Reading Charts

Before any pattern makes sense, a single candle has to make sense, because every pattern is really just a handful of these stacked next to each other and read as a group. Four numbers, one shape Same four numbers, two outcomes. Teal closes above open, red closes below it. Each candle covers one fixed slice of time, a minute, an hour, a day, whatever the chart is set to, and it’s built from four prices: the open and close, which set the top and bottom of the solid body, and the high and low, which set the thin wicks above and below it. If the close finishes above the open, the body is teal on this site’s charts; if it finishes below, it’s red. The colour is just a shortcut for which of those two numbers won. ...

Look closely at a single candle and you’re looking at a compressed little history of everything buyers and sellers did to each other over that stretch of time. The open tells you where the argument started, the close tells you who was left standing, and the wicks show you the ground that got fought over and lost. Once you can read that shape properly, the name attached to it stops mattering very much, though the names still help, if only so you’re not at sea when someone mentions a “shooting star” on a chart. ...

The same price data can be drawn three completely different ways, and none of them are wrong, they just show different amounts of the same story. Three views of one move Same six bars of price data, drawn three ways. A line chart plots one number per period, almost always the close, and connects them into a single continuous path. It’s the cleanest view for spotting a trend at a glance, but it throws away everything that happened inside each period. A bar chart brings that back: a vertical line for the high-to-low range with small ticks for open (left) and close (right), giving you the full range plus direction without a solid body to look at. A candlestick chart carries the same information as the bar chart, high, low, open, close, just drawn with a filled body between open and close instead of ticks, which is why the body and wicks read faster at a glance than a bar chart’s ticks do. Most traders end up on candlesticks for exactly that reason, though the underlying data is identical either way. ...

Support and resistance are simply the levels where price has reacted before, on the working assumption that where the market cared once, it’s likely to care again. It isn’t a law, but it’s a strong enough tendency to build a plan around. What a level is Resistance sits above current price, where sellers previously showed up in enough size to turn the market back down, while support sits below, where buyers did the same thing on the way back up. Neither is really a single price so much as a zone, bounded roughly by the wicks that tested it and the closes that respected it. Ask the market to bounce off an exact line to the pip and you’re asking for more precision than it usually offers. ...

A trendline is just a line connecting two or more swing points, but drawn carelessly it can be made to say almost anything, which is exactly why so many of them turn out to mean nothing at all. Wicks or bodies as the anchor A downtrend line connects a series of falling swing highs, the same way an uptrend line connects rising swing lows, but a single line through two points isn’t proof of anything yet, it only starts to mean something once price returns to it and reacts a third time. Two points can always be joined; a third touch that holds is what suggests other traders are watching the same line you are. ...

Every indicator is derived from price, not separate from it, and knowing what maths is running underneath one changes how much weight it deserves on your chart. They’re all just price, transformed A moving average smooths price into a lagging line. Useful for context, always a step behind. A moving average takes the last N closes and averages them, which smooths out the noise but means the line is always describing where price has already been rather than where it’s heading. An oscillator like RSI takes recent gains and losses and turns them into a bounded number, so it can flag when a move looks stretched, but it’s still built entirely from the same closes a chart already shows you. Nothing an indicator displays is new information; it’s existing price data run through a formula to make one property of it easier to see at a glance. ...

Price tells you what happened; volume tells you how much conviction was standing behind it, and read together they say a great deal more than either one alone. Volume as conviction A price move accompanied by a clear jump in volume, then a fade back toward normal on the smaller candles that follow. ...