Reading Day-Trading Charts
Understanding Bar, Candlestick, and Line Charts
Day traders use charts to watch asset prices move and to decide when to make their trades. There are several different types of trading charts, but they all show essentially the same trading information, such as the past and current prices. The most popular types of trading chart are:
Each chart type has its own advantages and disadvantages. Day traders will typically want to use a bar chart or candlestick stick chart as they show more information than a line chart.
Bar Charts and Candlestick Charts Versus Line Charts
Bar and candlestick charts show the open, high, low and last/closing price for each bar. The amount of time or space a price bar covers is determined by its time frame, as discussed next. For now, let's assume a new price bar or candle is generated every minute (1-minute time frame chart).
A bar and candlestick chart shows the price of the first transaction that occurred that minute, the highest and lowest transaction prices during that minute, and the last (or closing) price of that 1-minute period.
A line chart is a closing-price-only chart type. A time frame is still chosen, such as a 1-minute interval, but only the closing prices for those 1-minute intervals are recorded. Each closing price is connected to the next closing price via a single continuous line.
Line charts provide a quick summary of where the price has been, but data is missing since only the closing price of each time interval is included. Bar and candlesticks provide more data, showing where the price traveled during each interval.
Chart Time Frames
Regardless of the chart type, all trading charts have a time frame (the x-axis on a chart, which is usually time but doesn't have to be) that determines the amount of trading information that they will represent. Some time frames are based upon time, while others are based upon other pieces of trading information, such as numbers of trades or contracts/shares. The most popular time frames are:
- Tick (Number of trades)
- Volume (Number of contracts)
- Price Range
Day traders typically use time or tick time frames, with time being the most common. A 1-minute chart is an example of a time-based time frame. Each minute a new price bar will start, showing the price movements for that minute. One transaction may occur, or hundreds, during that time frame.
Tick charts draw a new price bar once a set amount of transactions have occurred. For example, a 200 tick chart will draw a new price bar for every 200 transactions. For a stock or futures contract that does very few transactions in a day, this may only produce one price bar for the entire day. If the stock/future does lots of transactions in a day, new price bars may form every few minutes.
Volume charts draw a new price bar once a set amount of volume has occurred, or the width of time-based price bars are altered in width based on how much volume occurred during that time interval (1-minute for example). In the latter case, if a 1-minute period sees 500 in volume and the next 1-minute period sees the volume of 1500, the latter price bar will be wider than the first because more volume occurred during that minute.
Day traders use charting software to create and view their charts. Most day trading brokerages provide charting software, but many day traders opt to use additional charting software. Some of the most popular charting packages include:
All of the above charting platforms include bar, candlestick, and line charts, and allow the charts to be customized according to the trader's preference.
Final Word on Day Trading Charts
The best way to learn and practice how to read day trading charts is to start playing around with them in a demo account. For example, TradingView is a free website that provides loads of charts types and also allows you to place "play money" trades. Learn without risking any real money.
Check out the various chart types, and see the differences between them. Try altering some of the settings on the chart to see how that affects what you see. As you begin to learn day-trading strategies and advance your knowledge, you will find that you prefer one chart type (or one set of settings) better than another. One chart type isn't necessarily better than another, it all comes down to personal choice and choosing a chart type that complements the trader's trading style.