The day trader’s main working tool is the chart or graph. As you start trading, you first need to learn how to read charts. A chart’s function is to present a stock’s price history to help you determine the stock’s future direction. Think of it as a financial crystal ball in which there is no present, and only the past exists. A nanosecond beforehand is already the past, a second forward is the future.
When deciding whether to buy or sell a stock, you cannot be satisfied with only the current price. You must review where that price came from before you can decide which direction it is heading. For example, you need to know the price at which sellers stopped its rise in the past (resistance lines) and at which buyers saved it from crashing (lines of support). Learning how to read stock charts, will help you determine how the stock will behave in the future, and at what prices certain actions might occur.
Day traders use as many charts as their computer monitors allow to follow the various stocks, sectors, and important market indices.
Day Traders Learn How to Read Stock Charts for Varying Intervals over One or More Days
Day traders most frequently use “daily charts” and “intraday charts.”
Daily charts are those that display data in one-day intervals of time. They are used by day traders to examine a stock’s daily behavior over periods of several days, weeks, or even months. For example, a daily chart for the months of June and July would include 61 data points, with each point representing one day of trade during the two-month period.
Intraday charts display data in much shorter intervals, such as five or 15 minutes. They are used to examine a stock’s “within-the-day” behavior over periods of just one or a few days.
Traders also can create “weekly charts” that display data in week-long intervals over periods of months or years.
When You Learn How to Read Stock Charts, You Learn How to Trace the Tug-of-War Between Buyers, Sellers
These charts give day traders a look deep inside the market and the ability to trace the price changes, which are the outcomes of the constant tug-of-war between buyers and sellers. Stock prices do not rise or drop coincidentally. This is a “war” of control over money and power, with victory going to the person who makes the best decisions based on the information at his or her disposal.
Even a person with vast experience in the capital market will find it challenging at first to understand the logic behind intraday stock trading. Those with insufficient experience might be tempted to limit their understanding and analysis to the weekly or daily charts. But, in fact, intraday live trading does have its logic, and plenty of it. The more screen-time experience you gain, the better you will understand what drives the bears and bulls influencing the stock. The more you become acquainted with intraday logic, the greater your self-confidence will grow. Soon enough, you, too, will want to join the war.
Every move the day trader makes, whether buying or selling, is based on a set of repeating chart patterns, and on outcomes that represent the trader’s evaluation of the war’s progress as plotted on the chart.
Several accepted norms exist for presenting prices on charts. Different traders choose different methods, but most of them, especially day traders, almost exclusively use the “Japanese candlesticks” method, which will be discussed in another topic.