The Importance of Charts in Trading

Getting started in trading can seem like a daunting task. The odds are certainly stacked against you but that doesn’t mean you will not be successful. The only way to set yourself up for success is by coming up with a trading plan. This includes such information as what type of investment you will be trading, what form of analysis, timeframe, risk management, etc. These are important guidelines that you must set up before you start trading. However, this article will be focusing on charts and their potential role in your trading strategy.

Firstly, a trading strategy that primarily uses charts is considered to be a trading plan that focuses on technical analysis. Charts are important because they can tell you where the price has come from and where it could be heading in the near term and long term. However, there are a number of different types of charts, which could have some new traders asking, “Which chart is right for my trading”?

Charts are broken up into timeframes. There is a 1 minute, 5 minute, 15 minute, 30, 45, 60, 90, Daily, Weekly and Monthly. For the most part, unless you are day trading, you will be using primarily daily and weekly charts because they are the most popular timeframes and the most widely used. However, as your trading progresses, you can use faster charts to determine the intraday trend, which could lead you to better entry and exit points in your investment. This is key because it can give you an extra little bump in your overall return.

To provide an example, if you are using the daily and weekly charts, always look at the weekly first. The reasoning is because you get the overall longer term trend right and you move to the daily to find an entry point that works well with your trend findings from the weekly. Think of the weekly chart as your strategy chart and the daily as your trading execution chart; where you decide to place trades. Getting into a habit of doing this can help save you from big losses down the road. If the daily is showing bullish signals but the weekly is showing bearish, wait for the daily to turn bearish before you place a trade. That way, there will be less of a chance of the trade going against your position resulting in a loss.

Prof. Binary’s Trading Tip:

Unfortunately Binary Option Brokers provide charts just in a very poor quality. The charts are not suitable for advanced trading and chart analysis and you have to find another resource if you take this business serious. A good and simple solution is a free eToro demo account. eToro is one of the biggest Forex brokers in the world and the broker offers an advanced charting tool including real time quotes even for demo traders. Please note that trading involves risk.

A lot of new traders ask me what kind of indicators I use for my charts when I am trading. Honestly, it is simply personal preference but moving averages, stochastics and MACD are the basics that you should start off with to get comfortable. Once you feel that you have a good understanding of these indicators and you can easily identify trading signals, move on to other indicators such as the ADX, Commodity Channel Index, etc. It is important that you not jump the gun and overload your charts in the beginning. Remember, a clean chart is easier to identify trading opportunities.

The disadvantages of using charts are over-reliance, not understanding the charts, take time to learn and not all that easy for beginners. Beginning traders tend to rely too much on the charts, which can get them into trouble. Remember, it takes time to learn the trade set ups and how to incorporate charts into your trading strategy. It is always recommended that new traders open a “paper” trading account that allows you to place trades but not risk your own money. This will help you painlessly get past the learning curve involved in trading.

The bottom line here is that learning a new strategy takes time. Charts are a very useful tool and a key to success in trading but if you are not properly educated on their use, it could lead to some key popping losses. Educate yourself, open a paper trading account and begin to slowly use charts to trade and see how you do. If after a few months your record is satisfactory, you may be ready for the real world of trading.

This is also a good article at Tradefair.