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MarketLife Ep 12 – How to read a chart

A_Joe wrote to ask me for some thoughts on how to read a chart. Here is his question:

A Quote goes “People See What They Have Learnt to See”. Would Request to Enlighten me on the Line of Thinking on Seeing a Chart. My Line of Thinking on Seeing a Chart mentioned Below

 

  1. Range of Bars in the Current Swing ( To get a Feel for the Environment ie Volatile / Stable + Trending / Ranging )
  2. Trend on Current Chart ( via a structure of Swing Highs & Low ): Up Down or Sideways. Mark The Current important Structure Point (ie Highest Low in Uptrend Lowest High in Downtrend Avg level of Support / Resistance in case of Sideways Trend)) Is it a Stair Step Trend ie level of Trend Leg – Consolidation – Trend Leg?
  3. Compare 2 Swings (ie Length of Current With trend Swing & Compare to Previous trend swing & 2 Retracement legs & Compare with Previous 2 Retracement legs.)
  4. Next Comes Expectation of Future Swing Direction (ie Continuation of Trend in case Current Swing is Retracing or Continuation in case of Current Swing is with Trend Swing or Expected Breakout in case of Sideways Trend.)
  5. Last come the Area to join-in the Action with any Setup ie (identification of Risk Reward – Entry – Stoploss – Exit) ie Breakout or Pullback or Failure Setups

I think he has a pretty good methodology there, but I spent some time thinking about my process and offer a few refinements. I look at many charts (hundreds every day, often more than once) so I have to have a way to quickly assess whether it’s worth digging deeper into the chart. Once you’ve decided if you want to trade it or not, then we veer into questions relating to specific trading methodologies. I tried to stay clear of most of those questions and focus only the higher-level questions of basic chart reading.

  1. Anything suggestive of an imbalance?
    1. Trend
    2. Large thrusts
    3. Change of character
  2. What are the most likely emerging volatility characteristics?
    1. Continuation or reversal
    2. Chop or momentum
  3. Is this a chart I’d like to trade? Do I want to be involved?
    1. Character
    2. Opportunity
  4. Are there any higher timeframe considerations?
  5. How to execute?
    1. Consolidations
    2. Breakouts
    3. Failure tests
  6. What risks do I face?
    1. Being wrong
    2. Volatility changing
    3. Gaps
    4. Anything (outside the chart) coming up that could distort the market? (E.g., earnings, reports, etc.)

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AdamHGrimes

Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.
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