Surely you have ever observed that certain figures that we can see in a graph tend to repeat themselves very often. In addition, these figures can give us valuable signals for our operations, such as trend turns, entries or exits, or anticipating a movement. The analysis of these figures is known as chartism, and it is the topic that we are going to teach you in this trading training lesson.
What is chartism?
Chartism is a type of chart study that emerged in the 1930s. It consists of observing price action using lines and geometric figures that are formed in the development of a chart. japanese candles. The first chartist theories come from the study of the Dow theory. Its word comes from chart, which translated into Spanish means graphic. Chartism allows us to identify movements in the price of an asset and in turn determine the areas where the supply and demand. This type of analysis can be combined with both technical indicators and fundamental data.
One of the principles of Dow theory is different market trends. Source: Economipedia.
What are chartism figures based on?
Chartism is based mainly on the observation of geometric figures that we can identify in the graph by drawing guidelines and observing Japanese candlestick patterns. Yes, precisely the Japanese candles that we explained to you in the previous trading training. Thanks to the study of these patterns and geometric figures we can determine if a trend is bullish, bearish or if we are in a period of lateralization. These figures can be categorized according to their degree of complexity and their implications. To determine the complexity of the figure we will base it on the length of the figure, that is, whether it is formed in a few or many periods. Instead, to determine the implication of the figure, we will observe whether the figure indicates a continuation or a reversal of the underlying trend.
How does chartism work?
Chartism is one of the pillars of our trading training. At first we may be more comfortable using indicators, but as we discover the magic of chartism, we end up applying it to all our analysis. As we can see below, it allows us to identify areas where demand or supply appears. In a simple way, it is enough to draw a horizontal line when we see two minimums or maximums forming in the same range. This will allow us to define floors or resistances of an asset, making it easier to identify entry or exit zones. We can also apply it when we detect decreasing or increasing maximums or minimums, which will allow us to define bullish or bearish trends in an asset.
Chartism is one of the pillars of our trading training. Source: Tradingview.
These are one of the first observations we can have when looking at a graph; defining an uptrend by joining increasing lows, a bearish trend by joining decreasing highs or the formation of a top by seeing that level rejected for the second time. But there are other figures that will allow us to identify future movements in the price. Let's review the most relevant figures to identify these movements.
Most popular chart figures
Double roof/floor
These figures usually form at peaks or bottoms of a trend. What the formation of a double bottom or top (depending on the situation) tells us is an exhaustion of the trend and, consequently, a possible trend reversal. Triple bottoms or ceilings can also form, which fully confirm a trend reversal. We can confirm the formation of these figures by observing how the volume develops in those figures.
When a double bottom is formed, the volume confirms the figure. Source: Tradingview.
Shoulder head shoulder (and HCH inverted)
We can usually interpret curious figures on a graph, like the one we are going to explain below. The head-shoulder shoulder is one of the most useful figures for trading training, but it is also often applied incorrectly. In order to correctly identify this chart figure, a first impulse must be seen, followed by a small correction that defines the first shoulder. The price then makes a stronger push, marking a new high followed by a deeper correction than the previous one, defining the head of the figure.
Representation of a shoulder head shoulder figure. Source: Tradingview.
At this moment is when we can see a support between the two corrections that we will call the neck of the figure (neckline in English). Afterwards, the price makes a new impulse but fails to match the maximum point and corrects again. This will be the final point of the figure of the right shoulder, which is also on the same level as the left shoulder. Finally, the price rises or falls depending on whether we have identified the figure in an upward or downward trend.
Ascending/descending wedge
This is one of the figures that can create confusion given that it has a certain resemblance to some figures that we will explain below. The wedge is a trend change figure that we can identify by using guidelines. As we see in the chart below the achievement of rising highs seems to be hard pressed to continue the bullish momentum. We see that the highs are getting closer together, which provides us with another confirmation that the trend is close to ending. Falling wedges are applied in the same way, but in downtrends.
The appearance of a rising wedge in an uptrend can show us an upcoming trend change. Source: Tradingview.
(The figures that we have seen so far in this trading training are the ones that help us identify trend changes. Let's see which ones indicate a continuation of the trends:)
Bullish/bearish pennant
The pennant (or the flag that is similar) are figures that indicate the continuation of a trend in process. We can easily observe them when we join the maximum points with a guideline and the minimum points with another. If we observe that it is getting narrower and narrower, we must look at the direction the pennant is taking. It is advisable to accompany the interpretation of this figure with other indicators such as volume, since sometimes they can indicate a continuation of the trend or a reversal of it.
The pennants are usually a confirmation of the continuation of the current trend. Source: Tradingview.
Ascending/descending triangle
This figure is similar to the previous figure that we just explained, but it has certain differences. The pennant or flag gradually narrows its minimums and maximums before following the trend. But triangles are characterized by forming increasing minimums and forming horizontal maximums if they are ascending. In the case of descending ones, they are formed by decreasing maximums and horizontal minimums. It is one of the easiest figures to identify within a graph.
Example of a bearish triangle that could continue the current downtrend. Source: Tradingview.
Up/down channel
This will be the last figure that we analyze in this trading training, it is the simplest. Channels (whether ascending or descending) help us determine the path of an impulse or trend easily. Fortunately for us, we have a tool in the Tradingview application that allows us to easily draw channels to determine a possible reversal of the trend. Sometimes it can be confused with a rectangle figure (which indicates a lateralization of the price), but this is ascending or descending.
Channels allow us to identify moments when a trend can reverse. Source: Tradingvview.
How can we apply this trading training to our operations?
With the figures that you have seen throughout this trading training, it is enough to be able to identify moments in which the price can reverse or continue its journey. We can combine the use of chart figures together with the analysis of japanese candles to have several signs that confirm our decisions.
The technical indicators tab shows us the chart figures, Japanese candles and other functions. Source: Tradingview.
If you think it may be a bit of a cumbersome task to identify these figures, Tradingview has a very useful function in the indicators section. If we go to the automatic technical indicators tab, we can choose the different chart figures that we have learned and they will be drawn automatically as we identify them. It is a simple way to visualize these figures and be able to make future decisions regarding our investments.