Level 1 Reading charts · Part 1/7

How to Read a Chart

A chart is not a picture of the market but a heavy compression of it. Millions of individual trades become a handful of numbers per period. Knowing which numbers survive – and which do not – changes how you read the same chart.

Four numbers per period

Almost every price display rests on four values per period: open, high, low and close, or OHLC. A period can be a minute, a day or a month; the four values stay the same.

The line chart shows closing prices only. That is less information, but not automatically worse: the close is the price the market settled on at the end of the period, so intraday spikes nobody wanted to hold drop out. For multi-year views, the line is usually the calmer rendering.

The bar chart adds high, low and open. The candlestick chart shows the same four values but fills the range between open and close, making the direction of the period readable at a glance. Bars and candles carry identical information – the candle is simply the faster-reading form.

The timeframe is part of the answer

The same market looks different across timeframes, and none of them is the “correct” one. A decline that looks like a trend break on the hourly chart is a single candle with a long lower wick on the weekly.

In practice the timeframe has to match the holding period. Someone holding for months does not decide on a 5-minute chart – there they mostly see noise. Conversely, a weekly chart cannot resolve a move that starts and ends within two days.

The common approach is to combine two timeframes: a higher one for direction and structure, a lower one for timing. Three or more rarely add clarity but reliably add contradictions.

Linear and logarithmic scales

On a linear scale, equal distance means an equal price amount: 10 to 20 is the same distance as 100 to 110. On a logarithmic scale, equal distance means an equal percentage change – 10 to 20 is as far as 100 to 200.

For investors the logarithmic scale is almost always the right one, because what matters is the percentage change, not the absolute amount. Over multi-year series the difference is dramatic: drawn linearly, every multiplication looks like an explosion at the right edge while the early years collapse into a flat line. Trendlines also sit in completely different places depending on the scale – one reason two people can argue about the same “trend break”.

Adjusted prices

A price chart often does not show the price that actually traded. Splits and dividends are back-adjusted so the series stays continuous. Without that adjustment, every split creates an artificial gap and every dividend an artificial drop on the ex-date.

That is the right choice, but it has consequences. Old prices in an adjusted chart correspond to no historically tradable price. Drawing support “at 50 from 2018” uses a number that never existed on the exchange. Commodity futures add a second problem: contracts expire and get rolled, which without correction creates jumps that were never a market event.

What a chart leaves out

• The order of events inside the period. A daily candle does not reveal whether the high or the low came first. Two entirely different trading days can produce identical candles.
• Executability. A price on the chart does not mean meaningful size could trade there. In thin instruments the bid-ask spread is wide and the drawn price sits somewhere in between.
• The cause. A chart shows the result, never the reason. That is why price and the economic calendar complement each other: one shows that something happened, the other often why.

Next

The next article takes the candle apart – why the ratio of body to wick says more than the colour does. To see the actual price series of each market, start with the markets overview .