The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
How a Pro Analyzes Charts
02/11/2013 6:00 am EST
Full-time trader Linda Raschke discusses what she focuses on the first time she looks at a new chart and how she identifies markets that are starting sustainable trends.
Traders need to be organized in the way they look at their data and the way they approach their charts. Our guest today is Linda Raschke to talk about that. So Linda, when you are first looking at a chart and looking at the data and price, what do you look at first? What jumps to your attention?
An experienced trader, and this is something that everybody can work for, is that you should be able to see the chart without any indicators, without putting oscillators below it, and you will be surprised at just how quickly you can learn to read the chart just with the bars itself, and here is the way to go about that.
First of all, I’m looking for several things: Are there definable swings up and down? Oftentimes, certain markets will enter into periods of extreme noise or consolidation; it could go on for one month, it could go on for three months. Don’t strain your eyes to analyze a chart that is just in choppy noise consolidation and the easiest way to train yourself to see that is go back and look at other markets where nothing has happened for an extended period of time and you will see pretty quickly it just looks like a bunch of noise. So we really want to find the charts where you have nice tradable swings on them.
The second thing we want to notice is where are the swing highs and swing lows? These are the most visible chart points for everybody. So once you start to recognize, okay the last downswing was greater than the previous upswing, or if this last downswing is previous than the previous downswing that is an increase in momentum, indicating that the trends have good odds of continuing.
Another thing I will usually look for is are we in a trading range and the best way that anybody can recognize a trading range is just imagine taking a ruler and drawing a horizontal line with a ruler through your charts, and if your horizontal line goes through a number of bars, you know, you have got a lot of price bar overlap and you are in a general trading range. So the rules for a trading range are much different than the rules for when you have those nice big swings that I think everybody loves to trade. In a trading range, I will look much more for one or two up-down days, one or two back and forth and back and forth without any follow through, so I know if I catch a good swing get out after a day or two. So with that said, again, keep in mind that the swing highs and the swing lows are always going to be the most important points; they are almost like magnets. Are we in a range?
The last thing I will look for is can you, anywhere on your chart, draw converging trend lines? If you can draw converging trend lines, meaning you have a lower high and a higher low on a chart formation that is extremely important because those are the chart formations that will lead to the more sustainable trends once you break out of that.
The best way to recognize the good breakouts from those type of chart formations is you are either going to have a gap; that is very powerful if we have a breakaway gap. Don’t worry if you weren’t on board at the time; it is almost better if you get on after the market is gapped and it has tipped its hand, or if you have very large range bars that indicate the strong supply-demand imbalance coming out of those voids.
So there is a lot you can train your eye to see looking at a chart and it doesn’t matter if it is a five-minute chart, a daily chart, or a weekly chart, swing high-swing lows; are the swings getting bigger, indicating increase in activity? Are they starting to contract, indicating a loss of momentum or consolidation, the converging trend lines or are we in a flat line, where you can just draw that horizontal ruler?
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