Analyze a trading chart
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- 1 # Identify a continuation of the market
- 2 # Build a solid price structure
- 3 # Follow the signals in real time on the chart
- Conclusions on How to analyze a trading chart
Before trading it is necessary to analyze the chart of the underlying you want to work on. For a truly effective technical analysis, the system is always the same: starting from a general level up to the particular, with a detailed analysis on different points and not only in terms of timing, which I have often discussed.
In this article I open the discussion on a fundamental topic if you want to become a true technical trader : what are from my point of view the 3 steps to follow to analyze your chart before opening each trade.
Analyze a trading chart
Analyzing a trading chart is not a quick and easy thing as it is often incorrectly indicated by the sponsors of brokers, intent only on grabbing the money of aspiring traders or novice traders.
To analyze a trading chart effectively, you need a real process to be followed constantly before opening any operation on the financial markets.
This is because you only have to trade if :
- the odds in your favor are high;
- the risk per trade is low and measured;
- the risk / return ratio always hangs on the side of the second parameter.
Graphical analysis is therefore the first approach to facilitate these three elements.
We often talk about analyzing a chart before trading, but what are the steps to follow to do it effectively?
As for me, the 3 essential steps that must be followed for an effective technical analysis , before therefore understanding if you can enter the market with a limited risk, are the following:
- Identify a continuation of the market.
- Building a solid price structure.
- Follow the signals in real time on the chart.
Now let’s see what each step means.
1 # Identify a continuation of the market
The right question to ask when you open the chart is not so much “ Where will the price go? “, But” Where is the price going? “.
The difference is as trivial as it is ignored: you cannot predict the future .
If you ask yourself the question “ Where is the price going? ”, It means that you are in the present moment and, with an eye towards yesterday, looking for a continuation of any movement, whether lateral or in trend.
Know that the price always moves in 3 different directions, which are not simply horizontal and bearish and bullish trends, but:
- in a continuation , in about 70% of cases, that is, the price continues what it has done previously and what it is already doing at the present moment;
- in an uptrend , in about 15% of cases, that is, the price starts an upward trend after an inverse continuation movement (bearish + lateral phases), then makes a sort of inversion or change of direction;
- in a bearish trend , in about 15% of cases, ie the price begins a downward trend, also in this case making a change of direction with respect to the previous continuation.
They are indicative percentages, because each market has its own peculiarities, in addition to the fact that the price moves differently if it is in a bullish or bearish trend.
For example, if we are in an uptrend, the percentage of continuation rises to 75%, with 15% of further more important bullish movements, we arrive at a 90% probability that the price will continue to rise , while only 10% that you start to go down.
If, on the other hand, we are in a bearish trend, the percentage of continuation even rises to 80%, with the usual 15% of other more important bearish movements, we arrive at a 95% probability that the price will continue to fall , while only 5% that you start to rise.
Isn’t that amazing? If you are always looking for a continuation of a trend, you are right at least 85% of the time and this, mathematically, helps your long-term online trading.
Now you ask yourself: and the lateral movements, such as congestion and trading range , where have they gone?
Lateral movement is always a continuation or ending of a certain larger movement. To be right in most cases, you always have to look at the whole. And to do this, the study of medium-long and then short-term structures helps us.
2 # Build a solid price structure
In online trading there is no mathematical certainty that our trades always go as calculated. This is why, through graphic analysis, we must always find the right points where structurally a breakthrough can take place, on which we can apply our techniques.
Creating a structural scaffolding on our chart allows us to take advantage of the positive probability that an event can actually occur on a certain pre-calculated level.
As I said, mathematical certainty does not exist with any trading strategy and if someone tells you otherwise to sell you their product, then run away. What we have to calculate with the techniques we use is the greater probability that the event studied will occur.
To do this we need to build the structure of each graph we analyze.
Therefore, highlight the support and resistance levels , channels, trend lines and everything we see on the chart, to actively participate, when possible and our plan foresees it, in the rebounds and emotional races caused and organized by those who actually moves the market.
The structural evidence of a graph is often not deceiving, especially over large time frames. And if you know how big capital moves on these structural levels, you are right, at least for 80% of your operations and it is really a great result knowing that, with good money management , even only 30% of the operations are enough. positive to be profitable in the long term.
I therefore advise you to definitively give up the opinions of others on the markets you follow and learn how to build a solid structure of your trading chart.
Remember that simplicity pays off most of the time. Don’t complicate your life, let alone your online trading.
Below I will list some more complex structural levels of simple static supports and resistances, from which you can start your trades:
- channels and trendlines;
- closing the day before;
- closing and opening of stock market sessions;
- other times such as the midday level for some underlyings;
- maximum and minimum period;
- personalized pivot points ;
- gap and microgap;
- complex levels calculated with Levels ;
and many more.
You don’t have to use all of them and you don’t have to fill your chart with imaginary lines , because none of them will ever stop the price. However, you must choose one or a little more, suitable for the markets you follow and be able to recognize them and apply them if necessary, in order to improve the probability of success of your actual trades.
Given the vast topic that cannot be covered in a single post, I will soon delve into this aspect and the others of these 3 essential steps, with further articles.
These are not techniques for their own sake, but only a starting point on which to apply the real strategies, the ones that everyone likes because they are part of the last phase, the operational one, from which the trades actually start.
3 # Follow the signals in real time on the chart
In order for your strategy to bear fruit, the signal alone is worth nothing without the other 2 aspects.
The trading signal is an element that, when manifested on a structure and in the direction of a continuation, simply tells you that you can enter the market. If it manifests itself instead without a structure and a continuation, it has no value, indeed in such cases it often tells you the inverse of its meaning.
Many common trading signals fact often occur even in empty areas of the chart, without structure and without a real continuation or reversal, that signal will almost certainly tell you that the big money they want to make a clean sweep of many orders. So the price will fake one direction, and then go the other way.
Instead, we are interested in a signal that gives us a way to have a low risk and the only way is to associate it with the other elements already mentioned above.
The trading signals are given by:
- candle analysis;
- analysis of indicators;
- price action analysis.
In the first case, it is the simple formation of graphic patterns formed by one or more candles (example: head and shoulders ). In the second, however, it is a question of exploiting once again the mathematical and statistical calculation of the price . In the latter case, we must take into account what the naked price does, without masks (example: the speed and systematic nature of the price during a stop hunt).
Conclusions on How to analyze a trading chart
All, or almost all, the strategies you study on blogs and often also on the most popular trading books , tell you how this last phase works, without mentioning the previous ones. You will therefore find many techniques, also in this blog, which analyze candles, indicators and the naked price to enter the market in a very superficial way.
I’ll give you some examples: the doji bar technique, the inside bars.
My advice is to start understanding how the first phase works first, and then gradually move on to the second and finally to the third that you know a lot more for sure.
Obviously this is just the tip of the iceberg to learn how to analyze a trading chart in more depth , but I intend to slowly share every aspect in this blog, hoping it will be useful to you.
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