How to Read a Chart and Act Effectively
Table of Contents

•Introduction
• Recommendation
• Using your charts effectively
• What to look at first
• How to use the information gathered so far
• How to trade the information gathered so far
• Other chart ideas
• Limitations of charts
• Summary
Introduction
This is a guide that tells you, in simple understandable language,
how to choose the right charts, read them correctly, and act
effectively in the market from what you see on them. Probably
most of you have taken a course or studied the use of charts in the
past. This should add to that knowledge.
Recommendation
There are several good charting packages available free. Netdania
is what I use.
Using charts effectively
The default number of periods on these charts is 300. This is a
good starting point;
• Hourly chart that’s about 12 days of data.
•15 minute chart its 3 days of data.
• 5-minute chart it’s slightly more than 24 hours of data.
You can create multiple "tabs" or "layouts" so that it’s easy to
quickly switch between charts or sets of charts.
What to look at first
1. Glance at hourly chart to see the big picture. Note significant
support and resistance levels within 2% of today’s opening rate.
2. Study the 15 minute chart in great detail noting the following:
• Prevailing trend
• Current price in relation to the 60 period simple moving average.
• High and low since GMT 00:00
• Tops and bottoms during full 3 day time period.
How to use the information gathered so far
1. Determine the big picture (for intraday trading).
Glancing at the hourly chart will give you the big picture – up or
down. If it’s not clear immediately then you’re in a trading range.
Lets assume the trend is down.
2. Determine if the 15 minute chart confirms the downtrend
indicated by big picture:
Current price on 15-minute chart should be below 60 period
moving average and the moving average line should be sloping
down. If this is so then you have established the direction of the
prevailing trend to be down.
There are always two trends – a prevailing (major) trend and a
minor trend. The minor trend is a reversal of the main trend, which
lasts for a short period of time. Minor trends are clearly spotted on
5-minute charts.
3. Determine the current trend (major or minor) from the 5 minute
chart:
Current price on 5-minute chart is below 60 period moving average
and the moving average line is sloping downward – major trend.
Current price on 5-minute chart is above 60 period moving
average and the moving average line is sloping upward – minor
trend.
How to trade the information gathered so far
At this point you know the following:
Direction of the prevailing trend.
Whether we are currently trading in the direction of the prevailing
(major) trend or experiencing a minor trend (reaction to major
trend).
Possible trade scenarios:
1) Lets assume prevailing (major) trend is down and we are in a
minor up-trend. Strategy would be to sell when the current price on
5-minute chart falls below the 60 period moving average and the
60 period moving average line is sloping downward. Why?
Because the prevailing trend is reasserting itself and the next
move is likely to be down. Is there more we can do? Yes. Look for
further confirmation. For example, if the minor trend had stalled for
awhile and the lows of the past half hour or hour are very close to
the 5 minute moving average then selling just below the lows of
the past half hour is a better place to enter the market then just
below the moving average line.
2) Lets assume prevailing (major) trend is down and 5 -minute
chart confirms downtrend. Strategy would be to wait for a minor
(up trend) trend to appear and reverse before entering the market.
The reason for this is that the move is too “mature” at this point
and a correction is likely. Since you trade with tight stops you will
be stopped out on a reaction. Exception: If market trades through
today’s low and/ or low of past three days (these levels will be
apparent on the 15 minute chart) further quick downward price
action is likely and a short position would be correct.
3) A better strategy assuming prevailing trend down, 5-minute
chart down, and just above days lows is to BUY with a tight stop
below the day’s low. Your risk is limited and defined and the
technical condition (overdone?) is in your favor. Confirmation
would be if today’s low was a bit higher than yesterday’s low and
the price action indicated a very short-term trading range (1 minute
chart) just above today ’s low. The thinking here is that buyers are
not waiting for a break of today’s or yesterday’s low to buy
cheaper; they are concerned they may not see the level.
4) Generally speaking, the safest place to buy is after a sustained
significant decline when the bottoms are getting higher. Preferably
these bottoms will be hours apart. By the third or forth higher
bottom it is clear a bottom is in place and an up-move is coming.
As in the example above your risk is limited and defined – a low
lower than the last low.
5) The reverse is true in major up-trends.
Other chart ideas
• There are always two trends to consider – a major trend and a
minor trend. The minor trend is a reversal of the major trend, which
generally lasts for a short period of time.
• Buying above old tops and selling below old bottoms can be
excellent entry levels; assuming the move is not overly mature and
a nearby reaction unlikely.
• When a strong up move is occurring the market should make
both higher tops and higher bottoms. The reverse is true for down
moves- lower bottoms and lower tops.
• Reactions (minor reversals) are smaller when a strong move is
occurring. As the reactions begin to increase that is a clear
warning signal that the move is losing momentum. When the last
reaction exceeds the prior reaction you can assume the trend has
changed, at least temporarily.
• Higher bottoms always indicate strength, and an up move usually
starts from the third or fourth higher bottom. Reverse this rule in a
rising market; lower tops…
• You will always make the most money by following the major
trend although to say you will never trade against the trend means
that you will miss a lot of opportunities to make big profits. The rule
is: When you are trading against the trend wait until you have a
definite indication of a selling or buying point near the top or
bottom, where you can place a close stop loss order (risk small
amount of capital). The profit target can be a short-term gain to
nearby resistance or more.
• Consider the normal or average daily range, average price
change from open to high and average price change from open to
low, in determining your intra-day price targets.
• Do not overlook the fact that it requires time for a market to get
ready at the bottom before it advances and for selling pressure to
work it’s way through at top before a decline. Smaller loses and
sideways trading are a sign the trend may be waning in a
downtrend. Smaller gains and sideways trading in an up trend…
• Fourth time at bottom or top is crucial; next phase of move will
soon become clear… be ready.
• Oftentimes, when an important support or resistance level is
broken a quick move occurs followed by a reaction back to or
slightly above support or below resistance. This is a great
opportunity to play the break on the “rebound”. Your stop can be
super tight. For example, EURUSD important resistance 1.0840 is
broken and a quick move to 1.0860, followed by a decline to
1.0835. Buy with a 1.0820 stop. The move back down is natural
and takes nothing away from the importance of the breakout.
However, EURUSD should not decline significantly below the
breakout (breakout 1.0840; EURUSD should not go below 1.0825.
• After a prolonged up move when a top has been made there is
usually a trading range, followed by a sharp decline. After that, a
secondary reaction back near the old highs often occurs. This is
because the market gets ahead of itself and a short squeeze
occurs. Selling near the old top with a stop above the old top is the
safest place to sell.
• The third lower top is also a great place to sell.
• The same is true in reverse for down moves.
• Be careful not to buy near top or sell near bottom within trading
ranges. Wait for breakaway (huge profit potential) or play the
range.
• Whether the market is very active or in a trading range, all
indications are more accurate and trustworthier when the market is
actively trading.
Limitations of charts
Scheduled economic announcements that are complete surprises
render nearby short-term support and resistance levels
meaningless because the basis (all available information) has
changed significantly, requiring a price adjustment to reflect the
new information. Other support and resistance levels within the
normal daily trading range remain valid. For example, on Friday
the unemployment number missed the mark by roughly 120,000
jobs. That’s a huge disparity and rendered all nearby resistance
levels in the EURUSD meaningless. However, resistance level 200
points or more from the day’s opening were still meaningful
because they represented resistance to a big up move on a given
day.
Unscheduled or unexpected statements by government officials
may render all charts points on a short-term chart meaningless,
depending upon the severity of what was said or implied. For
example, when Treasury Secretary John Snow hinted that the U.S.
had abandoned its strong U.S. dollar policy.