Using Charts To Trade CFDs
The most successful traders will always use charts to help them execute their day-to-day trading tactics and strategy. Although they might look complicated to the beginner it doesn’t take long to understand the basics.
It’s important when choosing a CFD provider that you check whether they offer a charting package as this will brings benefits in the long run.
Types of Chart
Line charts of often used to depict the overall direction of a market but they can be limiting to the expert day trader as they only show one piece of trading information, which is normally the closing price.
Bar charts are more popular among traders as they show a range of trading information usually the open, high, low and close price for an individual day or period of time. With the inclusion of the open and close prices traders can easily identify an upward or downward bar which indicates whether the instrument finished higher or lower on the day. These bars can be colour coded for ease of identification.
Candlestick charts are very popular with day traders too as they also include the opening, high, low and closing price for the day or period of time in question. The candlesticks themselves are colour coded, sometimes green and red, sometimes black and white. They’re easy to spot as yes they look like candlesticks; the open and close price is depicted by a vertical coloured rectangle (the candle) and the high and low prices are depicted by vertical lines (the wick). If a market closes up on the day – or within any specified time frame – the rectangle of body of the candle is usually white or green and if it closes down it is black or red. Thus candlesticks are a very good visual aid for traders wanting to make quick decisions on the current nature of a market.
The Importance of Recognising Patterns
While it can be relatively easy to make an educated trade and be successful, for serious long-term success it’s always best to learn how to develop a trading strategy. One of the tools that will help you do this is by using pattern recognition in charts.
Financial markets, like humans, tend to be cyclical and it’s important for sustainable success at day trading to get used to spotting short- and longer-term patterns in your chosen market.
Reversal patterns suggest that a general market movement might be coming to an end and that prices may change direction – an example of a reversal pattern would be a double top or a double bottom . While a continuation pattern will point to a short-term blip in behaviour and that the financial instrument will eventually continue its existing trend – these usually take the form of flags, wedges and pennants. Sophisticated financial markets charting software will spot these patterns for you and alert you when they occur.