How You Can Find More Profitable Trades Using These 2 Charts
Ah, the beloved candlestick chart – the favorite tool of traders everywhere. If you’ve been reading the Sleuth for any length of time, chances are you’ve already encountered more than a few candlestick charts. That’s for good reason…
The candlestick has some major advantages over other charting techniques. It can show you five times the data that you’d get from a paltry line chart and it can make trading patterns pop out better than a line chart can. But if you’re only looking at candlesticks, you could be doing yourself a big disservice.
I know that sounds surprising, but bear with me…
The popularity of candlesticks means that nearly every trader out there is looking at an identical chart. Too many candlesticks can also subject traders to “chart fatigue” – a side effect of being inundated with too many similar-looking setups at one time. While candlesticks (and bar charts, which are essentially identical) remain my favorite charting technique, I want to share two more approaches with you today: Point & Figure charts as well as Equivolume charts.
By supplementing your trading views with these two different chart types, you can get perspective that isn’t available when you’re looking at the same charts over and over again. And better yet, bringing up either of these charts doesn’t require a pricey software package or special abilities – you can find both of them free at StockCharts.com.
So, without further ado, let’s take a quick look at how these two charts can help you find more profitable trades.
1. Equivolume Charts
The chart above is an equivolume (also called CandleVolume) chart of Apple (NASDAQ:AAPL). At first glance, it doesn’t look all that different from a candlestick chart – the individual days are marked by candles, just like we’re used to. But there are some clear differences.
The biggest difference is the width of each candle. Unlike a traditional candlestick chart, where candle width is the same for each candle, an equivolume chart bases the width of any day’s candle on the volume that the stock saw that day. So, those super-wide bars at the middle of April indicate huge trading volume, while the narrower bars of the last few days mean that volume has been quieter lately.
Equivolume charts are useful because of volume’s role in technical analysis. Essentially, volume indicates participation in a trade – the more transactions that take place at a given level, the more significance that level will have. As a result, support and resistance levels become more important when they’re made on big volume, and equivolume charts make those levels easier to spot.
To find an equivolume chart, just create a candlestick chart at StockCharts.com, and then select CandleVolume under “Type” (SC’s equivolume chart is a modified, less useful type than its CandleVolume chart).
2. Point & Figure Charts
The Point & Figure chart for Apple probably looks a little less familiar. Point & Figure (or P&F) got its start back at the turn of the century from some of the most famous traders out there – and up until computers became commonplace, P&F was the technique used by floor traders on the major stock and commodity exchanges around the world.
Today, we can draw a Point & Figure chart using a computer, an advancement that greatly simplifies things.
The P&F chart was designed to be a filter for price, ignoring the day-to-day churning of a stock, and focusing on significant moves. To do that, P&F charts ignore time, and instead only chart reversals in trend that the person charting considers significant. Ignoring the time factor of a stock’s movement may sound crazy at first, but it’s actually a nice way to focus on what really matters, price, rather than how long a setup is taking to form.
In the chart above, an “X” represents upward movement, while an “O” represents downward movement. Buy and sell signals are generated when an X pushes above a resistance level (buy), or when an “O” breaks down below support. Clearly, there is much more to this very different charting method than I could try to cover in a few hundred words. For more details, check out this primer on P&F charts that I wrote for TheStreet.com a while back. Or, for even more depth, StockCharts’ ChartSchool offers a longer tutorial.
To generate the charts yourself, head over to StockCharts, and switch the chart from “SharpChart” to “P&F Chart” at the top of the page.
Just changing the type of chart you use can have a dramatic effect on your perspective – and your ability to spot profitable trading setups. If you find yourself frustrated by a lack of trading opportunities, try pulling up an equivolume or P&F chart the next time around.
Jonas Elmerraji, CMT
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