How Do You Read a Trading Chart? 

 

As a beginner you might be feeling a little overwhelmed by the sheer amount of information contained within a trading chart.

While it can be relatively easy to interpret historical data on a surface level by identifying past highs and lows, this hindsight does not always translate practically into real-time performance.

It is also very difficult to figure out which data is useful and which information is merely background noise. What’s more, political and economic pundits certainly do not help matters with their endless onslaught of opinions and rank speculation.

Understanding Price Charts

Many traders and investors will attempt to use historical data in order to predict what the price of a stock or currency pair will do in the future-this is a concept known as technical analysis.

One of the most fundamental aspects of technical analysis is the identification of levels of support and resistance.

Simply put, levels of support are where price struggles to go lower, and levels of resistance are where price struggles to go higher.

So when you look at a trading chart and see that price has repeatedly risen to a certain level before being knocked back down, you can identify that a level of resistance has been established and price may not surpass that level until something exceptional happens.

Usually some piece of economic or geopolitical news will cause investors to flock to or flee from a certain stock or currency pair, enabling price to move through its respective level of support or resistance.

When this happens, price will eventually reach a certain point and a new level of support or resistance will be established.

From here, you may notice that the price retreats back to its previous level of support or resistance. Often, what was previously a support line will become a resistance line, and vice versa.

It may be useful to use charting software in order to place your own lines of support and resistance because you can more accurately predict price movement up and down.

Trading in a Range

When price appears to be caught between support and resistance, we say that an asset is ranging or that it is in a range.

Ranging stocks and currency pairs do not generally provide good entry points because it can be difficult to know when they will continue trending.

Even when assets do break out of a range, they will not always continue on their previous trend.

If you are interested in trading in a stock or currency pair that is ranging then it might be a good idea to look out for relevant news items and global events that may result in a breakout.

The most important thing is to remember that past performance is never a guarantee of future performance, so we cannot always rely on historical data to make effective trades.

Having said that, combining basic technical analysis like this with other tools such as technical indicators may be a great way of gaining confirmation on a potential trade that you already have some certainty about.

 

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