Chart Construction 1st step in forecasting price trends
BY Chris Andreou|October 1, 2020
What are the two most common questions investors ask?
Is the market going up or down?
Is now the time to buy or sell?
The study of price action with charts for forecasting future price trends helps to answer these two fundamental questions.
Chart Construction as part of your trading building block will assist a trader in answering the above questions. Let us look at the three most common chart types and what information these charts can provide a trader about future price direction.
In a line chart, only the closing price is plotted for each successive period. A period is a specific time frame such as a minute, hour, day, week, month etc.
- The barcharts show the open, high, low, and close of the selected period (minute, hour, daily, weekly, monthly etc).
- Most charts use 5-day weeks.
- Weekends are not shown on the chart.
- Whenever an exchange is closed during the trading week, that day’s space is represented by the next day’s price action.
- A version of the bar chart with a wider portion of the bar (called the real body) measures the distance between the open and the close.
- A thin line (called the shadow) shows the day’s price range from the high to the low.
- If the close is higher than the open, the real body is white/green/orange etc. (positive).
- If the close is lower than the open, the real body is block/red etc. (negative).
- You can do everything with a candlestick chart that you can do with a bar chart.
Using charts offer the investor flexibility and adaptability since the trader can easily track several markets and trading instruments. Investors who “trade the charts” to identify price trends can swift rotate opinion, attention, and capital to take advantage of the rotational nature of the financial markets.
Once a trader can understand what pieces of price data are included within the different chart types, the trader will soon start to understand the art of chart reading, and the potential rewards this powerful tool can provide you as you move forward with your own price forecasting analysis.
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