Types of Charts

Charts are the foundation of technical analysis, visualizing price movements over time. Here are the most common types:

• Line Charts: These plot a single line connecting closing prices over a period, ideal for spotting long-term trends. They’re simple but lack intraday price details.

• Bar Charts: Each bar shows the open, high, low, and close (OHLC) prices for a period, offering more detail than line charts. The bar’s body represents the open-to-close range, with wicks showing highs and lows.

• Candlestick Charts: Similar to bar charts but more visual, candlesticks use a “body” for the open-to-close range and “wicks” for highs and lows. They’re popular for their clarity in showing price action and patterns.

• Point and Figure Charts: These focus on price movements, ignoring time, using X’s for rising prices and O’s for falling ones. They’re excellent for identifying support and resistance levels.

Each chart type serves different purposes, with candlestick charts being the most popular among traders for their detailed insights.

Basic Chart Patterns

Chart patterns are formations that signal potential price movements. Recognizing them is key to predicting market behavior:

Trends:

• Uptrend: Characterized by higher highs and higher lows, indicating rising prices.

• Downtrend: Marked by lower highs and lower lows, signaling falling prices.

• Sideways Trend: Prices moves within a range, showing no clear direction.

Support and Resistance:

• Support: A price level where buying pressure halts declines, acting as a “floor.”

• Resistance: A level where selling pressure caps rises, acting as a “ceiling.”

• Breakouts: When prices break through support or resistance, it may signal a strong move.

Candlestick Patterns:

• Doji: When open and close prices are nearly identical, signaling indecision and potential reversals.

• Hammer: A small body with a long lower wick, suggesting a bullish reversal after a decline (bullish or bearish).

• Engulfing: A candle that fully covers the previous candle’s body, indicating a potential reversal (bullish or bearish).

• Morning Star: A three-candle bullish reversal pattern after a downtrend.

• Evening Star: A three-candle bearish reversal pattern after an uptrend.

These patterns help traders anticipate market moves, but confirmation from other indicators is crucial.

Technical Indicators

Technical indicators are mathematical tools that analyze price and volume data to generate trading signals. Here are some essentials:

Moving Averages:

• Simple Moving Average (SMA): Averages prices over a set period (e.g., 21 days).

• Exponential Moving Average (EMA): Weights recent prices more heavily, reacting faster to changes.

• Use: Crossovers (e.g., 50-day SMA crossing above 200-day SMA) signal trend changes.

Relative Strength Index (RSI):

• Measures price movement speed on a 0–100 scale, typically over 14 days.

• Above 70 indicates overbought conditions, below 30 suggests oversold.

• Divergences (e.g., price rises but RSI falls) can signal reversals.

Moving Average Convergence Divergence (MACD):

• Compares a 12-day EMA to a 26-day EMA, with a 9-day signal line.

• Crossovers and divergences indicate buy or sell signals.

Bollinger Bands:

• Consist of a 20-day SMA and two bands set two standard deviations away.

• Widening bands signal high volatility, narrowing bands suggest consolidation.

These indicators enhance pattern analysis, but combining them increases reliability.

Volume Analysis

Volume, the number of shares or contracts traded, confirms the strength of price movements:

• High Volume: Validates significant price moves, such as breakouts or trend continuations.

• Low Volume: Suggests weak trends or potential reversals.

Indicators:

• On-Balance Volume (OBV): Adds volume on up days and subtracts on down days, showing buying or selling pressure.

• Volume-Price Trend (VPT): Combines price and volume to confirm trends.

Volume analysis ensures patterns and indicators are backed by market participation.