a sign that the market is overstretched. In the chart here, you might well wait for the price to pull back from its upper Bollinger band at least to the moving average before trying to hop on the uptrend.
Relative Strength Index (RSI)
The relative strength index is one of the most important indicators available to a trader. It uses a formula to compare up and down movements in price over a period of time. It can be used on weekly, daily or intraday charts and the settings can be changed by the user. 14 periods is the standard setting, but shorter periods are also popular. The indicator has a range of 0-100. Readings of 0-30 are considered ‘oversold’, meaning the price may temporarily have gone down too much. Readings of 70-100 are considered ‘overbought’ meaning a price may temporarily have gone up too much. When the RSI is applied on a chart, two lines at the 30 and 70 cut off lines are shown (shown as points a & b below).
Golden rules for using RSI:
- never use it to go against a trend
- in an uptrend use it to find opportunities to join the trend, when it gives an oversold reading (0-30)
- in a downtrend use it to find opportunities to join the trend, when it gives an overbought reading (70-100)
Figure 3
Here are the steps to using RSI to join a downtrend:
1. find a downtrend
2. wait for RSI to get to overbought levels (over 70)
3. place a sell bet when the price moves below a recent low
4. set a stop above a recent high
5. manually trail the stop as the price moves in your favour
Figure 3 is an example of how to join a downtrend. As you can see on the chart below the Sterling-Dollar was in a clear downtrend from July (shown on chart as point a). In September the 5 period RSI reached overbought levels (as indicated by point b) then moved on down. You could have gone short at 1.82 with a stop of 1.87, manually trailing the stop and eventually getting out at 1.53; at £1 per point this would have produced a profit of £2900 with £500 initial risk.
Other Types of Technical Analysis
The techniques we have outlined are great starting points for anyone wanting to become a more technical trader. There are of course a number of other techniques and theories that can be applied to charts from Parabolic SAR to MACD to Elliott Wave Theory. However our little black books are designed to be a handy reference guide and whole books have been written on some of these topics.
We’d suggest buying some of these books once you have grasped the fundamentals and whetted you appetite for Technical Analysis. There is of course more information on the Tradefair Spreads website.
The Trend is Your Friend
Trends can continue for a long time in financial markets.
The accompanying chart shows an up-trend in a company’s share price.
Drawing a line through the major low-points gives us a ‘trend-line.’
You can draw lines by clicking on the button shown here to the right:
You might try and profit from this up trend by doing a ‘buy’ trade, perhaps when the price touches the trend-line.
Support and Resistance
When a lot of buying or selling happens at a certain price, that level often becomes an important barrier on the chart.
A barrier that stops a price from rising is called ’resistance’ and a barrier that prevents it from falling is called ’support.’
Resistance is where sellers overcome buyers, while support is where buyers overcome sellers.
A resistance level is shown as (a) on the accompanying chart, while support is shown as (b).
Horizontal lines can be drawn by clicking on the button shown here on the right:
Once you identify these levels on a chart, you can use them to plan your entry and exit into the market, and also where to put your stop-loss.
For example, you could decide to buy when a price falls to an important support level and sell when it gets near a resistance.
Tradefair Spreads’ Charting Tools
Our trading platform lets you study charts in detail for all the markets we offer.
You can follow the action in real-time, second-by-second if you want.
Whether you’re a complete charting newcomer or already an expert, our range of tools will enable you to make the decisions that matter for your trades.
Learn More About Charting
Here are three we find very useful:
Marber on Markets – How to makemoney from charts
by Brian Marber
Technical Analysis Explained
by Martin Pring
Technical Analysis of the Financial Markets
by John J. Murphy
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