5 chart skills to help you avoid pitfalls in trading

Reading trading charts is a fundamental skill in trading. From beginners to experts, the difference lies in the depth of understanding of the charts. Today, let’s talk about those seemingly simple yet crucial secrets of chart analysis that can determine success or failure.

Three Types of Charts, Each with Its Purpose

trading charts mainly come in three types, each telling a different story.

Line Chart: The Weapon for Spotting Major Trends

The simplest and most straightforward—only connecting closing prices. Suitable for traders who don’t want to be overwhelmed by details and just want to see the direction clearly. Want to buy the dip or sell the top? This chart won’t help you. But if you want to understand the market trend over the past year? It’s your good friend. Long-term investors often use this because it has less noise and clearer trends.

Bar Chart: The Choice for Detail-Oriented Traders

Bar charts show everything—opening price, high, low, and closing price, all in one. Essential for swing traders and intraday traders. Each bar is like a little story, showing how buyers and sellers are competing during that period. By observing the length of the bars and where the closing price is, you can feel the market’s strength.

Japanese Candlestick: The Most Popular Chart

Candlesticks are traders’ favorites. They pack four price points (open, high, low, close) into a single shape, and can also convey sentiment through color and shape. A green candle indicates buyers won; red shows sellers are in control. The upper and lower shadows tell you how much disagreement there is in the market. That’s why candlesticks are so useful—they contain a high density of information, allowing you to read market psychology at a glance.

How to Make Money Using Charts

Knowing what charts look like isn’t enough; the key is to use them for decision-making.

Observe Cycles, Choose Strategies

The same coin, a 1-hour chart and a daily chart tell completely different stories.

• Hourly Chart: Suitable for traders who want to enter and exit quickly. Frequent fluctuations, many opportunities, but also higher risk.
• Daily Chart: For those who focus on trend analysis. Less noise, more reliable signals. A genuine buy signal is valuable.
• Weekly Chart: The domain of long-term investing. Reversals on weekly charts often indicate major turning points.

Many professional traders operate this way: look at the weekly chart for direction, confirm entry on the daily chart, and refine the timing on the hourly chart. Multi-timeframe analysis can significantly improve win rates.

Use Technical Indicators in conjunction

Moving Averages (MA)

Moving averages are straightforward—they calculate the average price over a period. 5-day, 10-day, 30-day, 60-day MAs each serve their purpose.

When a short-term MA crosses above a long-term MA (e.g., 5-day crossing above 10-day), it’s called a “Golden Cross,” usually indicating upward momentum. Conversely, a “Death Cross” suggests potential decline. This signal is especially effective in crypto markets because of rapid price changes and responsive MAs.

Relative Strength Index (RSI)

RSI measures price momentum. Readings above 70 suggest overbought conditions; below 30 indicate oversold.

In practice, many traders buy when RSI drops below 30, aiming to catch bottoms. But be cautious—don’t rely solely on RSI; always check the price chart. If the price is rising while RSI is falling, it’s a warning sign of potential reversal.

MACD Indicator

MACD is the difference between two moving averages. When the fast line crosses above the slow line, it’s a buy signal; crossing below is a sell signal.

Many traders use MACD’s Golden and Dead Crosses to determine entry points. When combined with candlestick patterns, this indicator’s success rate increases.

Bollinger Bands

Bollinger Bands act like a “price range.” When prices touch the upper band, they may pull back; when they hit the lower band, they might bounce.

Persistent trading near the upper band indicates high market heat; near the lower band suggests potential rebound opportunities. Many traders use Bollinger Bands to decide when to take profits or cut losses.

Common Pitfalls in Chart Analysis

1. Overtrading: The more charts you look at, the stronger the urge to trade. Not every signal is worth acting on.
2. Ignoring Higher Timeframes: A daily chart looks good, but if the weekly chart is in a downtrend? Likely to be a trap.
3. Too Many Indicators: Using more than five indicators can cause contradictions. Simple, effective indicators are usually best.
4. Ignoring Volume: Price rises without volume support often lead to short-lived rebounds.

Summary

Mastering trading charts involves:

• Choosing the right chart type for yourself
• Adjusting strategies based on trading cycles
• Using indicators for confirmation, not letting them dominate
• Remembering that charts are tools, and discipline is the key to success

Look at charts more, practice more, and summarize more. Your ability to read charts is like driving—more experience makes you more intuitive. Soon, you’ll be able to read the market’s pulse from numbers and lines.