Charts are the main tool analysts use to understand the history and current state of any financial market. Investors who learn how to read them properly can properly time entries and exit and therefore profit from the market. This guide walks through the main chart types and the indicators that experienced traders keep coming back to.
Types of Trading Charts and How to Analyse Them
A technical analysis chart is a visual representation of an asset's price movements and trading volume over a period of time. The horizontal axis shows time, moving from left to right. The vertical axis shows price. Most charts also display volume bars along the bottom, which show how many shares or units were traded during each time interval. Taller volume bars indicate heavier activity, which often signals a stronger trend.
Price charts display the trading activity that occurs during a single trading period (whether it is five minutes, 30 minutes, one day, and so on). Generally, each period contains several data points, including the opening, high, low, and/or closing prices. When studying charts, traders typically rely on one or more of the three types: line, bar, and candlestick.
Line Chart
The most fundamental price chart is the line chart. It draws a single line connecting all closing prices of an asset over a given time interval, offering traders a quick overview of trends. It is easy to follow, but the line chart may not reveal much about each day's activity. It will, however, help traders identify trends quickly and visually compare the closing price from one period to the next.
Bar Chart
The bar chart is another method for charting price activity. Each bar displays the high, low, open, and close price for a particular time period. Bar charts help traders observe the price range of each period. Bars may grow or shrink from one bar to the next or across a range of bars.
The variation in bar size is due to the way each bar is constructed. The vertical height of the bar reflects the distance between the high and low price of the bar period. The price bar also records the period's opening and closing prices with attached horizontal lines; the left line represents the open, and the right line represents the close.
Candlestick Chart
The candlestick chart is a variation of the bar chart, but it provides traders with more detail. Candles help visualise bullish or bearish sentiment by displaying distinctive "bodies" that are green or red, depending on whether the asset closes above or below the opening price. The body represents the gap between the opening and closing prices of the time interval; the high and low prices are referred to as the wick or shadow.
Candles also help analysts observe how prices behave in a trending market. In a typical bull market, there tend to be more clusters of green candles than red candles, while the opposite holds true for a bear market.
Most traders prefer to use candlestick charts simply because they give more detail at first glance and can be used across different markets such as equities, forex and spread betting. Additionally, certain combinations of candles form patterns that traders may use as entry or exit signals.
Key Indicators and When to Use Them
Reading the chart itself is only half the job. The other half is knowing the best indicators to layer on top of the price action to confirm what you think you are seeing. There are dozens of indicators out there but most traders narrow it down to a handful that they trust and use consistently.
Moving Averages
A moving average takes the average closing price over a set number of periods and plots it as a smooth line across the chart. The two most common are the 50-period and the 200-period. When the price is trading above the moving average, the trend is generally considered bullish. When it drops below, the mood turns bearish. The real value comes when you use two moving averages together.
If the shorter one crosses above the longer one, traders call that a golden cross and treat it as a buy signal. The opposite crossover is called a death cross and is read as a warning to sell or stay out. Moving averages work best in trending markets. In a choppy, sideways market they tend to produce false signals, so keep that in mind.
RSI (Relative Strength Index)
RSI measures momentum on a scale of 0 to 100. Anything above 70 suggests the asset has been bought aggressively and might be due for a pullback. Anything below 30 suggests heavy selling and a potential bounce. Most traders use RSI to avoid chasing a move that has already gone too far. It is particularly useful after a sharp rally or sell-off when you need to decide whether there is still room to run or whether the move is exhausted. One mistake beginners make is treating RSI levels as automatic buy or sell triggers. An asset can stay overbought at 80 for weeks during a strong trend. RSI works best as a confirmation tool alongside price action rather than a standalone signal.
MACD (Moving Average Convergence Divergence)
Moving Average Convergence Divergence (MACD) tracks the relationship between two moving averages and plots the difference as a line that oscillates around zero. A second line, called the signal line, acts as a trigger. When the MACD line crosses above the signal line, it suggests momentum is building to the upside. When it crosses below, momentum is fading. Traders tend to use MACD for spotting trend reversals early. It pairs well with RSI because MACD tells you about the direction and strength of a trend while RSI tells you whether the move is getting stretched.
Start Simple and Build From There
It will take a bit of time to fully grasp the concept of charts and how to fully utilize them. So take it little by little and make sure to combine visual instructors such as YouTube videos in your learning process. Also, no single indicator gives you the full picture. The traders who get consistent results are the ones who combine two or three tools and wait for them to agree before acting. A practical setup for someone starting out would be candlestick charts with a 50-day moving average and RSI. Watch for the price to pull back to the moving average, check that RSI is not in overbought territory, and look for a bullish candlestick pattern at that level. When all three line up, you have a higher probability trade. When they contradict each other, it is usually better to wait.