Basics of Chart Analysis for Trading Options Basics of Chart Analysis for Trading Options By Joe Duarte Chart analysis is the aspect of technical analysis that focuses on visual analysis to ferret out price and volume data that will let you discover the dominant trends in the market. There are a variety of chart types and data displays, providing you with an extremely large list of tools for analysis.
Options Charts - How to Use Charts to Trade Options
By focusing here on a handful of technical tools and techniques geared toward sector and option trading, traders new to chart analysis should get up to speed quickly while those more familiar with it will get a bit of review.
Charts are pictures that are built by plotting price data to provide you with a view of trading activity during a given period.
Learn How to Read Options Charts
A short list of common chart types include the following: Line chart: Documents price movement versus time. A single price data point for each period is connected using a line.
Line charts typically plot closing values, which are generally considered the most important value for the period day, week, and so on. Disadvantages to line charts include the fact that they provide no information about the strength of trading during the day or whether price gaps occurred from one period to the next.
A price gap is created when trading for one period is completely above or below trading for the previous period. This happens when significant news impacting the company comes out when the markets are closed.
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A total of four price points are used to construct each bar. OHLC charts are more complete and useful over different periods of time because they provide information about both trading period strength and price gaps. Using a daily chart as a point of reference, a relatively long vertical bar tells you the price range was pretty big for the day.
Basics of Chart Analysis for Trading Options
Another way to look at it is to say the stock was volatile that day — good information for option traders. It also hints at strength in the stock when the stock closes near the high of the day option trading on daily charts weakness when it closes near the low for the day.
Candlestick chart: These are the most commonly used charts by professional traders.
They also plot price versus time and are similar to an OHLC chart with the price range between the open and the close for the period highlighted by a thickened bar. Patterns unique option trading on daily charts this chart can enhance daily analysis.
How to Read Options Charts
Candlestick charts have distinct pattern interpretations describing the battle between bulls and bears. These are best applied to a daily chart. Candlesticks also display price ranges and gaps.
View charts using both: Longer-term line charts noting price trends OHLC or candlestick charts for better understanding of price action during the period, including security strength and volatility Many technical charting packages are available as independent software programs or web-based applications. The cost ranges from free to thousands of dollars, depending on the package features.
The Top Technical Indicators for Options Trading
When first using technical analysis, consider starting with a free web-based package and then identify your specific needs and expand from there. Sometimes these packages are available at some cost, whereas at other times, they may be free of charge, especially if you are an active trader.
He has provided education to individual traders and investors for over 20 years. Article Reviewed on July 28, Gordon Scott Updated September 17, New traders often wonder which time frames to watch while day trading stocks. Do you use tick charts and a five-minute chart for context, or is it better to use a one-minute chart instead?
His work has been quoted in Barron's, Marketwatch.