Trading charts: selecting the right tool for the job (3 main chart types and their key advantages)

I’ve been flicking through my charts of the main markets this morning…

Just getting a feel for how things currently sit and trying to spot a few good support and resistance levels.

It occurred to me how I’ll switch between the different chart types depending on the stage of analysis I’m working on.

It’s not something I’ve consciously thought about before, but sometimes I’ll have a trusty old candlestick chart on the screen, and the next minute I’ll flick to a stripped-down line chart. I’ll spend a bit of time there and before I know it I’m back on the candlesticks!

I’ve noticed it does depend which price action features I’m searching for at that particular time – I’ll use the different chart types to find different things. So I slowed down and took a few notes as I was jumping between the screens. I wanted to analyse exactly what I tend to use each chart type for.

Are you the same? Do you use different styles of chart for different reasons or do you stick to just one type regardless?

If you use one chart all the time, why not try mixing things up a bit – look at the same market on different types of chart. It’s a bit like changing the lens on your camera: some charts are great for close-in detailed work, others are perfect for a wide-angle overview of the entire landscape of the market.

You might find you gain a valuable new insight simply by looking at the market in a slightly different way.

Here are three charts I use most and the distinct advantages I think they offer:

1) Candlestick Charts: Probably the default choice of most traders these days. If you’ve been trading for a while, you’ve probably used candlesticks yourself at some point.

(If candlesticks are completely new to you, or if you’d like a quick refresher, you can read more on the Trader’s Nest website here.)

I tend to use candlesticks when I’m looking for potential turning points in the market. I’ll be ready to use them on all timeframes and I pay particular attention when the market is trading near an anticipated level of support and resistance – they help me see how things are playing out in those areas where a pause in momentum or a short-term reversal is most probable.

And the good news is there are a hundred and one (at least!) predefined candlestick price patterns to look for.

I like how the strong visual impact of the candlestick lets you quickly see the buying and selling forces in action. Your eye is drawn to the colour-filled bodies of the candles as they print on your screen. They extend upwards and downwards like little pistons and that helps you spot who’s currently controlling the action – the buyers or the sellers.

Key advantage: Candlesticks give you a strong visual overview of the buying and selling forces in action.

An example of insights to be gained from candlestick charts

2) Bar Charts: You might hear these called ‘Open-High-Low-Close’ (OHLC) charts. I’m sure you’ll have seen them. They’re those thin vertical lines with a ‘tag’ either side marking the open and close price of the bar. They look like this:

Open-High-Low-Close bar

Now they might not look as fancy as the candlesticks, they certainly don’t have the same visual impact, but I like them for two reasons…

  • You are not so drawn to the bullish/bearish nature of the bars like you are with candlesticks. OHLC bars can help you take a more objective overview of the longer-term picture.

You can cram loads more bars on the screen than you can with candlesticks – this helps those areas of support and resistance stand out really clearly.

So this is a different tool for a different job. Candlesticks still definitely have their place but I like to use bar charts to uncover those little pockets of price congestion. I find they just jump off the screen with this chart type.

Bar charts can help me find price levels that have proven to be relevant to the market on previous occasions and could be expected to provide support/resistance again in future.

Key advantage: OHLC bar charts let you cram more data on the screen and see areas of price congestion easily. It means you can quickly find reliable support and resistance levels.

This ‘cluster’ of congested prices marked a future resistance zone.

3) Line Charts: The third of my regular chart types is the line chart. It’s just a simple line drawn between the closing prices of the period the chart is measuring.

I tend to use these on the longer-term charts – the weekly and daily (and sometimes monthly) charts – and it’s just a really clean and simple way to keep focused on the main trending action.

Get yourself in tune with the bigger picture on the weekly and daily chart and you can then go looking for specific entry opportunities on the intraday charts.

I’m not saying this is the only way you can stay in tune with the longer-term trends but I really like the pared-back line charts for their pure simplicity.

Key advantage: Line charts help you concentrate on underlying longer-term trends through their clutter-free simplicity.

Line charts are simple and distraction free. Perfect for
when you need to zoom-out and focus on the main trend.

But which charts are going to work best for you?

So those are the three charts I find myself flicking between the most. Looking at each in turn helped me answer my own question: ‘Why do I sometimes prefer a bar chart and sometimes a candlestick?’.

Sounds a bit daft I suppose. But you do tend to pick up habits and fall into routines without giving them much thought. So there you go… a glimpse into the dingy recesses of my mind!

Am I saying these are the only three charts to use? Not at all. I know traders are out there gaining an edge from Ichimoku charts, putting Point & Figure charts through their paces, and finding great trades with Renko charts.

But as with all things trading, the important thing is to find what works best for YOU and then build it into your personal trading campaign.

So why not give a new chart type chance to shine next time you sit down to analyse the markets? You might find something useful in a chart you’ve never really given chance to work for you before.

In fact why not join in the discussion.  Pop over the Trader’s Nest forum and let me know which charts you are currently using and if I’ve inspired you to try any new ones!  Posting in the Trader’s Nest forum is free and always will be.  You’ll find it here:  Trader’s Nest Forum

Be Prepared: Market Moving Data Coming This Week (London Time).

Wednesday 4th February:
09:30    GBP    Services PMI

13:15    USD    Nonfarm employment change

15:00    USD    ISM Non-manufacturing

Thursday 5th February:

12:00    GBP    Interest Rate Decision

Friday 6th February:

13:30    USD    Employment numbers!

Monday 9th February:

No big reports

Tuesday 10th February:
09:30    GBP    Manufacturing production

Yes, it’s that time of month again – US job numbers!  Will EURUSD continue its downward slide after taking a breather for a week? Will that bit of overhead resistance at 1.1550 get a probing? Is the market simply too punch-drunk from recent events to take much notice?

There’s only one way to find out: tune in at 13:30 on Friday and let’s see what we get!

Whatever happens, trade carefully and I’ll catch up with you again very soon.

Until then, happy trading.