Chapter 4. Technical Analysis in Depth
Types of Charts in Technical Analysis
Although trading binary options can be as simple as choosing between call or put options, making stronger trades calls for an understanding of the market and this requires some skills in analyzing technical analysis. Price charts are graphical depictions of historical prices. By plotting prices on charts, a trader can have a bird eye view of the market. Trends can be better analyzed and compared to the timeline. Take note that even the well analyzed charts without a complementary fundamental analysis is far from robust.
Most binary option brokers will offer their clients their own trading charts for the assets traded. For example, by looking at the chart of a binary option for the previous few hours, you can see where its high point and low point are. This will give you a rough indication where your support and resistance level should be. Nevertheless, they usually do not offer a fuller picture of the market but rather just a snapshot of a particular time frame. Learning about the different types available at your disposal is the first step towards being a better trader. Some of the main types of chart that you will regularly come across are:
In essence, bar charts are just a visual aid. Prices are plotted against the time factor in the form of bars on the chart. The bars on the chart can be used to represent just five (5) minutes of trading or the entire day’s trading activity. With a bar chart, trader can study the highs, lows, open, and close (HLOC) of an asset.
Line charts, although being the simplest, are popular among trades as they are extremely easy to understand. They are normally plotted based on time or volume. However they do have some limitations as to the amount of information that they can display. Long term investors will find line charts adequate as precise information are not required. Short term investors like binary options traders would mostly likely prefer bar charts or candlesticks charts as a higher level of detail is needed to evaluate the market.
This type of chart looks like candlesticks. They are highly detailed and are worth learning despite their complexity. More information about candlesticks chart can be found later in the following chapters of this guide.
Charts can also be plotted based on:
- Time vs. Price
This is one of the simplest types of charts. Assets prices are just plotted against a timeframe in the form of a histogram, bar charts, line chart or candlesticks.
- Volume vs. Price
As their name suggests, these type of charts compare volume traded against the price of the asset. They allow the day’s trading activity to be condensed in just a few plots on the chart ensuring that traders are not overwhelmed by information overload.