# Graphic Tools On Charts

On the price charts, there are a huge number of different analytical tools enabling you to conduct effective trade. The vast majority of them are quite simple.

Contents

## Price scale

The price chart is actually constructed in a rectangular system of two coordinates. So, in this case, we plot time along the horizontal axis of the abscissa, while the price is plotted on the vertical axis of the ordinates – that’s the price scale (fig. 1). As a matter of fact, there are two basic types of the price scale display. These are logarithmic and arithmetic. The arithmetic scale displays the absolute price increase, while the logarithmic price scale indicates the relative increase.

Fig. 1

For example, the segment between 1 to 10 dollars in length would be the same as the segment from 1001 to 1010 dollars on the arithmetic scale. However, in percentage terms, the difference between the values varies a lot. As for the logarithmic scale, a price leap for different prices here will take the same distance on the condition the percentage jump is the same. Segments on a logarithmic scale will also head south with a decrease in price changes in percentage terms.

Displaying prices on the arithmetic scale is good for tracking prices in rather a narrow range of market fluctuations. It’s also suitable for quick analysis as well as fast trading strategies. As for the logarithmic scale, we can note that it’s more convenient to analyze a relatively large price range, regardless of the time period. On the logarithmic scale, the trend lines are more pronounced. The logarithmic scale displays the dynamics of price, which makes it ideal for long-term forecasting.

## Horizontal line

Horizontal lines are utilized when it comes to displaying any marks, which display the consistent dynamics of any processes on the chart, such as price fluctuations, for instance. (fig. 2).

Read this article to learn more about the horizontal lines on the stock charts.

As a rule, horizontal lines stand for resistance and support levels, but a trader is free to utilize an unlimited number of horizontal lines anywhere depending on his goals. To show long-term movements in the market a horizontal line would be an ideal solution. It will enable you to assess the strength of certain trends.

Fig. 2

The horizontal line is good for focusing on the extremes. In this case, you won’t be confused by a large amount of data, in particular on a short timeframe. Besides this, horizontal lines are also utilized for analyzing completed transactions. In this case, they can highlight areas on the graph on which deals were concluded. The main purpose of the horizontal lines is to provide clarity of mind to the trader. It introduces greater logic in his actions and designates patterns of price movement, thus increasing trade efficiency.

## Trend line

A trend line appears to be the major tool for graphical analysis for any trader. Well, it’s simple but despite this fact, it provides tons of vital information. In simple terms, a trend line can be defined as a display of some values, such as prices, most often, depending on time.

Fig. 3

There’re three types of trend lines:

- An upward trend line (the so-called «bullish trend»), when asset prices are going up;
- A downward trend line (the so-called «bearish trend»), when asset prices dive;
- A flat trend line – long-lasting minor price fluctuations.

We determine an uptrend when on the chart its right end is above the left. The upward trend line clearly shows that steady demand dominates the market, so there’re more buyers or they’re more active than sellers. As for the downward trend line, its right end is below the left. The given trend shows that sellers dominate the market, and supply definitely exceeds demand.

For a trend line, it’s crucial to properly choose the points through which it will pass. The trend is formed from right to left. On the right side of the graph, current prices are displayed, while previous prices are shown on the left. The correctness of the construction of the trend should be checked by additional parameters. As a rule, trading platforms have everything required to build a trend on the chart. As a trader, you’re just expected to correctly interpret the information. First of all, the trend line is definitely required to determine the trend. Additionally, on the trend line, you can spot signs of a trend change that enables you to find profitable entry and exit points to the market.

Patterns are formed on the trend line. These are typical graphic figures, which show how the situation is going to develop further. Many trading strategies are based on these patterns. When analyzing a trend line, you require taking into account the time scale, duration, and the frequency of the price tangencies of the line if it’s drawn along extremes. You should also consider the angle of the line that indicates the strength of the trend.

The longer timeframe the trend line is formed on, the more stable it is. On the daily chart, the trend line is more stable than on a smaller timeframe. So, the longer the trend line is, the more stable and reliable it is for forecast and analysis. The more often the price touches the trend, the more stable the trend is (view an example of trading with the trend). The sharper the angle between the horizontal line and the trend line is, the stronger the trend is, and it also suggests the more active trade. Smoothed trend lines point to the weak market.

## Segment

A segment appears to be one of the key elements of the chart. The segment (fig. 4) can be of arbitrary size, depending on the trader’s goals. However, depending on the location and the type of chart, the segment can be very informative. By the way, generally speaking, the trend itself happens to be a segment of a longer sequence of values.

Fig. 4

A segment of the trend line (although not all graphs take into account time frames), enables us to evaluate the local movement of the asset price. Moreover, it also allows us to view the ratio of supply and demand right at the time of bidding. There’re many trading strategies based on various timeframes: 5-minute, 15-minute, 30-minute and so on. All of them are already available on trading platforms.

By the way, there are charts built solely from the segments. For example, the bar chart, which is very popular with traders. It’s made up of vertical segments, each of which represents a separate trading period, and also the maximum and minimum price.

## Ray

A ray (fig. 5) appears to be a geometrically infinite continuation of the trend line to the right or left on the graph. On the chart, it’s a line built on two chosen values and extended to the last value on the chart. In contrast with the trend line, part of the information is cut off. It enables you to clearly see the key direction of the trend at a certain time.

Fig. 5

Therefore, the ray can be employed to forecast the situation on the market. It’s available on any trading platform. A number of trading strategies are built around this figure. For example, the rays on the chart are built on the minima. Short positions are opened at the breakdown of the minima indicated by the rays. The same way you can use the rays for long trading positions.

## Support and resistance levels

Support and resistance lines (fig. 6) are the cornerstone of technical analysis. Well, everything having to do with the dynamics of prices is considered relative to the lines of support and resistance. What’s more, all the patterns and figures are formed exactly by these lines.

In fact, any models and figures you observe on price graphs are just certain combinations of support and resistance lines (view an example of trading support and resistance levels). Evidently, support and resistance lines display the never-ending struggle of the bulls (traders, making money on rising asset prices) and bears (traders, deriving benefits from diving asset prices) when trading assets. Support displays the level of price control by bulls, while resistance indicates the level of price control by bears.

Fig. 6

Resistance lines normally connect highs. They’re formed when buyers are reluctant to purchase an asset at prices higher than they’ve been already reached. Apparently, the established resistance line points out that sellers have already gained some superiority, therefore the price might start going down.

Support lines connect lows. They’re formed when sellers don’t want to sell an asset at lower prices than those, which are already available. Buyers demonstrate they’re already dominating the market. Therefore, the asset price might start heading north. Traders enter the market at support and resistance levels in order to try reversing the trend.

For instance, the price stops during upward movement. For sellers who intend to stop the trend that’s a signal to enter the market. If they fail to stop the trend, they might at least try to diminish the price on the next resistance line. Similarly, when a support line is being formed in a downward movement, buyers show up willing to stop further price decline.

## Andrew’s Pitchfork

Andrew’s Pitchfork (fig. 7) turns out to be a technical indicator created by the well-known investor Alan Andrews. The striking efficiency of this indicator made it a full-fledged trading tool. As a rule, Andrews’ Pitchfork is utilized to determine resistance and support channels, and also to forecast the direction of asset price changes.

Andrew’s Pitchfork is made up of three parallel lines, built on three consecutive highs or three consecutive lows on the graph. In particular, the lines are built in a sequence of low-high-low on an uptrend, while on a downtrend the sequence high-low-high is utilized. The first line is drawn from the starting point («the pitchfork handle») through the center of the segment, connecting the second as well as the third extremes. Moreover, on the remaining points («the pitchfork teeth») two lines are built parallel to the first one on the graph.

When trading the investor can focus on resistance and support lines that show Andrew’s Pitchfork in relation to the middle line of this indicator. Price movements inside the pitchforked channel indicate that the trend keeps evolving. The breakdown of the boundaries of the channel demonstrates that the entire trend changes its direction.

Fig. 7

Traders noticed several features of the use of this indicator. For instance, if the asset price breaks the upper descending line of the channel upwards, it’s high time to buy an asset. If the asset price breaks the lower ascending line of the channel downwards, that’s a sell signal. If the price doesn’t reach the center line of the pitchfork, breaking the upper line upwards, that’s a buy signal. If it doesn’t reach the center line, breaking through the lower line of the channel, you should sell.

Andrew’s Pitchfork is a standard tool available on trading platforms (binary options platforms, Forex brokers, and cryptoexchanges). They have been being utilized for several decades. You need to be cautious when using them, especially when it comes to determining the entry point. Traders combine them with additional indicators.

## Fibonacci sequence

When talking about a Fibonacci sequence (fig. 8), we first of all mean levels built around a sequence of numbers. Leonardo Fibonacci, the outstanding Italian mathematician was the first who described it in the 13th century. It can be defined as a series of numbers in which every subsequent number appears to be the sum of the two previous ones: 1, 1, 2, 3, 5, 8, 13, 21… and so on.

When dividing any number by the number of the previous one within the sequence, the ratio always accounts for 1.618. The Fibonacci numbers have a lot of «magical» features. It’s no wonder that some of them have been implemented in trading. By means of Fibonacci numbers, it’s possible to determine the potential objectives of the correction, the potential values of the continuation of the trend. What’s more, they enable us to identify strong levels of resistance and support.

Fig. 8

It’s a common view that the trend direction is adjusted at levels corresponding to the regularities of the Fibonacci number series. So, the correction or reversal of the trend takes place at respectively 23.6%, 38.2%, 50%, 61.8%, 76.4%. It makes sense to place a line between the beginning of a trend and its maximum. Additionally, on this line you require marking the levels: 23.6%, 38.2%, 50%, 61.8%, 76.4%.

The levels of 38.2% and 61.8% are considered to be the strongest. It means that the Fibonacci regularities work best at these levels. You’d better utilize Fibonacci sequence in tandem with additional tools as well as indicators confirming the trend movement. You’d better stay away from using Fibonacci sequence if there’s no pronounced trend. The indicator can be utilized used on any timeframe and on any assets.

As a standard tool, Fibonacci sequence is available on up-to-date trading platforms. By the way, the Fibonacci number series also appears to be the cornerstone of another popular trading technique – a wave theory of mathematician Ralph Elliott. As follows from this theory, the price moves upwards in a wave-like way and from the minimum, it hits a high for up to eight waves: five impulse waves as well as three corrective ones. By the way, eight waves make their way from a high to a low on a downtrend.

## Fibonacci Fan

On numerous trading platforms, a number of tools built around Fibonacci numbers are available, except for Fibonacci sequence. These include «Fibonacci Fan», «Fibonacci Expansion», etc. Fibonacci Fan shows the levels of support and resistance at which correction will most probably take place. It’s built on two extremes in compliance with Fibonacci sequence. The axial line is drawn through these extremes. In fact, there are three types of Fibonacci Fan: direct, corrective and also counter.

Fibonacci Fan is built by simply connecting lows and highs on an uptrend or highs and lows on a downtrend. A direct fan is used to before the breakdown of the correction level of 23.6. After that, the fan should be rebuilt. Due to its specificity, you’d better utilize this indicator on a flat trend or a long-term price movement without considerable fluctuations. However, some traders are assured that on the contrary, it works better in a volatile market, enabling them to sort out accurate signals from a huge number of false ones.

The corrective Fibonacci fan is probably the most popular type of this indicator. It’s built after the breakdown of the 23.6 correction level. A high on the uptrend or a low on the downtrend, the point from which the fan axis is built remains in place, while the second point is transferred to the first correction wave that is traditionally determined by the wave’s peak. Every next correction is expected to take place sequentially at 38.2, 50, 61.8. Exactly from the last mark, one may expect a change in the trend. The counter Fibonacci fan will come in handy after the price breaks through the level of 61.8, indicated by a correction fan. That might point to a new trend. The starting point of a new fan, or the zero point, is the same here. That’s the low on the uptrend and the high on the downward. As for the second point, you can find it at the top of the wave that showed up before the 61.8 correctional level.

It’s not recommended to rely only on Fibonacci Fan. Its readings need to be backed by other indicators due to the fact in practice it’s not easy to distinguish the true signs of Fibonacci levels from false ones.

## Moving average

A moving average (fig. 9) turns out to be one of the oldest and most widely used tools on trading charts. It’s one of the basic tools available on all trading platforms. The moving average can be defined as an average asset price for a certain period of changes. The indicator cuts of minor price fluctuations and displays the main trend direction.

Fig. 9

Moving averages can be different. One of them is a simple moving average, or SMA for short. It’s calculated as an arithmetic average. For instance, prices of ten bars are summed up and then divided by ten. It’s generally utilized to analyze price movements over long timeframes. An exponential moving average (EMA) is employed for analysis on short timeframes, due to the fact it shows an average in which actual prices are more crucial than the old ones. This type of moving average is calculated with a more complex formula. By the way, the vast majority of intraday strategies make use of the exponential average.

It’s the cornerstone of extra indicators. These are an Adaptive Moving Average (AMA), that has a minimal delay in changing the trend, a Double Exponential Moving Average, which is good for tracking the trend during the so-called zigzag movement, a Triple Exponential Moving Average, where up to three types of exponential moving averages are combined, a Fractal Adaptive Moving Average capable of determining the movement of a strong trend, and a Variable Index Dynamic Average with the averaging period in a highly volatile market, etc.

Besides this, there’s also a linear weighted moving average (LWMA). In contrast with the EMA, here the «weight» parameter of price values is calculated arithmetically. There’s a point of view that the LWMA reacts faster to sharp changes in the trend and generally provides more accurate signals. However, its difference from the EMA is insignificant. As for the weighted moving average (WMA), it’s calculated with the formula, according to which every price is multiplied by its sequence number, and the sum is divided by the sum of the sequence numbers. Therefore, current prices have more weight compared to older prices.

The weighted moving average is rarely utilized. You’d better use the exponential moving average on short timeframes because it’s a more sensitive gauge. On long timeframes, the simple moving average would be an ideal choice because it accurately shows the main trend. It’s believed that the longer the period and the timeframe on which the moving average is utilized, the more accurate the situation analysis will be and also the more accurate trading signals you can count on. In order to determine the direction of the trend and forecast the trend change, you require using two moving averages. When utilizing two moving averages, the greater the distance between them results in the higher volatility and the stronger trend.

The moving average appears to be an extremely flexible indicator. It can be successfully utilized as a trend line, a support line and also as a resistance line. Furthermore, the given indicator can be employed to determine the momentum, which is the rate of price change. There’re a lot of trading strategies built around moving averages. Since the moving average points to the main trend, trading positions are opened in compliance with the moving direction. The strategies using moving averages track the main signals. Let’s view the simplest example of how they’re used. If the moving average moves up, there’s an uptrend and it’s high time to buy. On the contrary, if the moving average descends, the downtrend dominates, so the trader needs to sell. A buy signal is generated when the moving average crosses the price chart from top to bottom. When the moving average crosses the price chart from bottom to top, that’s a sell signal.

The moving average is a popular and useful tool. Nevertheless, it has its own downsides. First of all, averaging is prone to hiding part of the data on the price dynamics. Secondly, it poorly and slowly reacts to steep changes in the price dynamics. Moving average signals are often late on large timeframes. The trend might have already completed, but it keeps influencing the last value of the moving average, thus distorting the whole price situation. However, on short timeframes, this indicator generates many false signals. For instance, a short uptrend that has long ended, nevertheless, keeps influencing the last value of the simple moving average along with recent more relevant price trends. That’s difficult to forecast the future from the moving average. The given indicator is good for evaluating the current market condition. In general, it means that trading with moving averages suggests the use of extra indicators.

## Conclusion

All the trading tools illustrated in this review are must-have for trading. Such technical indicators as the moving average, trend line, resistance and support lines, various other horizontal lines are used by any investor. Fibonacci sequence, Andrew’s Pitchfork are utilized by most experienced traders. All the listed indicators have various options, characterized by complexity as well as efficiency in trading.

The practical application of all the indicators mentioned above requires the support of additional indicators. It’s clear none of them along is able to make your trading effective. Moreover, most indicators require learning and skills.