From the November 01, 2011 issue of Futures Magazine • Subscribe!

The basics of reading charts

If you are looking to enter a position and stay in it for an extended period, then a longer bar duration is probably better. But, if you are a day trader, then a shorter bar duration probably will suit you better. It’s important to find what bar length you are comfortable with in making trading decisions.

Even if you are a longer-term trader, there may be times you will want to look at a shorter timeframe. "Events don’t follow a 24-hour calendar. Events come out at specific times of day and in order to judge the importance of those events, you really want to see something intraday. A perfect example is payrolls," Rockefeller says.

It usually is necessary to look at multiple timeframes to get a read on a market. Often a trader picks a direction with a longer-term chart and then pinpoints an entry with a shorter-term chart.

Pattern recognition

Charts can be a powerful analytical tool because they can make it easier to identify long- and short-term trends, or the lack of a trend. Further, historic data allows you to identify levels of support and resistance, areas of price consolidation and areas of high volatility.

Charts excel at making trends recognizable both because the human brain naturally shines at picking out patterns and because a number of simple indicators have been developed to assist in this area (see "The trend(line) is your friend," below). "Charts provide a visual representation of trading activity and trendlines can be added to charts to see them more clearly," Russell says.

One of the simplest ways of visualizing this is hand-drawn trendlines. Burke says that although hand drawing trendlines is pretty simple, if you asked 10 traders, each probably would have a slightly different approach. Nonetheless, he recommends looking for small retracements against the current trend and drawing your trendline between those retracement points.

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