Charts are the “footprints” of buyers and sellers. It is a visual representation of their psychology. Repeatable chart patterns form because human nature is slow to change — if a pattern occurred once, then it is likely to occur again in the future. However, chart patterns (and charts in general) cannot guarantee knowledge about future price movements. Some patterns usually resolve themselves in a particular way, but there is no certainty that they will be resolved the same way in the future.

Chart Types

The two most popular chart types are BAR CHARTS and CANDLESTICK charts. For the purposes of this course, it doesn’t matter which type you prefer, but you should pick one and stick with it. We will be using BAR CHARTS for all our chart examples, though — primarily because you can put more of them on a chart, since they are thinner than candlesticks. And because we’ve conditioned our eye and instincts using them over the years — in other words, we are used to them.

Other chart types that you might see in the future include:

• Market Profile
• Point And Figure
• KAGI
• KASE
• Line Break
• Range
• Renko

While each type of chart conveys information in a slightly different way, this is a practical course designed to get you productive as fast as possible, so we will stick to one type of chart. After you have completed this course, you should have enough information to be able to research these other types of charts and make intelligent decisions on whether or not they can be useful to your trading.

The image above shows a basic bar chart. The vertical arrow is pointing to the left tic which is the opening price level for the bar. The horizontal arrow is pointing to the right tic on the same bar which is the level of the closing price.

Bar Chart Components

A price bar on a financial instrument chart consists of simple vertical bars with tics on either side of them that show where the bar opened and where it closed. The tic on the left side indicates the opening price, and the tic on the right side indicates the closing price. The convention is that a close below the open will color the bar red, and a close above the open will color a bar green. However, many charting packages allow you to choose your own colors, so you are not restricted to this convention.

A complement to the chart itself is volume, which is usually placed beneath the price bars. There are a few instances where you can discern additional information using volume, but 95% of the information you need to make a trading decision is going to be in the bar chart itself.

The above image shows a basic bar chart with volume bars plotted beneath.

One of the most common questions we get is why did we choose those intervals? It’s simple — each interval is double the prior interval. There is nothing magic about our choices. You can choose to look at the intraday charts in 61, 122, 244, and 488 minute bars if you wanted. The key to bar intervals is to remain consistent. By using the same intervals, you help your subconscious to develop, thereby developing better instincts over time. Changing the chart intervals on a regular basis does not allow that instinct to be developed. Using the popular car analogy — how well would you drive your car if you changed your dashboard and steering wheel every week?

Indicators

Indicators are algorithmic transformations of the four key components of a bar — opening price, closing price, the highest price on the bar, and the lowest price on the bar. Some indicators use volume as well. At the end of the day, there are hundreds of different indicators, each with its own algorithm for transforming and smoothing out price movements. Used properly, they can be quite beneficial. And, as you saw in your drills, they can serve a purpose. But, if we had to go back in time and re-do our learning process, we would remove all indicators from our charts from Day One. That hindsight is going to be passed onto you, because the charts we use will not have indicators on them. Later (much later) in the course, we will introduce some indicators and provide feedback on the specific circumstances under which they can be useful.

Many traders use indicators and use them profitably but, again, we’re making a choice in this course as to what to teach to best help you get started, and so we will teach chart interpretation without using indicators.

Therefore, for now, if you read trading books or articles on the internet about magical indicators, you should probably run as far as you possibly can. You don’t need that temptation distracting you from the progress you’re making (or can make) in this course.