Trading Charts Explained: How to Read Trading Charts

Trading charts can become an essential tool for CFD traders looking to obtain maximal information regarding the wider market trends of a given contract’s underlying asset. To be better-prepared to implement trading charts into your CFD strategy, keep reading:

What Is a Trading Chart?

In the context of CFD trading, trading charts are essential tools that visually represent the price movements of assets over time. These charts are integral to technical analysis, a method traders use to evaluate and predict future price behaviour based on historical data. By examining these charts, traders can identify recognisable patterns and trends, which can provide valuable insights into potential price movements of various markets, including forex pairs, shares, and indices.

How Does a Trading Chart Work?

In CFD trading, charts are essential tools for tracking price movements over time, offering various perspectives on an asset's performance. The vertical axis typically displays price levels, while the horizontal axis represents time. Different chart types, such as line, bar, and candlestick charts, provide unique insights into price trends. These charts can also highlight the intensity of price movements, incorporating volume indicators and the magnitude of price changes, thereby helping traders adjust their trading strategy according to the prevailing market trends, although success in CFD trading is never guaranteed.

Fundamental Analysis vs. Technical Analysis

In CFD trading, fundamental and technical analysis offer distinct approaches to making informed decisions. Fundamental analysis evaluates an asset’s intrinsic value by examining financial statements, economic indicators, and events to identify long-term opportunities. In contrast, technical analysis focuses on interpreting past price and volume patterns using trading charts to forecast future price movements.

CFD traders may make use of trading charts to visualise price dynamics when performing either type of analysis, or both. Fundamental analysts might look at charts to gauge market sentiment and historical performance, while CFD traders choosing to perform technical analysis could rely on them to identify trends, support and resistance levels, and technical indicators.

How Do Traders Use Trading Charts?

When trading CFDs with Plus500, traders gain access to a wide array of trading charts to make decisions about when to open and close their positions. Trading charts offer a visual representation of price movements over time, which is crucial for identifying trends and patterns.

In CFD trading, technical analysis is primarily used to predict future price movements by examining past price data and trading volumes. Traders have the opportunity to use Plus500’s advanced charting tools to identify key patterns and trends that indicate potential entry and exit points. These charts typically display price on the vertical axis and time on the horizontal axis, making it easier to spot trends and make timely decisions.

However, it’s also crucial for traders to consider fundamental news, such as earnings reports or significant corporate changes like a CEO departure. Certain market experts hold that these factors can have a more substantial impact on price movements than technical patterns. Since such events are often unpredictable, traders should balance their technical analysis with awareness of fundamental news to avoid overcommitting to technical patterns alone.

Trading Chart Types

For CFD traders wishing to integrate maximal use of trading charts into their personal strategies, Plus500 offers a wide array of options. Let's take a look at some of the key types of trading charts:

Bar Charts Bar charts display the open, close, high, and low prices for a selected time period, ranging from minutes to weeks. A vertical line represents price movements, with horizontal lines on the left and right indicating the opening and closing prices, respectively. Longer vertical lines suggest higher volatility, while shorter bars indicate less movement.
Line Charts Line charts are the most straightforward type, connecting price points with a continuous line. Typically showing closing prices within a specified time period, they highlight open, high, and low prices as well. These charts are considered suitable for beginners but may lack the detail provided by other chart types.
Candlestick Charts These charts visually represent price movements using candle-shaped figures. Green candles indicate upward movements from opening to closing prices, while red candles indicate downward movements. Each candlestick shows the open, close, high, and low prices within a specific time frame, helping traders forecast short-term price directions.

In addition to the popular charts listed above, Plus500 provides several additional chart types to cater to various trading styles and needs, such as:

Baseline Charts
Hollow Candle Charts
Mountain Charts
Colored Bar Charts
Heikin-Ashi Charts
Renko Charts
Kagi Charts
Line Break Charts
Range Bars Charts
Point and Figure Charts

You can learn more about the different types of trading charts offered by Plus500 in the “Types of Trading Charts” video and article.

Trading Chart Patterns

When using trading charts, understanding the patterns that they may reveal is crucial for CFD traders. While it's essential to recognise what a chart represents, the real skill lies in interpreting it accurately.

CFD traders rely on charts to identify trends and key price levels. An uptrend is characterised by a series of higher highs and higher lows, while a downtrend features lower highs and lower lows. Recognising these patterns helps traders determine the direction of price movements related to underlying assets.

Support This is the price level where a downward-trending asset stops falling and starts to rise. It acts as a floor, with buyers stepping in to halt the decline. If the price revisits this level without breaking it, the support becomes stronger, indicating potential buying opportunities.
Resistance Conversely, resistance is the price level where an upward-trending asset halts its rise and begins to fall. It acts as a ceiling, with sellers stepping in to stop further price increases. Persistent resistance levels may indicate selling opportunities or points to exit long positions.
Reversals and Breakout Patterns Certain repeatable patterns on trading charts can signal the beginning or end of a trend, providing potential entry and exit points for CFD trades. Reversal patterns indicate a change in trend direction. For example, if an asset in a downtrend starts forming higher highs and higher lows, it may be entering an uptrend. Confirmation of this reversal requires at least one higher high and one higher low compared to the previous trend. Conversely, breakout patterns help identify points where the price is likely to move significantly up or down.

Common breakout patterns include:

Ascending and Descending Triangles: These suggest a potential continuation of the current trend once the price breaks out of the triangle formation.
Bullish and Bearish Flags: These indicate short-term consolidations within an ongoing trend, followed by a resumption of the trend.
Pennants: Similar to flags, pennants show brief periods of consolidation followed by a breakout in the direction of the previous trend.

Understanding and applying these patterns in the context of CFD trading with platforms like Plus500 can enhance a trader's ability to navigate the markets more effectively, although in the CFD arena the risk of significant losses is ever-present.

How to Read Trading Charts

When reading trading charts, there are a few key tips they may assist you in making the connection between what you discern on and the chart and what this information means for the underlying asset you wish to trade.

Trendline Identification The trendline connects a series of price points, indicating the asset’s general direction. Identifying whether a given asset is on an uptrend, downtrend, or moving sideways can help traders make the appropriate decisions for their CFD strategy.
Support and Resistance Levels Support and resistance levels, which we delved into above, and crucial for gleaning key information regarding a CFD's underlying asset. When reading trading charts, it may be advisable to try to identify these levels when relevant to your portfolio.
Monitor Dividends and Stock Splits Dividends and stock splits can significantly impact the trends affecting share CFDs. Staying up-to-date on the management decisions that may influence a share CFD's underlying asset may be a good way to integrate the news with your use of trading charts.
Understand Historical Trading Volumes Volume, shown at the bottom of a trading chart, reflects the amount traded over a defined period. High volume during price movements may suggest positive market sentiment, and so keeping your eye on trading volumes may come in handy when reading a chart.

Benefits of Reading Trading Charts

Reading trading charts has several potential benefits for those interested in CFDs and ready to take the next step in their trading. By interpreting chart patterns and trends, traders can gain insights into market sentiment, price movements, and potential future directions. Here are the key benefits of mastering trading chart analysis:

Enhanced Market Trend Analysis: Trading charts are vital for identifying market trends. By observing patterns in price movements and volumes, traders can discern the overall direction of the market or individual assets, helping to align their CFD trading strategies with market dynamics.
Identification of Support and Resistance Levels: Support and resistance levels are crucial in chart analysis, indicating price points where an asset repeatedly stops falling or rising. These levels help traders understand potential barriers to price movement, informing decisions on when to enter or exit positions.
Improved Timing for Buying and Selling: Charts offer insights into the best times to buy or sell CFDs based on technical indicators and historical price movements. Recognizing patterns like support and resistance levels can significantly enhance trade timing, potentially leading to better returns, although the risk of losses is significant as well.
Better Understanding of Volatility: Volatility, depicted clearly in trading charts, measures price fluctuations. Understanding volatility is essential for risk management, allowing traders to tailor their strategies to match their risk tolerance.

How to Identify Trends on Charts

Identifying trends in CFD trading involves analysing chart patterns, trendlines, and technical indicators. Trends can be upward, downward, or sideways, each reflecting unique market phenomena.

To identify an upward trend, look for a series of higher highs and higher lows on the chart. Drawing a trendline along the lows helps visualise this positive movement. Conversely, a downward trend is characterised by lower highs and lower lows, with a trendline drawn along the highs. Sideways trends occur when the price moves within a horizontal range, indicating a period of consolidation.

Technical indicators like moving averages, the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD) can confirm these trends. For example, a stock trading above its moving average suggests an upward trend, while trading below indicates a downward trend.

Recognising these patterns may allow traders to make the most informed decisions in accordance with their strategy and goals, although a positive outcome with CFD trading is far from certain.

Conclusion

Mastering the reading of trading charts can be a key component of an effective CFD trading strategy. These charts provide crucial insights into price movements and market trends, aiding traders in making informed decisions. By identifying trends, support and resistance levels, and understanding volatility through technical indicators and patterns, traders can better navigate the complexities of the market. Utilising various chart types and recognising key patterns can significantly enhance trading strategies. However, it's important to balance technical analysis with awareness of news to manage risks effectively. With practice and careful analysis, traders can leverage these tools to impact their trading outcomes, keeping in mind that CFD trading carries significant risks.

FAQs

What do chart patterns mean?

Chart patterns represent recurring formations in price movements that traders use to predict future market direction.

How many types of chart patterns are there?

There are various types of chart patterns, including reversal patterns like head and shoulders, continuation patterns like flags and pennants, and consolidation patterns like triangles and rectangles.

What is the strongest chart pattern?

The strength of a chart pattern depends on market conditions, but some traders consider the double bottom and double top patterns to be among the strongest due to their indication of trend reversals.

What information is on a trading chart?

A trading chart typically displays price movements over time, with the vertical axis showing price levels and the horizontal axis representing time intervals. Additional information such as volume, indicators, and patterns may also be included.

What should I be looking for on the trading chart?

When examining a trading chart, focus on identifying trends, support and resistance levels, chart patterns, and volume, as these factors can provide valuable insights into market sentiment and potential price movements.

What is the most important indicator when reading a trading chart?

The most important indicator often depends on the trader's strategy and preferences, but commonly used indicators include moving averages, Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD), each providing unique insights into price dynamics and trend strength.