Reading time: 13-17 minutes (3.254 words)
When you are day trading, you are looking at charts most of the time.
What are charts?
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Over time you’ll find patterns and strategies that work best on a certain asset. You can’t simply copy strategies from one asset to another. If something works on the bitcoin chart that does not mean the same thing works on the US30 chart. You should treat each chart as unique. But some charts in the same market will follow the same patterns. Although every asset has an unique chart, there are some basic charting analysis rules that work on every chart and you should master these:
- Support and resistance lines
- Market structure
A very important aspect of reading charts is understanding different timeframes.
It’s important to know that price is fractal. Meaning that every move or trend is eventually happening on all timeframes. You can spot a monthly trend in advance by looking at weekly trends. And hourly trends can be spotted in the minute charts. Most people will call the lower time frames “noise” but that is not true. The only reason that minute charts have more “noise” is because most people are looking at higher time frames creating much more liquidity and attention. In essence, every trend will happen on any timeframe so it does not matter what timeframe you trade.
For day traders it’s most common to trade daily, hourly, 15 min, 5 min or even 1 min charts. All depending on the used strategy. One advantage from lower time frames is getting more trades. It might take days or weeks to get into a trade on a daily time frame. While on the 5 minute chart you can make trades every day. But that does not mean you have more profits because price ranges are pretty small compared to big moves on the daily chart. One big trade in the daily chart can bring more profit than 100 small trades. For example:
Bitcoin chart sept -okt 2021. Source: tradingview.com
Let’s say you got in on the first purple arrow around $45.000 and sold at the second arrow mark around $61.000. That’s a $16.000 move… Only thing is, you need to wait a few weeks to make it happen.
Before I continue, I would suggest using tradingview as your main charting and analysis program. Tradingview is one of the best web based charting programs out there. You can start out with a free account and have everything you need to start. Once you are comfortable adding multiple indicators (if needed) you can upgrade to a paid account for $10-$15 dollars each month. Most brokers and exchanges also provide charts but they are more basic and lack options. You can still use them but I would recommend that you do all analysis on tradingview. Since you will be spending hundreds or thousands of hours looking at charts, you might as well get the best charting software out there.
In tradingview you can choose between many timeframes:
What happens when you select a time frame?
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Time frames are very important to understand. Some trading strategies only work on certain time frames. And higher time frames can help you to determine the current trend. For example, the trend might be up when you are looking at the 5 min time frame but when you zoom out to the 1 hour time frame the trend might be down. Always remember that you should always look at higher time frames (15 min and above) to determine the current trend. You’ll learn more about this in the upcoming chapters.
For now, be very aware of what time frame your chosen strategy is using. If you apply a great strategy in the wrong time frame it may cost you a lot of money.
3.2 Support and resistance lines
Why the price moves around the chart does not always have a certain reason. It might be random movement, good or bad news, insiders buying or selling or traders and banks that are all following the same principles. For example, it’s very common that round numbers behave as support and resistance zones. Bitcoin is around $60.000 for a few days at this time of writing (2021). When price goes up or down around this price point support and resistance is mostly formed. Basically, people are waiting for the price to pass $60.000 and stepping in and selling when the price drops below $60.000.
What is true about support and resistance?
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Support and resistance lines are drawn lines on the chart at key support and resistance zones. Most of the time these zones are drawn where the price stops the current momentum.
- If the price does not get past a certain point in an uptrend it is called “resistance”
- If the price does not get past a certain point in a downtrend it is called “support”.
Support and resistance are the most basic indicators you can use. Although they are basic, they are very powerful. But you have to draw them on the chart yourself. Drawing support and resistance lines in the wrong place can really hurt your strategy. Drawing support and resistance lines on the chart is the first thing you should do when looking at any chart. Where to draw support and resistance lines:
- Always on the 15 min time frame or above
- Above the highest price point(s) on the chart
- Below the lowest price point(s) on the chart
- Above the highest price point(s) on the chart at the current price
- Below the lowest price point(s) on the chart at the current price
You should always draw support and resistance lines on the 15 min timeframe or above because on lower timeframes they are not strong enough. When you are looking at 1 minutes time frames, prices might be jumping up and down. 60 candlesticks on a 1 minute chart is just 1 candlestick in the hourly chart. And 24 hourly chadlesticks is 1 daily candlestick. You basically smooth out the noise when looking at higher timeframes. The higher timeframes you pick, the stronger the support and resistance becomes.
Bitcoin/USD chart sept -okt 2021. Source: tradingview.com
The four horizontal lines are support and resistance lines I drew on the chart. If you are using tradingview, you can use ALT+H to draw a horizontal line on the chart with a simple click.
- The line on the top is placed on the all time high
- The line in the bottom is placed at the lowest low in the past ~ 25 days
- The two middle lines are drawn where price retests former highs or lows
As you can see, there are multiple points that perfectly line up. That is a clear indication of a support or resistance area. When price hits a support level, that means that there are more buyers than sellers not letting price drop below a certain point. When price hits a resistance level, then sellers are pushing the buyers back down. Once these support and resistance zones are broken, the price might go up or down in freefall. Another example:
Eth/USD chart sept -okt 2021. Source: tradingview.com
Few things to look for when drawing support and resistance lines:
- Try to look for places there the price resisted or finds support multiple times
- Look for big up or downtrend reversals
- Always draw on the 15 min time frame or above
- Don’t draw lines under wicks, use the body of the candles
- You don’t have to be 100% precise when drawing lines
- Make sure you hit as many points as possible. The more up and downs your drawn line hits the stronger the support or resistance.
After you have done this you can zoom in on lower time frames. On lower time frames you can also look for support and resistance zones. Mark these zones with a different colour so you can differentiate them from the 15 min or 1 hour support and resistance zones.
These lines are used for your own analysis. It’s simply a way to give you a reference of previous support and resistance zones. Price tends to bounce on these lines more often than not. If price is near a support and resistance line you should always wait for a retest of these zones before placing trades if you want to play safe. Many traders get trapped by thinking once a support or resistance line is broken for the first time that price will go up or down. But if everybody knows this then traps will be set. Making you think price broke support or resistance but suddenly the price is reversing.
Action: Hop on a random chart (like BTCUSD) and start drawing support and resistance lines on the 15 min or 1 hour chart. Compare your results with the above examples. When you are done, zoom in on the 5 min and 1 min time frames and look at where your drawn lines are formed on these smaller time frames.
3.3 Fake breakouts and waiting for candle close
More experienced traders know how other people trade. Especially beginning traders that do not really have a clue what they are doing. There are two huge common mistakes beginning traders make and these are:
- Getting caught in fake breakouts
- Not waiting until the candle is closed
Both are related to each other. A fake breakout occurs when the price moves beyond a specific price point. For example, the price broke the latest support or resistance zone. New traders think the support or resistance is broken, not waiting for the candle to close and already start trading. But just a few moments later the price plummets down and what looked like a breakthrough of former resistance turned out to be a bearish momentum.
These breakouts are called fake breakouts and are carefully planned by bigger traders like institutions or whales. They know exactly what new traders look at. Trading support and resistance is basic knowledge for almost any trader.
To counter fake breakouts you should always look for two things:
- Always wait for the candle to close
- Always wait for a retest
You should consider waiting for a retest of the price at the resistance zone before the breakout can be confirmed. A retest looks like this:
- Price started to plummet (big red candle)
- Buyers started to take over (first green candle with huge wick)
- Support zone is created
- Sellers tested the support zone again (red candle with large wick dipping below the support line)
- Sellers could not push the price down, buyers took over again
For a retest to happen, the candle body needs to close below the support line. Then the price bounces back up to retest the support line. If the price bounces on the support line again and starts going down again (yellow arrow), this is a good indication of a possible break in support.
It is crucially important to wait for the candle to close before you make a decision. Because when you are watching a live chart, you will always see the candle body being formed and never the wicks. The huge green wick started as a full red body candle. Only when the price went up again, the wick started to form.
3.4 Market structure
Being able to read market structure is one of the best (if not the best) thing you can learn when day trading or trading in general. It’s a skill that every professional trader has and you should learn it too. Fortunately it’s not that hard to understand but it’s key to expand your day trading skills.
Market structure shows the current trend or momentum. Whatever chart you look at, there is always a trend. There are three kind of trends:
- Sideways / consolidation
In a bullish trend, price actions form higher highs and higher lows. A bullish trend looks like this:
- HH = Higher low
- HL = Higher low
A real example:
The angle is important here. If price goes up in a very strong angle (> 45 degrees) then bullish momentum is big. If the angle begins to fall below 45 degrees, it might be a sign that the trend is reversing or might be consolidating.
A bearish trend is exactly the same only the other way around:
- LL = Lower low
- LH = Lower high
In a sideways or consolidation trend, price is not moving up or down but stays about the same. There are no new high or new lows.
Below is an example where the price is starting a bullish trend and ends in consolidation.
Market structure is being formed below each bounce in price. You can draw a line beneath each hop in price:
If you do this on a live chart, you can clearly spot how market structure is being formed:
Bitcoin/USD 1h timeframe
- Price started with bullish momentum;
- The next low was higher than the last low and the next high was also higher than the previous high;
- Price broke market structure and started to decline. Lower highs and lower lows are formed;
- Phase of consolidation (red circle). Price did not form higher highs or lower lows but stayed about the same;
- Price broke consolidation moving up but did not last long;
- Price turned bearish and broke the short uptrend;
- New market structure formed, price went bullish again;
- New market structure failed and turned bearish again;
- And finally price again broke the short term market structure and went bullish.
But if you zoom out, you might as well consider this as consolidation:
If you spot a consolidation phase, you can draw two lines or a rectangle above the highs and below the lows. Once the price breaks out (for example, at number 8 in above chart), wait for the price to drop or rise further. The best signal would be a retest of the consolidation fase:
In this case, the price did break the lower lows but went back into consolidation.
A common mistake that beginning day traders often take is looking at the wrong scale of the chart by zooming in too much. When you zoom in too much it might look like price is consolidating but when you zoom out you can suddenly spot a clear trend. At the bottom of the chart in tradingview there is a button named “Auto”:
With this button you turn on or off auto scaling. If you think you are lost then always turn on auto scale as this will put everything in perspective. But keep in mind that auto scaling does lock the chart in place based on the highs and lows. When the auto scale is off you can left click on the chart and by holding the left click you can move around the chart. When auto scale is enabled this is not possible. You can use the scroll wheel to zoom in and out but most of the time you want to turn auto scaling off. I’m using this feature quite a lot. Just play with it a bit and see what works best for you. If you like logarithmic scaling you can use the “log” button next to the “auto” button.
Market structure is broken when?
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As mentioned before, the strength of the market structure or trend is determined by the angle the new price is formed. This is very important because many trading strategies use market structure to determine their next move. You can easily determine the angle by using the “trend angle” draw option in tradingview:
As mentioned before, If the new candlesticks are formed with an angle at or higher than 45 degrees, the trend is strong. If it fall below 45 degrees, be aware that the trend might be weakening and start to form consolidation.
At what moment did the market structure clearly break in above example?
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The new market structure contnued to go down:
Bullish or bearisch market structure can follow eachother up without ever hitting consolidation.
Market structure looks very different on the 1 minute timeframe vs the hourly time frame. It’s important to know that market structure has much more weight on higher time frames. If market structure is bullish on the one hour timeframe but bearish on the five minute chart you should be careful. Always use market structure on higher time frames to determine the current trend.
Just like support and resistance lines, you can also draw trend lines based on market structure. This can be done by:
- Drawing a line below the valleys when price is up.
- Drawing a line over the tops if the price is down.
Bullish market structure:
In this example, price broke the bullish market structure. The new low was lower than the previous low. This is a sign the price might reverse and might be an indication to get positions for a trade.
Bearish market structure:
Consolidation (no clear market structure up or down):
Action: Trendlines in combination with support and resistance lines are very powerful. You need to master this first before you learn anything else. Fire up some charts from some random stocks or crypto and draw support, resistance and trendlines for a while until you get the hang of it.
Basically, the angle lines I drew before when discussing market structure are actually trend lines. The trend can be considered strong when the angle is above 45 degrees.
Things to keep in mind when drawing trendlines:
- You don’t have to be 100% accurate. Sometimes you can use wicks and other times you don’t. It just depends on how the price is moving and what strategy you are using.
- You need at least three touch points before you can call it a trend line. Meaning, there should be at least three candles touching the line.
- Small candles don’t count, focus on bigger candles.
- These rules are not set in stone. Best is to play with it and see what happens when your trendlines are broken.
3.6 Not trading with the trend
The biggest mistake most traders make is not trading with the trend. If you see a clear market structure up or down on the one hour chart then you should always follow the trend. Prices will go up and down within a trend if you zoom in on smaller time frames but price always follows market structure until it’s broken. Meaning you should not go short in a bullish trend. Or not going long in a bearish trend. Trading against the trend is one of the worst things you can do.
What is “going short”?
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You can however trade trend reversals. Trend reversals happen when new market structure is formed. But trend reversals can be hard to spot. Because you don’t know if the trend is actually reversing. When you are new to day trading, you should only focus on trading with the trend. This is very important and the biggest reason why you should draw your support and resistance lines at the one hour chart. Because if you zoom in on the one minute chart, it might look like you are in a downtrend. While in the one hour chart you are in a clear uptrend. Always switch between time frames to determine what trend you are trading.
If you simply look at this from a mathematical point of view, is the chance that the price will go up in an uptrend be higher or lower versus the price going down? Price is much more likely to go up in an uptrend. So always remember: Trade with the trend! When you are more experienced you can spot and trade reversals.