Charts form an integral part of technical analysis. Financial charts have come a long way from the days of hand drawn data points to the sophisticated feature-rich pieces of software from the likes of TradingView and others that are available today.
With a huge array of bars, lines and candlestick styles, traders have literally hundreds of indicators and drawing options at their fingertips to research over the price movements of any financial instrument. From daily and monthly timeframe right down to the granular second by second or even tick by tick data, charts have evolved to provide really meaningful way to understand price movements and find patterns that can be used to trade or provide entry and exit signals.
What is a Chart Layout?
As with every feature rich and complex system, it’s crucial to find the best way to use its features based on individual trading needs. This is where the “chart layout” can help. Simply put, a “chart layout” specific to trading can be summed up as the structure and display of all indicators used by a trader together in a single chart plotted over or alongside price action either in form of candlesticks, line chart or any other method of displaying the price.
For e.g. a trader might have a daily chart that plots price as candlesticks with few indicators like MACD (moving average convergence/divergence), Bollinger Band and Volume (underlay) plotted along with the candlesticks. So this combination of price, timeframe and indicators together form a “chart layout” that a trader uses to view the price movement of any financial instrument or a stock.
Why Chart Layouts Matter
Finding a right combination of technical indicators and/or price is very important for a trader to find patterns in price/indicator movements. These patterns are the very basis of technical analysis, which helps identify trading opportunities based on probability of these patterns repeating over time again. Plotting/using too many indicators might end up with more noise (too many patterns or conflicting signals between indicators), or having too few or no indicator will leave a trader solely at the mercy or price movements. Obviously there are many experienced or professional traders who trade only on price action movements, but that level of expertise comes with experience and generally cannot be expected from a trader with very less experience.
Below is an example of a simple chart layout that has candlesticks on daily timeframe along with volume underlay indicator, MACD and Bollinger Band. Note that both MACD and Bollinger Band settings are kept at default. Traders can easily edit the settings of any indicator as per their preferences, however keeping the default values would be a good idea to begin with.
Notice how all 3 indicators are plotted in a different way. That’s because each has a different function and way to display. Imagine MACD being plotted over the candlesticks just like Bollinger Band! It would create utter confusion and would be almost impossible to read, whereas Volume bars plotted below each candle makes it easier for viewer to associate it with each other.
Finding Repetitive Patterns
Every trader should experiment with many of these indicators and should end up creating their own chart layout(s) that feels “right” to trade. Finding repetitive patterns of price and indicator behavior becomes much more intuitive when a same chart layout is used repetitively… and finding repetitive patterns should be one of the prime goals when it comes to trading based on technical analysis.
Let’s check a simple repetitive pattern… MACD lines crossing each other (seen in the above chart as orange and blue lines). Notice how the price movement going up and down over a period of days makes the MACD lines cross or converge. Now imagine being a trader who follows every convergence of these lines. Going long or buying the stock whenever the blue line going upwards crosses the orange line would be a good idea. This will happen when the price of the stock starts moving up. So essentially what the trader does is to follow the new trend created by the price movement. Of course this is a very basic idea of how to recognize patterns on a chart layout and it should be much more evolved than just following one indicator.