Reading Stock Charts for Day Trading
There’s a big difference between learning to read stock charts for your long term investments, and the stock charts that day traders use to make their trades. A day trader has to take advantage of the small movements a stock makes during the day. The stock charts you might be used to are only plotted according to the closing price at the end of the day. This is not a sufficient amount of information for a day trader. He requires a whole different type of chart, uses a shorter time frame, and requires an additional indicator that you wouldn’t need for long term investments.
This different type of a chart used by a day traders is called a Chinese candlestick chart. When day traders learn how to read stock charts, this is the type of chart they learn. It has this name because each plotted point has the appearance of a candlestick with the ends of the upper and lower wicks being the extreme highs and lows during the timeframe, and the body of the candle representing the opening and closing prices. It is called a “Chinese” candlestick chart because it has been used for centuries by Chinese economists.
The time frames used on these charts are usually either 1 minute or 5 minutes. This means that each candlestick represents a 1 or 5 minute time block. When that time block ends, another candlestick begins. These progress in succession, and tend to form patterns that day traders use to make trading decisions on when to trade, and whether to buy long, or sell short.
Momentum is another aspect of day trading, and usually those patterns won’t follow through without it. Momentum refers to an increase of the amount of trades coming through when a price approaches lines of support or resistance, and the size of those trades as well. The additional indicator used by day traders to track this is called the time time/sales window. This indicator actually shows every trade that happens on the stock market in real time. This will coincide with whatever stock’s chart you happen to be monitoring. You can use the combination of typical stock patterns, support, and resistance, combined with momentum in order to make high probability trades.
Day trading isn’t for everyone, and more people lose money trying to do it than those who actually make money. Those who do make money learn to perfect reading stock charts in real time, and combining that with momentum as indicated on the time & sales window.
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