Trading Price Action
There are multiple ways to manipulate market data into a graphical format as a chart type. The most common is the standard bar chart. This consists of a line connecting the high and low price, with a small mark placed on the left for the open and the right for the close. Each bar represents whatever specific time frame the trader is interested in studying, and generally ranges from anywhere between 5 minutes to 1 month. Often below the price chart analysts will plot volume and, for futures, open interest. In order to understand how to succeed in trading price action successfully, it is imperative that one realizes one indisputable fact. That is a chart is not the market, it is a graphical representation of the market. All the different ways to massage price data into a chart is an attempt to provide the trader a better picture of market conditions. This is done in an attempt to to get an “edge” on everyone else.
Trading Price Action
How to read trading charts is a case in point. The basic difference between the standard bar and candlestick is that a rectangular box is drawn between the open and the close. If the open is below the close the box is colored white or green, if above black or red. This rectangular box is called the real body. The thin lines above and below the real body are referred to as the shadow. The difference between a standard bar and a candlestick is that the area between the open and close is expanded and filled in. The color shows which way the market opened and closed. While that information is also provided in a standard bar, the color and body makes it easier to trade price action.
Another interesting variation of the standard bar is called a range bar chart. In this variant time is not a component. Rather each bar is of equal size. A new bar only begins when the current range equals the previous one. Another interesting modification to price data is the the market profile chart. In this format price is presented into two dimensions.
That is, in the market profile chart, there are two components to price plotted against time. Each set of letters/colors represent one time period just as in a standard bar, in this example 30 minutes. These 30 minute time frames are then grouped into a larger conglomerate of time, in this case 1 day.
Understanding how to read trading charts is an important component in in trading price action. In future posts we will delve into a more in depth discussion of the different varieties available to traders.