Chart Reading: Day & Swing Traders in Forex & Cryptocurrency Markets

Chart Reading: Day & Swing Traders in Forex & Cryptocurrency Markets

Chart Reading Guide For FX trader by Kishore M

Forex is an over the counter currency exchange hub and is one of the most liquid markets of the world. Traders who trade in this market vary in their trading styles. Depending on their respective trading styles, traders are classified as:

  • Day traders;
  • Swing Traders ;
  • Intra-day traders ;
  • End of Day traders ;
  • Fundamental traders ;
  • Technical traders ;
  • News trading ;
  • Scalping ;
  • Position trading ; &
  • Trend trading

These types of trading styles do not change with markets, though a few of them may not be widely practiced in some markets. However, day trading and swing trading are common trading styles in the FX as well as the crypto currency market. So what do these trading styles mean?

Day Trading:

A day trader trades through the day and ends his trading at the end of the day. He might end up racking profits or suffer loses.  A typical characteristic of day traders is that they do not hold positions over night. They  trade multiple times a day and look out for the smallest of the price fluctuation to make profits from. Such traders would usually start the day with a market analysis. Their strategy is to enter a position and quickly make an exit once they make a profit. They will enter into another trade as soon as they spot a good position.

Forex and Crypto currency expert and trader, Kishore M states that, “In the FX market, though the liquidity may be enough for the day traders to make profits, the same is as true for the crypto currency market as well. Day trading is a short term trading strategy and therefore timing of entry and exit is a must. Day traders have to monitor the market via charts and any other preferred tools, through the day, due to which they have to trade full time”.  Day traders will accumulate approximately 1% to 3% of profits per trade, which will multiply towards the end of the day.

Swing trading:

Swing trading, on the other hand, is a long term trading strategy where the traders hold his position for days or weeks. As and when the price swings the right way, the trader sells his options, making money.

Swing traders adopt technical analysis to spot an opportunity with short term price momentum. In sharp contrast to day trading, Swing traders look at capturing a larger price move, as opposed to what day traders aim at. A swing trader will end up making around 20% to 50% profits on good speculation.

A striking difference between these two styles of trading is that a swing trader can start trading with a smaller amount. However, when a day trader is branded a Day pattern trader he has to maintain a minimum equity in their account.  A day pattern trader is one who has traded in more than 5 trades for 5 business days. The number of day trades for the trader has to more than 6% of the total trading activity of these 5 days

Importance  of charts:

Charts are categorized as tools used by technical traders. These charts compare pricing from the past to the current, to indicate price trends. The trends could be upward or downward price trends. Kishore M, Forex trader and trainer notes, “It must be recalled here, that technical trading believes in history repeating itself. Hence, in trading terms, they work on the principle that a pattern, which was once existent, will repeat itself. This belief materializes in the charts. It is therefore, of utmost importance that traders, especially the ones who are inclined towards the technical analysis school of thought, get a hang of reading charts effectively”.

Popular charts used in Day trading

The three most popular day trading charts are:

  • Bar Charts ;
  • Candle Stick charts; &
  • One Line charts

Bar Charts:

These charts are popular. However a new trader would need practice, to start reading them, accurately. The bars in the charts represent more than just the price movement. A bar chart is set to a time frame. A bar will hence generate in the set time frame. For instance: If a trader sets the time frame for two minutes, a new bar will generate every two minutes. This keeps the trader updated on the market movement for every two minutes, which is extremely important for the day traders.

Typically a bar chart will have: An opening foot, a vertical line and a closing foot. Each individual bar is also divided into: Open, High, Low and close.

  • Open: Refers to the opening or the first price that was traded as the bar formed
  • High: Refers to the highest price at which the asset was traded. It is represented by the top of the vertical bar
  • Low: Is indicative of the lowest price traded and is the represented by the bottom of the bars
  • Closing: Is the price at which the trade closed

The direction of the market price is indicated by the bars’ open and close feet. If the closing feet is higher than the opening feet, it would mean, that the market closed at a price higher than what it opened with and vice versa.

Chart Reading Guide Forex - Bar Charts

Courtesy – StockCharts

Candle stick charts:

These are one of the most favored charts, where the candles themselves are representative of the opening price, the highest and the lowest trading price. The candle stick has two wicks to it: One at the top and another at the bottom. The top wick stands for the highest price traded and the lower wick stands for the lowest price traded in.

The candle sticks also change colors to showcase the market trend. If the market closes at a higher price than the opening price, the candles turn green. They turn red, if the closing price is lower than the opening price.

 

Bullish and Bearish Candle Chart in Forex Trading

Courtesy – StockCharts

Fx Trading - Candle stick charts

Line Bar:

Though used by technical traders, these charts are less detailed then the earlier two. A line bar is a good way to compare day to day closing prices since that is all they represent.

Line Chart in FX trading

Courtesy – StockCharts

Popular charts used in Swing trading

Swing traders are long-term traders. The charts used by the swing traders can be improvised to track the market by other traders too, trading in commodities, indices or stocks.

The most popular charts used by Swing traders are:

  • T -30;
  • Ghost Town;
  • Swing trap; and
  • Side trap.

 T-30 Chart:

One of the most used charts by swing traders, this chart is preferred by traders since it is easy to use and comprehend. The T in the name stands for “tail”. This chart uses a 30 period EMA. The tail of this EMA is the point where the 30 EMA is cut across, downwards.

Reading the chart:

In this chart the pointers to look out for are:

  • A comparative volume trade wherein the current trade volume should be more than the previous day; and
  • The resistance and the support levels of the market

A winning trade strategy is to buy towards the end of the day if a trader is trading during the day. If not, than it is best to put a stop loss order above the high of the “hammer”.

Chart Reading Guide Forex

Courtesy – StockCharts

Ghost Town Chart:

These charts depict a low volatile atmosphere for an ignored asset. In case the FX or the crypto currency market, the assets would either be a currency pair or a crypto currency.

Reading the Chart:

The pattern on these charts show a pull back that is indicative of a resurge. It tends to be a repetitive pattern, standing true to the technical analysis belief. In this chart too, like the T-30 chart, it is important to track the resistance and the support levels.

Here are a few notes to keep in mind in context of these charts:

  • Low volatility will lead to high volatility;
  • High volatility will lead to low volatility; and
  • When the candles on the candlestick chart, starts narrowing down it indicates that the price movement will slow down.
Ghost Town Chart reading forex trading

Courtesy – StockCharts

Swing Trap chart:

This is a recurring and common chart that occurs almost everywhere. It is named a “trap” since, the moment this pattern pops up on charts; traders are trapped into selling, as the downtrend seems set.

Reading the chart:

The pattern is almost a cheat. It builds up with the price driving hard on a upswing, followed by a pull back. This would make a technical trader believe in the next upswing. However, here is where the trap lies. The chart pulls up a bit, hinting at a upswing and then falls back taking out all the stop loss orders. In its final upswing the chart rallies. The crucial pointers to keep in mind with this pattern are:

  • For the final swing to rally, it must drop below the low of the first swing
  • This pattern appears in all the charts in all the time frames
  • When this pattern appears on the short term trades, the pattern reverses
Swing Trap chart reading in fx and crypto

Courtesy – StockCharts

Side trap chart:

This is another “cheat” pattern. The pattern begins with a breakthrough consolidation. The trade ends on a bearish note and most of the traders sell out their options.  Next day, without any more sellers to pull down the trade, an upswing comes into play, rallying all the chart all the way up.

Reading the chart:

This pattern goes through a three stage pattern:

  • Consolidation
  • Breakthrough; and
  • Reversal

To trade this pattern, here are a few pointers to keep in mind:

  • Keep an eye on the time-frame of the consolidation. The longer this phase holds, more the probability of a volatile scenario
  • When the pattern reverses, the candle on the chart must be a strong one
  • During the break down phase, there might be high volume of trade
  • A downtrend in the market increases the probability of this pattern’s occurrence
Side trap chart in Crypto

Courtesy – StockCharts

Conclusion:

Reading the charts is an indispensable skill that every technical trader has to develop. Charts are like the pathfinders for the traders. A wrong reading can cost a trader a good position and this would mean, an opportunity lost for the traders.

 

 

 

2018-11-29T13:06:31+00:00