18/12 – How to use & handle charts and setups compiled by other traders

Today somebody emailed me a chart (NZ dollar against US dollar, 4-hour timeframe) and asked me what I thought about it.  I quickly realised that the chart already had 5,000+ views, 12 comments and 132 likes (from whichever site it was taken).  Thus I really didn’t think that I would be able to offer any additional technical insight on this one!

However, this might be a good opportunity for discussing how to use charts shared by other traders.  This is purely my own opinion – there might not be a right or wrong answer, just sharing my own thoughts .  Here’s the chart that was emailed to me:

nzdusd-4h

Firstly, rather than acting on the basis of another trader’s analysis, one should have a certain tested trading strategy before considering a trade.  Then, when looking at the chart, the trader assess whether the price action in front of him/her meets all the requirements of the setup of his/her trading strategy.  It’s generally bad idea to simply look at a chart and make a buy/sell decision without the context of a trading strategy.

Chart Settings – ideally convert the chart to the settings that you are accustomed to.  The chart settings should also be spelt out in your own trading strategy document – including exactly what indicators are to be used such as Fibonaccis, moving averages, and a whole raft of indicators regularly displayed at the bottom of price charts.  Your decision is going to be better reasoned using your own settings and interpretation style rather than quickly going with somebody else’s.

Timeframe – this is part of settings – is the chart showing a timeframe that you normally use for placing trades – if not, then why suddenly change the timeframe that you are used to?

Amount of price information/number of candles displayed on the chart – if I am using a 1-hour timeframe, I like to have about 1 week’s worth of historical price data on the chart, if it’s a 4-hour timeframe I like to have about 1 month’s worth of data on the chart – I can spot very quickly whether I think there’s too much information on the chart – simply by looking at the width (or narrowness in this case) of individual candles.  In this example there is too much information (for me) on the chart – approx two months’ worth of 4-hour data.  For me that is simply too much information to process in my brain.  But, each trader will have their own preference.

Looking at comments written by another trader – this can be quite insightful because that trader might be looking at details that you yourself overlook and/or don’t ordinarily pay attention to.  It’s a good way for increasing one’s skills in interpreting charts and increasing one’s technical knowledge.  However, then take that newly learned perspective and incorporate it into your own strategy before basing a trading decision on it.

Thus, in summary:

  1. Convert the chart in front of you to your own settings
  2. Judge it in the light of your own existing trading strategy
  3. Carefully read and assess what’s in front of you to allow you to look at price data in a new way

Hope that helps!  Comments and questions welcome!

This entry was posted in Financial Markets 101. Bookmark the permalink.

One Response to 18/12 – How to use & handle charts and setups compiled by other traders

  1. David Eppel says:

    Your chart at the top looks like mine- I prefer a black background-as do most pro’s, just easier on the eyes. Over time I have evolved my own favourite settings and a couple of indicators, but as an options trader I’m more interested in volatility than precise entry points. I do like to do 2 things with charts,though- see them from a distance, and see daily charts converted to weekly. does anyone use point and figure with forex I wonder?

    Like

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