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How to read trading charts? Our ultimate guide

For any trader, knowing how to read a trader's chart is necessary to make informed decisions and minimize trading errors. By understanding chart types, trends and the use of technical analysis indicators, you can gain a clearer perspective of market behavior and significantly improve your performance.

Here is our ultimate (and quick) guide on how to read trading charts the easy way. This is necessary to apply several of the strategies we have been teaching you in our trading academy.

What is a trading chart?

To be able to read them you must understand them, so we want to start with the basics: what are they and what are their types?

A trading chart is a visual representation of the historical price behavior of an asset. It is a fundamental tool for technical analysis, allowing you to observe characteristics such as volume, trend and volatility over different time intervals.

By interpreting trading charts, you can analyze the price movements of an asset and detect patterns that help you identify buying or selling opportunities. Therefore, charts function as a confirmation tool, not a prediction tool, in your trading decisions.

Chart patterns in trading refer to possible future price behavior based on the analysis of historical data. This means that it is possible to estimate the probability that the price will go up or down, but it does not guarantee the movement with certainty.

Main types of trading charts

There are several types of charts used in trading, which differ in their design and use. Each offers unique perspectives and different levels of detail on price movements. Some of the most common in different markets are:

• Line chart: this simple chart connects the closing prices of an asset over time with a line. It is ideal for detecting general trends, but lacks detailed information on intraday price movements.
• Bar chart: This chart shows four key price points - open, close, high and low - within a specified time period. It provides more information than a line chart, making it the preferred choice of traders.
• Candlestick chart: a trader's favorite for its visual clarity. Each “candlestick” represents a specific time frame and includes the opening, closing, high and low prices. The body of the candlestick shows the opening and closing prices, while the wicks show the highs and lows.

In addition to these chart types, understanding the components of a trading chart is just as important for analysis.

• Time frames: the time frame determines the period of time represented by each candlestick or bar, from minutes for day traders to months for long-term traders. Shorter time frames are used by day traders, while longer time frames help traders analyze long-term trends.
• Price movements: price movement is the central element of trading charts, as it represents the changing value of an asset over time. In any chart, price movement is represented by a series of dots, bars or candlesticks that show how the price of an asset fluctuates over a given period.
• Volume: Volume indicators show the number of trades executed in a given period, reflecting market interest and the strength behind price movements. High volume usually confirms trends, while low volume may indicate uncertainty.

Reading trading charts: tips and guidelines

Reading trading charts is easy, as long as you understand the general trends.

Trends represent the general direction in which the price of an asset moves over a period of time. Identifying trends on a chart is one of the first things traders learn to do when reading charts.

Uptrend Charts (bull market)

An uptrend is characterized by a series of higher highs and higher lows, indicating that demand for an asset is strong, pushing prices higher. Traders consider an uptrend to be intact as long as each subsequent high is higher than the previous high and each low is also higher than the previous low.

3-step uptrend:

• Price forms a series of rising highs and rising lows.
• Market sentiment is bullish, with buyers in the driver's seat.
• Buying opportunities are often found during pullbacks to support levels, especially when the price respects a trend line or moving average.

Bearish Trend Charts (Bear Market)

A downtrend is the opposite of an uptrend and is identified by lower highs and lower lows. This indicates that selling pressure is dominating, pushing the price of the asset down. Downtrends are usually driven by negative sentiment about the asset, economic conditions or company-specific factors in the case of stocks.

3-step downtrend:

• Price forms a series of declining highs and lows.
• Sellers are in control, often resulting in panic selling or sustained downward pressure.
• Short selling opportunities may arise during brief rallies to resistance levels, as they are usually considered temporary before further declines.

Sideways Trend Charts (Consolidation/Limited Range Market)

A sideways or range bound trend occurs when the price oscillates within a well-defined horizontal range, with no clear upward or downward direction. This may indicate indecision or market consolidation, where neither buyers nor sellers have a clear advantage.

3-step sideways trend:

• Price moves between well-established support and resistance levels, creating a horizontal range.
• Low volatility may indicate that the market is waiting for new information (e.g., earnings reports, economic data) before making a decisive move.
• Traders often employ range trading strategies, buying near support and selling near resistance, but should watch for possible breakouts.

Common patterns in trading charts

In trading chart analysis, recognizing price patterns is important for predicting future price movements. One of the most reliable and popular patterns is the head and shoulders pattern. Many traders see this pattern as a signal that the market trend is about to reverse, either from an uptrend to a downtrend or vice versa.

Head and shoulders pattern

The Head and Shoulders pattern usually appears at the peak of an uptrend, indicating that the price is about to fall once the pattern is completed. Conversely, the Inverse Head and Shoulders (or Inverse Head and Shoulders) pattern usually forms during a downtrend, suggesting that the price is ready to move higher. Both patterns share a similar visual structure, containing four key elements: two shoulders, a head and a neckline.

• Head and Shoulders: Typically form at the peak of an uptrend, signaling that the asset's price is preparing to move lower once the pattern is complete.
• Inverse Head and Shoulders: Typically appear during a downtrend, indicating that the asset price is preparing to move up.

The formation of these patterns reflects price fluctuations in the market, influenced by investor behavior. The peaks and valleys on the chart contribute to these formations, and the patterns are confirmed when the price breaks the neckline (which serves as a support or resistance level). This breakout usually indicates an impending trend change.

Other common patterns to look for

In addition to the head and shoulders pattern, traders use other patterns to analyze market activity. Here are some common examples:

• Double Top/Double Bottom: This pattern consists of observing two consecutive highs or lows at similar price levels. A double top usually indicates a possible reversal of an uptrend, while a double bottom suggests the end of a downtrend. This pattern is usually accompanied by a temporary price pullback, known as a pullback, before the trend reversal occurs.
• Triple top/triple bottom: similar to the double top/bottom, this pattern is characterized by three consecutive highs or lows at similar price levels. This pattern usually indicates a stronger trend change and may also show a slight pullback.
• Pinocchio Bar: Named after the famous wooden puppet, this pattern features an unusually long wick on a candlestick chart. In an uptrend, a longer-than-normal wick emerging from a small body indicates a possible reversal, suggesting that the price could turn down soon. Conversely, in a downtrend, a longer wick could mean an imminent price rise.
• Engulfing pattern: This pattern occurs when a candle completely engulfs the previous candle, but in a different color. This indicates a strong change in momentum. In a bullish scenario, a black candlestick followed by a white candlestick engulfing it signals a possible uptrend. Conversely, in a bearish scenario, a white candlestick followed by a black candlestick indicates a possible downward shift.

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• How to read trading charts? Our ultimate guide
• What is a trading chart?
• Main types of trading charts
• Reading trading charts: tips and guidelines
• Uptrend Charts (bull market)
• Bearish Trend Charts (Bear Market)
• Sideways Trend Charts (Consolidation/Limited Range Market)
• Common patterns in trading charts
• Head and shoulders pattern
• Other common patterns to look for
• Frequently asked questions about trading charts
• Keep learning 🤓