GET Financial Education Series - Futures
Charting Basics – Lesson 6
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Just as James knows he has to start with the basics in his karate class, he also knows he has to start with the basics as he learns about technical analysis and how it can help him as a Futures trader.
Charts are one of a Futures trader's best friends. You will probably spend more time using your price-charts as a Futures trader than you will any other trading tool. Since your charts are going to play such a large part in your trading it is imperative you become familiar with them. The more comfortable you are with your charts, the easier it will be to become a successful Futures trader.
To help you become acquainted with your charts, and how you can effectively use them, we will cover the following concepts:
- Chart setup
- Chart time frames
- Chart types
We will discuss the incredible technical indicators that you can add to your charts to improve your trading results in a later section. Take the time now to learn them so that you will be ready for more advanced material later.
Chart Setup
Let's start from the very beginning and take a look at how a Futures price-chart is set up. Once you understand the basics you will be much more successful in applying more advanced concepts to your technical analysis.
Futures price-charts (see Figure 1) are built on two axes - the X axis (the horizontal axis) and the Y axis (the vertical axis).
Figure 1 - Basic Chart Setup
The X axis runs horizontally along the bottom of the chart, providing a timeline for everything that has happened on the chart. The most recent price action is shown on the right side of the chart and the earliest price action is shown on the left side of the chart.
The Y axis runs vertically along the right side of the chart, providing a price scale for the price movement on the chart. Lower prices are shown towards the bottom of the chart and higher prices are shown towards the top of the chart.
When you put the two axes together you can see a price at a particular time in the past. For example you can see that gold was trading at $890 on 2 April 2008 (see Figure 2).
Figure 2 - Identifying the Date and Price
Chart Time Frames
Get Financial charts give you the ability to analyse the price movement of your favourite Futures contract utilizing timeframes giving captured data on anything from a minute-by-minute basis to a month-by-month basis. You have the flexibility to choose which timeframe is best for you.
If you are a shorter-term trader you will want to use shorter timeframes for your charts. If you are a longer-term trader, you will want to use longer timeframes for your charts. For example a trader who is looking to quickly jump in and out of trades for 10- to 20-pip profits would most likely want to be watching a 1-minute or a 5-minute chart. Yet a trader who is looking to hold onto trades for a longer period of time to take advantage of larger price moves would most likely want to be watching an hourly or a daily chart.
Some traders even choose to use multiple timeframes so that they can see how the movement of a Futures contract looks from various points of view. We will discuss this concept in detail within a later section.
To change the timeframe on your chart to best match your trading style you should click on the button at the top of the chart. A drop-down menu will appear and you can select your preferred timeframe (see Figure 3).
Figure 3 - Chart Time Frames
Chart Types
GET Financial charts give you the ability to analyse the price movement of your favourite Futures contracts in various formats, from line charts to candlestick charts. You have the flexibility to choose which format is best for you.
Technical analysis is a visual and almost artistic skill that traders develop, and different traders like to practice their art on different types of charts. Some traders feel that they can see and analyse support and resistance levels better on a line chart, whilst other traders feel that they get more information on price movement on a bar chart or a candlestick chart.
Technical analysts tend to gravitate toward the following three chart types:
- Line charts
- Bar charts
- Candlestick charts
Line Charts
Line charts are the most basic type of chart. Technical analysts often use line charts to easily identify support and resistance levels. Line charts only have basic information plotted on them, which means there is not a lot of other 'clutter' to get in the way of your analysis.
You create a line chart by plotting the closing price of each trading period on a chart and then connecting each closing price with a line. You can see an example of a line chart below (see Figure 4).
Figure 4 - Line Chart
Bar Charts
Bar charts provide more information than line charts. Technical analysts often use bar charts to evaluate more information about how a Futures contract's price moved up and down during each trading period. Whereas line charts only plot the closing price from each trading period, bar charts plot the opening, high, low and closing prices from each period.
You create a bar chart by plotting a series of bars across the chart. Each bar represents one trading period. To create a bar you plot the high and low price of a trading period and connect them with a vertical line. Next you plot the opening price out to the left side of the vertical line you have just drawn and then connect that point to the vertical line with a horizontal line. Lastly you plot the closing price out to the right side of the vertical line you have just drawn and then connect that point to the vertical line with a horizontal line (see Figure 5).
Figure 5 - Price Bar
Seeing where a Futures contract started the trading period compared to where it ended the trading period can help you to more easily identify trends. If the price closed higher than it opened you know investors were bullish on the Futures contract during the trading period. If the price closed lower than it opened then you know investors were bearish on the Futures contract during the trading period.
You can see an example of a bar chart below (see Figure 6).
Figure 6 - Bar Chart
Candlestick Charts
Candlestick charts provide the same information as bar charts but in a slightly different format. Technical analysts often use candlestick charts instead of bar charts because it is easier to see and identify various trading patterns using candlestick charts. In fact a complete line of technical analysis - Japanese candlestick-chart analysis - was developed around these easy-to-use charts.
Cut Outs
Candlestick analysis was developed during the 1700s in Japan. Traders in the Japanese rice markets would use candlestick analysis to help them make more profitable rice trades.
You create a candlestick chart by plotting a series of candlesticks across the chart. Each candlestick represents one trading period. To create a candlestick you plot the high and low price of a trading period and connect them with a vertical line. This line is called the wick of the candle. Next you plot the opening price by drawing a horizontal line through the vertical line, or wick. After you have plotted the opening price you plot the closing price by drawing another horizontal line through the vertical line. Lastly you fill in the area between the opening price and the closing price. This area is called the body of the candlestick (see Figure 7).
Figure 7 - Price Candlestick
Seeing where a Futures contract started the trading period compared to where it ended the trading period can help you to more easily identify trends. If the price closes higher than it opened you know investors were bullish on the Futures contract during the trading period. If the price closes lower than it opened you know investors were bearish on the Futures contract during the trading period.
You can see an example of a candlestick chart below (see Figure 8).
Figure 8 - Candlestick Chart
Chart Setup
