How to read a CFD trading chart

How to read a CFD trading chart

Reading time: 6 minutes

If you’re new to trading, you might find reading CFD trading charts overwhelming. The flurry of lines, candles, and coloured bars can look complex, especially when displayed together in just one dashboard. They all serve one purpose though, which is to help you interpret price movements in the market. Once you understand the basics, reading trading charts can become second nature to you.

What is a CFD trading chart?

A CFD trading chart is a visual representation of an asset’s price movement over a period of time. It displays price data that traders can use to identify chart patterns, trends and market behaviour. Charting also enables investors to see the past and current prices of chosen tradable instruments, as well as the volume and, with the help of indicators, volatility of the market.

CFDs, or contracts for difference, are agreements between an investor and CFD broker to exchange the difference in the value of a tradable instrument between the time the contracts open and close. Without owning the underlying asset, traders use CFDs to speculate on whether the underlying asset’s price will rise or fall.

Modern trading platforms such as MetaTrader 4 and 5, cTrader, and TradingView allow users to customise charts by tweaking timeframes, adding technical indicators, and switching between different chart types that suit their preferred trading style.

What information does a trading chart show?

Before even diving into the more technical aspects, it would be helpful to understand the information every trading chart contains:

Price axis

Representing the asset’s price, the price axis (or the vertical axis) is usually located on the right-hand side of the chart. Evidently, as prices rise, they move higher on the chart. As prices fall, they move lower.

Time axis

The horizontal axis depicts time. Depending on the date range you set, each point on the chart could represent one minute, five minutes, one hour, one day to even one month. In addition, the timeframe a trader chooses often reflects their trading style: short-term traders analyse lower timeframes, while swing traders and longer-term traders typically focus on daily or weekly charts.

Price data

Each candlestick, bar or plotted point represents price activity over a specific period. This typically includes the opening price, closing price, highest price reached, as well as lowest price traded during that interval— all four of which form the foundation of many chart types.

Types of trading charts

There are many ways to display market data, and each chart type offers traders different perspectives on price movement.

Line charts

One of the simplest charts available, a line chart connects the closing price for each selected time interval with a continuous line. Because it focuses only on closing prices, it provides a simple overview of the market’s overall direction. It also shows long-term trends while hiding short-time price movements. Beginners often start with line charts first before progressing to more detailed chart formats. Evidently, line charts lack more in-depth information about the fluctuation of prices within a particular timeframe.

Bar charts

When reading the bar chart to examine the market’s movement, you have to be on the lookout for four key pieces of information for each trading period - opening price, highest price, lowest price, and closing price. Bar charts are also known as OHLC (Open, High, Low, Close) charts.

Each vertical bar represents one selected time interval, while the small horizontal ticks indicate the opening and closing prices. The left tick marks the opening price, and the right tick marks the closing price. The height of the bar represents the price range during that interval, with taller bars indicating larger price movements and shorter bars indicating smaller price movements.

By looking at a bar chart, a trader easily understands the price action for that period. Many experienced traders appreciate bar charts because they display detailed price information without the visual emphasis of candlestick charts. One disadvantage for beginners may be that a bar chart can look more cluttered and less intuitive than line charts.

Candlestick charts

Among modern traders, the candlestick chart is one of the most popular chart types. They display the same OHLC (Open, High, Low, Close) information as bar charts but present it in a more visual format.

A candlestick consists of a ‘real body’ and ‘wicks’ (also known as shadows). The real body is the thick part of the candlestick and represents the range between opening and closing prices. The wicks extend on both ends of the real body, which show both the high price and low price for that period.

The color of the body then tells you about the price direction:

• Green - indicates that the closing price was higher than the opening price (also a bullish candle).
• Red - indicates that the closing price was lower than the opening price (also a bearish candle).

In addition, candlesticks provide traders with insights about market sentiment. For instance long real bodies suggest strong buying or selling pressure, whereas short real bodies suggest little price movement and indecision in the market.

Long upper wicks mean that buyers tried to push the asset’s price up, but sellers took control and pushed it back down before the trading period closed. This is therefore a bearish signal. Long lower wicks, on the other hand, mean that sellers tried to push the price down, but buyers came in and drove it back up, which suggests a bullish signal.

The primary advantage of using candlestick charts is that groups of candlesticks form patterns that can signal potential reversals or continuations of a trend. Moreover, they’re visually intuitive, reveal market psychology behind the symbols, and provide recognisable patterns, which can help traders identify potential market scenarios and support their decision-making.

Ready to put chart analysis into practice?

Knowing how to read trading charts is the first step. Next, apply that knowledge in live market conditions. Open an account with FP Markets to access advanced charting tools, multiple asset classes, and powerful trading platforms that can help beginning traders analyse the markets and refine their trading strategy.