Tips For Understanding Stock Charts
For investors and traders hoping to make large gains in the stock market, the wild price action of the market requires some tips for understanding stock charts.
Price charts don't just show where price has been but indicate which direction price is likely to travel, creating big opportunities for the skilled speculator.
First, notice where price begins and where it ends on a six-month price chart.
If price begins at the lower left-hand corner of the chart and travels towards the upper right-hand corner of the chart, then the chart is showing bullish price action that will likely continue to trader higher.
This indicates an upward bias and you should adjust your trading/investment strategy based on this evidence.
If price begins trading at the upper left-hand corner of your 6 month price chart and has traded downward towards the lower right-hand corner, then the market is showing bearish characteristics.
In this case, you should adjust your strategy to account for the downward bias in price and act on either liquidating long positions you might have or start preparing to short the market in the anticipation that it will trader lower.
The second thing you must understand about stock charts is that there are 3 trends in play at all times.
They are: the long-term trend, the intermediate-term trend, and the short-term trend.
The long-term trend is the largest time frame and can trade from a period of months to years, the intermediate-term trend can trade from a period of weeks up to a year, and the short-term trend can trade from a few minutes up to a week.
These 3 trends operate on different time frames and in concert with one another.
This leads to the 3rd tip which is that you must trade in the direction of the next largest trend from the one you are currently trading.
This means that if you are a day trader and trading the short-term trend on 5 minute charts, you must look at the intermediate time frame to determine the dominant trend in play and then trade in the direction of that trend which, for this example, could be the weekly chart.
For the 4th tip, you want to use the next smallest time period to time your entries.
If you want to trade in the direction of the dominant larger trend, then you want to use the smaller time frames to time your entries.
From our example above, if you are trading in the direction of the dominant intermediate time frame as a day trader using 5 minute charts, then when getting ready to enter a position in the direction of the intermediate trend, you will want to drop down to the 1 minute charts to time your entries.
The smaller time frames let you get a closer look at price action as it develops making your entries more accurate as you are able to watch your setup form early and exploit it for greater profit potential.
These tips for understanding price charts can help you form a foundation to begin trading for greater returns and control your risk.
Having a solid education on reading stock charts and then using actionable information with confidence lets you gain a strong competitive advantage over other traders and puts you on the winning side of the trade more often, pushing far ahead of the pack of investors or traders who just wander around in frustration and confusion by not taking the time to implement this knowledge.
Price charts don't just show where price has been but indicate which direction price is likely to travel, creating big opportunities for the skilled speculator.
First, notice where price begins and where it ends on a six-month price chart.
If price begins at the lower left-hand corner of the chart and travels towards the upper right-hand corner of the chart, then the chart is showing bullish price action that will likely continue to trader higher.
This indicates an upward bias and you should adjust your trading/investment strategy based on this evidence.
If price begins trading at the upper left-hand corner of your 6 month price chart and has traded downward towards the lower right-hand corner, then the market is showing bearish characteristics.
In this case, you should adjust your strategy to account for the downward bias in price and act on either liquidating long positions you might have or start preparing to short the market in the anticipation that it will trader lower.
The second thing you must understand about stock charts is that there are 3 trends in play at all times.
They are: the long-term trend, the intermediate-term trend, and the short-term trend.
The long-term trend is the largest time frame and can trade from a period of months to years, the intermediate-term trend can trade from a period of weeks up to a year, and the short-term trend can trade from a few minutes up to a week.
These 3 trends operate on different time frames and in concert with one another.
This leads to the 3rd tip which is that you must trade in the direction of the next largest trend from the one you are currently trading.
This means that if you are a day trader and trading the short-term trend on 5 minute charts, you must look at the intermediate time frame to determine the dominant trend in play and then trade in the direction of that trend which, for this example, could be the weekly chart.
For the 4th tip, you want to use the next smallest time period to time your entries.
If you want to trade in the direction of the dominant larger trend, then you want to use the smaller time frames to time your entries.
From our example above, if you are trading in the direction of the dominant intermediate time frame as a day trader using 5 minute charts, then when getting ready to enter a position in the direction of the intermediate trend, you will want to drop down to the 1 minute charts to time your entries.
The smaller time frames let you get a closer look at price action as it develops making your entries more accurate as you are able to watch your setup form early and exploit it for greater profit potential.
These tips for understanding price charts can help you form a foundation to begin trading for greater returns and control your risk.
Having a solid education on reading stock charts and then using actionable information with confidence lets you gain a strong competitive advantage over other traders and puts you on the winning side of the trade more often, pushing far ahead of the pack of investors or traders who just wander around in frustration and confusion by not taking the time to implement this knowledge.
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