Charting, or reading charts, is the practice of technical analysis that is performed through careful inspection of share price and volume data. It can help identify well-known data patterns that emerge in share prices.
What is really being measured on the charts is not mass behavior in the marketplace but the techniques of the specialist in an individual stock as they maneuver to solve short-term, intermediate-term, and long-term inventory problems. In other words, everything you need to know about stock is on a simple price and volume chart.
Here are 4 helpful tips for reading charts that can help you trade like a pro.
Know When to Buy and Sell
How do you know when to buy and sell? Just emulate the professionals. Buy and sell when they buy and sell; i.e. buy on declining (falling) prices, and sell on inclining (rising) prices.
Contrary to popular misconception, it is not selling that causes prices to fall. It is falling prices that cause selling. Similarly, it is not buying that causes prices to rise. It is rising prices that cause buying.
It is important to know that a down bar is a price bar that closes either below the close of the previous bar, or in a downtrend closes at the close of the previous bar or lower. Meanwhile, an up bar is a price bar that closes either above the close of the previous bar, or in an uptrend closes at the close of the previous bar or higher.
In light of this, another crucial tip is to buy on strong bars (strength) and sell on weak bars (weakness).
Look for Spikes in Volume
Many traders misunderstand volume, which, on a trading chart, shows you the trade quantity. You have to analyze both vertical and horizontal volumes. Vertical volume shows you the total volume per price bar, whereas the horizontal volume shows you the volume by price.
With vertical volume, look for volume spikes that follow after a period of relatively low volume. Such volume spikes tell you either of the two things:
- The dominant party just got absorbed by limit orders, or
- The dominant party just got stronger with new buyers/sellers jumping in
These are two conflicting scenarios, which one do you speculate on? Well, it depends on your directional bias based on the price swings.
For example, if the market keeps breaking below its recent price swings and is showing strong momentum in downward positions, it means you want to go short as you do not want to trade against the trend.
Determine Current Market’s Direction by Considering Price Action
Is the market in a downtrend, uptrend or a trading range? Most people determine this by using moving averages, but you can easily do this by looking at only the price action. Studying price action can help discover changes in market structure much sooner than moving averages.
How do you use this? Look for price swings and their breakouts. If price swings are being broken consistently in an upward direction, then there is an uptrend in the market and you want to trade long. Obviously, vice versa applies for short.
(At the very least, expect prices to go sideways as professionals work out the buy and sell orders while either accumulating or distributing inventory. These maneuvers take several bars to resolve themselves.)
The Opposite Poles of Market Volume
Another lesser-known fact is that markets work on either high volume or on low volume. High volume is generally stopping of price volume. Expect price to either reverse or go sideways as professionals complete either their inventory objective of accumulation or distribution.
If the volume is low – less than the previous 2 bars – this is a sign of strength on down bars in an up trend and a sign of weakness on up bars in a downtrend. The market works on both high and low volume.
Avoid following what influencers or other people tell you, rather read and believe your charts; they are your best friends. Some of the ways of charting were presented in this blog. But why stop at the surface level?
You can gain a more thorough understanding of charts as well as learn hidden secrets about how the market is manipulated, and become an expert at recognizing these patterns to become a trading grandmaster. Simply purchase my celebrated book ‘The Definitive Guide to Price and Volume’ here to get your hand on hidden trading secrets. You can also sign up for my Prosperity Trading Course with proven techniques to help you succeed in any market.
