Lesson 5. Working with Graphs

In this lesson, we will address the following questions:

1. Why do we need charts and what do they show us?
2. Candlestick charts – How can we read them?

1. Why do we need charts and what do they show us?

Quote charts are necessary to display information about the price change dynamics of an investment asset over a certain period of time.

Live charts are published by many different sources. You can find analytics from brokerage companies, banks, information sites, or specialized software.

How to read a candlestick chart

The most common type of analytical charts is based on Japanese candlesticks.

Each candle has certain parameters according to the aggregate of which traders choose the best moments to open and close deals.

1. Opening price.
2. Maximum price movement.
3. Closing price.
4. Minimum price movement.
5. Shadows (“wicks”).

The body of the candle is the gap between its opening and closing prices.

• If the closing price of a candle is higher than the opening price, then the candlestick is green.
• If the closing price is lower than the opening price, then the candlestick will be red.

Each candlestick represents a certain period of time (or “timeframe”) between its opening and closing.

2. How to read Japanese candlesticks

To understand the situation on the market, you need to imagine price movement as a battle between bulls and bears, or, in other words, between buyers and sellers.

When buyers outperform sellers (there are more bulls than bears), then the buying demand becomes higher and the price rises with it. The price will continue to grow until it becomes attractive to sellers.

If there are more bears, then the price will fall until the balance between bulls and bears is restored.

The wider the gap between bears and bulls, the more dynamically the market moves.

An equal level of buyers and sellers on the market leads to a balance that is known as a flat.

Trades centered around the movements of asset prices are based on the ratio of the strengths of bulls and bears.

Candlestick patterns

Trading decisions are generally made after a candlestick pattern has been detected. There are many types of candlestick patterns.

Spinning top

A candle of any color with a small body and large shadows. A spinning top on the chart indicates market uncertainty. When a spinning top appears, you should expect sudden movements in the asset price and not make any decisions.

Doji

Dojis are unique candlesticks. Its opening price is equal to the closing price. In most cases, dojis indicate a reversal of the price movement.

Marubozu

Marubozus are candles without shadows. Its opening and closing prices are the maximum and minimum points for the selected time interval, respectively.

Line Chart

Line charts connect the closing prices for a specific period and provide an overview of trends. They are the simplest, but least informative way of displaying quotes.