Trading charts are essential to technical analysis in the futures markets as they provide the foundation of the entire study. They are the means to view price moves in a visual way and form the backdrop on which you can place various indicators to help you make decisions.
You can set up charts to show different time frames and in different visual styles. Depending on your time horizon for trades, you can choose to look at various charts showing various time frames. A longer-term trader may track price on a weekly or monthly chart while a shorter-term trader may use charts with a 60-minute or 5-minute chart.
There are many ways to organize charts and the visual representation of price on these charts. The most common chart types are candlestick, bar charts and line charts.
Regardless of which type of visual representation of price traders use, candlesticks, bar charts and line chart help to find clues to identify:
- Whether the market is trending
- Reversal signals at market tops and bottoms
- Periods of consolidation
Candlestick charts use a visual representation of price broken down into two main parts, the body and the wick. These pieces meet in a style that looks like a candle, thus the name of the chart style.
The wick, illustrated by a thin line at the top and bottom of the body, shows the highest and lowest prices traded over the time frame. The body of the candle, the thicker middle portion, shows the open and closing prices during the time frame.
If the open is higher than the close, then the color of the bar will generally be green, depending on the color settings of your software. If the closing price is lower than the opening price, then the bar will generally be red, depending on the color settings of your software.
Using Candlestick Charts
Candlesticks allow traders to visualize buying and selling pressure in two ways.
Firstly, the size of the body indicates the intensity of buying or selling. The longer the body, the more price moved over the time period of that candlestick. A short body means that the opening and closing prices were very similar, meaning that there was not much strength to price action.
Secondly, the size of the wick relative to the body is important. A candle with a short or no wick means that price action was strong in to the close and either buyers, represented with a green candlestick, or sellers, represented with a red candlestick, were in control for the entire time period.
If the wicks are long, then there was a large range of prices traded and buyers and sellers were both in control.
Candlesticks can also show you who was in control at the close of the bar. If you have a small body near the low of bar, it means that at the end of the bar sellers had taken control from the buyers who were strong at the open of the bar.
If you have a small body near the top of the bar, it means that buyers took control from sellers at the end of the time period.
Gapping is another signal that traders will look for with candlestick charts. Candles that gap above or below the previous candle are an indication that there is momentum in the trend.
For example, 30-Year Treasury Note futures (ZB) gapped down twice on this daily chart and continued to push down after the gap.
The line chart is another way to visualize the price of the underlying, but unlike candlesticks, which allow you to analyze finer points of pricing, a line chart provides a quick way to visualize a longer-term trend.
A line chart represents where price has been in the past and shows the closing price for a certain period of time.
The bar chart, or OHLC chart, is much like a candlestick chart but has a few visual differences. Like a candlestick chart, a bar chart provides four pieces of data for each time period: the open, high, low and close.
The opening price is indicated by a small horizontal line to the right with the closing price to the left. Highs and lows are indicated by the vertical line of the bar. In one bar you can see where price started, where price ended and the range that price traded.
For example, if a trader sees a series of bars on the 5-minute chart where the open and high are above the previous bar’s high, then they might conclude that the market is trending upwards.
Approaching Reading Charts
As a trader, you will need to set how often a new candlestick or bar appears on your chart using either a time-based approach or trade-based approach.
Time-based charts generate a new bar or line point after a set amount of time has passed. Depending on your preferences, this can be anywhere from one minute to a week or year.
A trade-based approach will use what is commonly referred to as a “tick chart” to help visualize the momentum behind the move in price. A tick chart generates a new bar or line point after a certain number of trades have occurred.
For example, you might want a new bar every 25 trades or a new bar after 512 trades. The shorter- and longer-term tick charts can show a different perspective in the market, while the 5-minute chart will look much different than the 512-tick chart.
Tick charts will generate new bars faster during time of high volume and more slowly during times of low volume. The speed of new bars being formed may allow a trader to better visualize increasing and decreasing volume in a market.
Charts, in combination with other data, help guide your opinions on where prices are moving. With the ability to tailor data points to many specifications, you can fine tune your charts to illustrate the information that works best for you.
Peter Knight Advisor