Trading Basics For Beginners

In this installment, we’ll cover the most important aspect of trading: technical analysis. Essentially, we’re going to respectively take you on a deep dive into line charts, bar charts, and candlestick charts. I’ll show you how each work, what they’re best for, and the pros and cons of each. I think you’ll find there’s something of value for every type of trader, no matter your experience level.

“The combined experience of art and science makes your success in trading.”

Performance Analysis: A Blend of Art and Science

Let’s start with a high-level explanation of why you need to learn technical analysis. It’s essentially a combo of art and science. We’ll cover the science, the back testing, the statistics, and the academic research that have been conducted on trading. But remember, not everything can be done by numbers alone. How you interpret a market chart can be subjective and may be different from how others perceive it.

Line Charts: The Basic Tool

Line charts are your initial stepping stone. Essentially, they connect the closing prices of a security over a given time. Pros of using line charts include:

• They’re easy to read
• The price direction is clearly shown
• You can easily spot patterns

However, a major con to line charts is the lack of detailed data. Line charts only show the closing price, not the full range of trading action during the day.

You should use Line charts to clearly see the price direction over time. However they lack detailed data in between the closing prices.

Bar Charts: A Step Up

In comparison to line charts, bar charts are slightly more complicated but go the extra mile in providing useful information. A bar chart adds data of opening price, highest price, lowest price, and closing price for each trading period. Each bar represents a specific period- a day, an hour, or even down to a minute. More pros and cons include:

Pros

• Fairly clean
• Provides High, Low, Open, Close (HLOC)

Cons

• Hard to spot up or down days quickly
• Misses powerful candlestick patterns

Japanese Candlestick: The Detailed Analysis

Stretching back hundreds of years, the Japanese candlesticks method is a perfect blend of art and science. They offer visual variety, making it quicker and easier to discern important information in a snap. Pros and cons of Candlestick charts include:

Pros

• Easy to read
• Gives short-term trading signals
• Provides a wealth of data

Cons

• Can be visually complex
• There’s a learning curve involved

Candlesticks were developed in the 18th century by Japanese rice traders to analyze price patterns. Candlesticks provide more data than line and bar charts.

So that sums up our basic guide to fundamental chart types. Mastering these three types of financial charts can provide you with the fundamental analysis tools you need to make informed trading decisions. Do remember, there’s no right or wrong answer in trading. Just like our journey, it’s full of uncertainties, gray areas, and the thrill of success.

Head over to our next lesson where we will dive into learning various candlestick patterns. And keep practicing! Remember, it’s a bit like being a doctor. Mastery takes time and patience, but the reward is worth it.