Watch our video on how to read trading charts. Candlesticks and charts are the foundation of trading and will give you the quickest entries and exits with your trades.
How to Read Stock Trading Charts
- Here are the simple steps on how to read trading charts:
- Understand that price action and candlesticks are most important indicator
- Study the most popular candlestick patterns and reversal patterns
- Look for big patterns like cup and handles, ascending triangles, head and shoulders
- Look for smaller patterns like bull flags and pennants
- Search for single reversal patterns such as doji's, hammers, spinning tops, shooting stars
- Look at 2 pattern reversals such as haramis and engulfing patterns
- Watch for reversal 3 pattern completion such as morning stars and evening stars
- Connect horizontal support and resistance levels
- Connect highs and lows to determine overall trend of the stock
How to read trading charts is a skill that you're going to need if you plan to grow your capital and live off your trading. Master chart reading, and you can now 'see the market.'
I've laid out the keys below to give you a very good grounding. But for real charting knowledge, put your checkbook away, and check out the Bullish Bears video library. It's your one-stop shop to learn the ins and outs of chart reading for day trading. More on that library later.
1. Time Frames: How to Read Trading Charts
Trading charts feature the ability to view data over different time intervals; like monthly, weekly, daily, and intraday. Intraday charts commonly used include hourly, 15-minute, 5-minute, and 2-minute charts.
Which chart is best for intraday? The hourly chart is the most popular, but some traders swear by tick charts. It depends on your trading style and strategy.
Even if you day trade, you still want to keep on top of the longer-term trends and understand how to read stock charts for day trading.
Although not commonly used, monthly charts provide data for years or decades. Likewise, weekly charts also offer longer-term data analysis usually for periods over six months.
Check out our trading service to learn more about how to read trading charts with different trading styles.
2. Daily Charts: How to Read Trading Charts Using
What's a daily chart? It's one of the most commonly used charts for analyzing intermediate to short-term time periods.
A daily chart works well to analyze time periods of over six weeks. It is also an ideal charts to "read" the market in general.
The following price data commonly displays on charts with each bar or candlestick representing your selected time interval.
- Opening Price: The price an instrument first trades for a given time interval.
- High Price: The top price of an interval's trading range, offering price resistance.
- Low Price: The bottom of an interval's trading range, providing price support.
- Closing Price: The price an instrument last trades before the subsequent time interval begins.
What Chart & Which Time Frame Is Best for Trading?
- Using a candlestick chart is best for trading any time frame
- 1 min, 5 minute, 1 hr, and daily charts are best for day trading
- 5 min, 1 hr, daily charts for short term swing trading
- Daily, weekly chart for intermediate swing trading
- Daily, weekly, and monthly charts for long term trading
1. Types of Charts
Numerous chart types and their variations exist, but here we'll cover the three main types to give you the very basic on how to read trading charts.
What Are Line Charts?
- A line chart is the most simple of the chart types. The line constitutes the closing prices for a set time frame. Although it doesn't provide as much information as most charts, it spotlights the closing prices. Line charts help traders see trends more easily. The reason is that it focuses solely on what many traders consider the most important price data.
What Are Bar Charts?
- A bar chart adds even more price data by including the daily price range. Therefore, you still get the closing price. But it also incorporates the opening, high, and low prices. Bar charts displays vertical lines that begin and end with the high and low prices. Meanwhile, short horizontal lines on the bar show the open and close prices.
The open price is located on the left side of the bar. While the close price is to the right.
If the price closed lower than it opened, then the bar shows as red. Conversely, if the price closed higher than it opened, then you see a green (or blue or black bar).
1. Candlestick Charts
The candlestick chart resembles a bar chart in many ways. Both relay the same information. However, a candlestick chart focuses more attention on the opening and closing prices (learn when to enter a stop loss vs stop limit order).
Meanwhile, a bar chart draws the eye more to the high and low prices. To learn how to read trading charts, understanding candlesticks patterns will be your best ally.
What do the candlesticks mean on a stock chart? For starters, it depends on your chosen time interval. On a monthly chart, each candlestick or bar represents a month.
Likewise, on a weekly chart, each one represents a week. Then on a daily chart, it's a day. On an hourly chart, it's an hour, then so on, right down to ticks.
Take our candlesticks course to learn how to read candlesticks charts.
2. How to Analyze, Trade & Read Trading Charts
Let's explore in more detail how to read candles since this is such a popular chart for advanced traders. The thin vertical line on a candlestick chart represents the high and low prices, like on a bar chart.
However, instead of using horizontal lines for open and close prices, the candlestick chart uses a wider bar called the "body." Meanwhile, the highs and lows, called "wicks," stick out of the body at both ends, resembling candles.
If the price drops below the opening price, the body appears red (or black). Conversely, if the price rises above the opening price, the body appears green (or clear or white).
If no body appears at all, it signifies that the price opened and closed at the same amount.
Despite similarities, a candlestick chart gives a better view than a bar chart of the emotions driving the market.
Once you recognize the patterns, candlestick chart analysis indicates trends of optimism or panic selling (check out our different styles of stocks page).
3. Candlestick Patterns
Most candlestick patterns occur over a short term of one to three days. Also, the pattern's location within the trend bears significance.
Day traders find them invaluable. Therefore, it's necessary to know how to read stock charts for day trading to recognize the patterns.
Popular patterns include pennants, cup and handles, head and shoulders, and ascending or descending triangles.
So which candlestick pattern is bullish? In fact, several bullish patterns exist. For example, a bullish engulfing pattern reflects when the bulls take control.
It appears when a long green candlestick body follows a candlestick with a short red body. This pattern signals that the price could rise higher.
Patterns are extremely helpful when it comes to trading penny stocks along with large cap stocks. A safe penny stocks list will always get plays based on the charts.
4. Other Bullish Patterns
- Belt Hold
- Doji Star
- Harami Cross
- Morning Star
- Morning Doji Star
- Piercing Line
- Three White Soldiers
Likewise, multiple bearish patterns exist. For example, a bearish hanging man occurs during an uptrend. The candlestick displays a long lower wick at least two times longer than the body.
Also, it exhibits barely any upper wick, giving it the appearance of a hanging man. Check out our live trading rooms if you want to see candlesticks in action.
5. Other Bearish Patterns
- Belt Hold
- Harami Cross
- Shooting Star
- Dark Cloud Cover
- Three Black Crows
What Time Frame Do Professional Traders Use?
- Professional day traders use daily, 1 hr charts and 5 min charts for setups
- Then they use 1 minute for entries and exit either on 1 min or 5 minute charts
- Professional swing traders use daily, 1 hr charts and 5 min charts for setups
- They enter on a 1 min or 5 minute. Then exit on a 1 hr or daily chart
- Long term traders use daily, weekly, month charts and exit the same depending on how long term they are
Note that no pattern always works every single time. Candlestick patterns represent probabilities.
However, there's no such thing as a silver bullet in trading. Previously used key phrase: You've used this key phrase once before. Do not use your key phrase more than once.
1. How to Read Trading Charts Software
Nearly all charting software features the option of candlestick charts. And most provide real-time streaming data for using trading charts live.
Also, many brokerages offer candlestick charts free as part of the complementary platforms they provide.
Additionally, some companies, like TradingView, offer free online trading charts. View a free chart here.
Final Thoughts on How to Read Trading Charts
Remember I said more about the Bullish Bears video library later? Well, you can access it by joining our community.
In fact, we have a free candlesticks eBook you can download. It has the different candlesticks patterns right to study at your convenience.
Some of you may be asking how to read trading charts for cryptocurrency. Look, once you master charting, you can see the patterns for crypto, stocks, futures, and the rest.
But you must pay your dues, and learn to read the charts. You can't wing it. My best advice is our community, now that you have a good grounding by having read this far.