3.06 Reading price charts

Reading price charts is a fundamental skill in technical analysis which allows traders and investors to understand market movements and make informed investment decisions. Price charts present historical data on asset prices over various time frames, allowing you to analyze trends, identify price patterns, support and resistance levels. 

In this lesson, we will focus on learning the basic elements of price charts and developing the ability to interpret them, which is crucial for successful trading in financial markets.

Remember: The appearance of a given pattern does not imply the price's future movement. It is only a repeating pattern that can help the person interpreting the data to draw conclusions. Technical analysis should be used in conjunction with fundamental analysis.

 

Interpretation of Data

Goal: Understanding basic elements of price charts and how to interpret them.

Reading price charts involves visually analyzing the data depicted on them, such as opening, closing, maximum and minimum prices over different time frames. In this section, we will discuss how to recognize and understand these key elements of charts so that you can effectively analyze and predict future price movements. With this knowledge, you will be able to better recognize market signals and make more informed investment decisions. 

Introduction to price charts

Price charts are an essential tool for technical analysis. They enable traders to visualize changes in asset prices over time, identify patterns, and forecast potential future price movements.

Types of charts 

• Linear: Shows closing prices in the selected time interval, connecting them with a line. Easiest to interpret, but conveys the least amount of information.

• Bar chart (OHLC): Shows the opening, closing, maximum and minimum prices for a given period.

• Candlestick: The most commonly used chart in technical analysis, after the line chart.

Chart elements

• X-axis (horizontal): Represents time.

• Y-axis (vertical): Represents price.

• Volume: The number of transactions made in a given time interval. Can be represented as a histogram (a series of rectangles on the coordinate axis) below the main chart.

 

How the candlestick is constructed

1. Body

   • Description: The space between the opening and closing price. The colour of the body shows whether the price has risen (usually green/white) or fallen (usually red/black).

   • Interpretation: A long body indicates a large difference between the opening and closing, suggesting strong price movement. A short body suggests little price change and possible market consolidation.

2. Wicks, Shadows

   • Description: Lines protruding above or below the body, representing maximum (upper shadow) and minimum (lower shadow) prices.

   • Interpretation: Long shadows indicate high volatility in a given period. Short shadows suggest greater price stability.

Division of candle patterns

1. Reversal Patterns 

• Hammer: Small body on top of the candle with a long lower shadow. Suggests a potential reversal of the downtrend.

• Hanging Man: Similar to the hammer, but appears at the top of an uptrend, suggesting a potential downward reversal.

• Morning Star: A triple-candle pattern signalling a reversal of the downtrend. It consists of a long red candle, a small candle (red or green) and a long green candle. 

• Evening Star: A triple-candle pattern signalling a reversal of the uptrend. It consists of a long green candle, a small candle (red or green) and a long red candle.

2. Continuation Patterns 

• Cloud: A series of candles that move in one direction, indicating a continuation of the current trend.

• Flag: A short-term consolidation pattern that usually precedes the continuation of the previous trend.

You will find out more about candlestick charts and their use in financial market trading, and technical analysis in the upcoming lessons. 

 

Example of candlestick chart analysis

Let's assume that we are analyzing a candlestick chart of Bitcoin on a 1D (1 day) interval:

1. Trend: Upward, with a series of higher peaks and higher lows.

2. Candlestick patterns: The presence of a hammer at the bottom of a downtrend suggests an upward reversal.

3. Volume: An increase in volume during a breakout suggests a strong upward move.

4. Wicks: Long lower wicks indicate strong support at lower price levels.

Summary

Interpreting data from price charts is a key element of technical analysis. Understanding the different types of charts, such as line, bar and candlestick, and being able to read the opening, closing, maximum and minimum prices allows you to analyze the market more accurately. Analysis of candlestick patterns and volume helps to identify trends and spot potential turning points. 

Practice and experience in interpreting chart data are key to performing effective technical analysis.