In order to start analyzing charts, we need to know the fundamentals of our charting platform. The first time you see a chart, you might be thinking it looks very complex. However, it’s really quite simple if you understand the fundamentals. From there, you can move things, change the appearance, switch graphing tools, etc. All of those are a matter of personal preference and everyone is different. Let’s begin with the basics.
Time (X) and Price (Y)
The bottom (x axis) is your time, and the side (Y axis) is your price. The time refers to the date and time of day. The price is the price of the stock, option, etc. As you scroll or adjust your screen both of these will adjust.
Understand the dataAt the top of your chart, you will see some small boxes. Each box will have a letter, then numbers following. Each of these boxes represent something different.
- D = Date – the date and time on the chart you are currently viewing
- O = Open – the price where the stock opened
- H = High – the high that stock last hit
- L = Low – the low that stock last hit
- C = Close – the price where the stock closed
Time FramesNo matter what type of chart you are viewing (line, candlestick, bar), you can adjust the time frame for each. Much of this is dependent on what type of trader you are, or what you’re trading that day. A day trader will more than likely look at time frames in minutes, 3 minutes, 10 minutes, 30 minutes, etc. because they enter and exit a trade in the same day. A swing trader may look at daily or weekly time frames because they hang on to the trade a bit longer. A position trader may look at weekly or monthly time frames. They are investing in the stock for a longer time and need a longer picture of the movement to analyze their entrance and exit.
Price ChartsThe most common charts are bar, candlestick, and line. For better understanding, here’s a picture of each:
Support and ResistanceSupport is a price zone where buying interest (demand), increases and prices rise. This is also known as the floor. Resistance is a price zone where selling pressure (supply) increases and prices decline. This is also known as the ceiling. Knowing and charting your support and resistance levels will become increasingly important as you begin to analyze your charts. This is how you will identify trends and movements.
Not only will you identify these trends but will make note of them with what we call trend lines. These are lines that you can draw directly onto your chart. Just as the name suggests, they will help identify any trends that might be taking place. A common saying in the financial markets is, “the trend is your friend.”
- Bullish (up)
- Bearish (down)
- Directionless (sideways)
Understanding GapsOccasionally you will notice large gaps on your charts, possibly between candlesticks (if that’s the type of graph you’re using). These gaps occur when the price of a stock makes a sharp move up or down with no trading in between. These large movements will usually occur overnight or during non-trading hours. They can be caused by a number of factors including regular buying/selling pressure, or the introduction of new information or news. Gaps can present both opportunity and risk.
The SpreadThe bid is the price in the market to buy. The ask is the price a seller is willing to accept. The spread is the difference between the bid and the ask. Some spreads can be quite large. Keep in mind that the larger the spread, the more money it is going to cost to initiate the trade.
Order TypesThere are two main types of orders when placing any trade. This is how and when our order will be filled.
If you place a market order, it will fill at the next available price, regardless of what that price may be. There are no restrictions or limits and guarantees an immediate fill.
A limit order will only fill at a specified price or better but does not guarantee that your order is filled. Buying will fill at a specified price or lower and selling will fill at a specified price or higher.
StopsOne of the most important things to understand when trading in the markets is, STOPS! These are triggers that can be set to automatically buy or sell when and if a certain price is hit. Setting stops can help to drastically reduce your risk during trading. Life happens, and sometimes even small distractions occur. You get a phone call, or someone comes to your door, and you have to step away while in a trade. Your stop will automatically “kicked you out” avoiding any loss.
This may seem like a lot of information but the more these fundaments become part of our routines, the more they will make sense. Sometimes, seeing really is believing and the more we practice, the better we will become. At Legacy, we offer courses that cover all of these strategies and more.
Areas of Review
Big picture takeaway points
- No matter how complex something can look, if you understand the fundamentals, it can all make sense.
- Stops are a huge help in keeping you safe in the market.
- Understand a few basic concepts will help you see the bigger picture.
Self-reflection questions to think more about the content
- Do I have a trading account set up?
- How long will I trade in my practice account till I’m ready to trade with real money?
- Mutiple streams of income is how you build wealth over time.
Legacy’s Building Wealth Club offers you the financial education needed to pursue your goals. Let our education and experience lead the way!