There is little doubt that using a bar chart trading strategy can pay off. When traders do it well, the result is always the building of legends. This is why throughout the years, accomplished traders have sung the praise of relying on a sound bar chart strategy.
Legendary trader Jesse Livermore made so much money trading using bar chart patterns, that by the time he died in 1940, his small trust had ballooned to $5 million, around $100 million in today’s dollars. In more recent times, day traders who rely on day trading patterns using charts have become even more common.
The trend has produced people like Timothy Sykes, the brash millionaire who took a small investment in himself and turned Profits unlimited of $350 million. So, it is clear that traders can make a lot of money using a bar chart strategy. But what charts? Let’s explore that now.
Bar charts are very popular among day traders because they pack a lot of information and are relatively easy to read once you learn the basics. A bar chart brings at a glance the two most important metrics that any trader needs to make lots of money. These metrics are price and volume. But it’s how quickly the trader can assimilate the information that makes a bar chart trading strategy a good way of making lots of money.
A typical bar chart (see figure 1 below) shows a collection of price bars. These price bars depict the movements of a particular stock over time. The time horizon that is displayed will depend on the trader and the trading goals. Day traders typically use short time horizon bar charts, so that a typical day trader will set up a chart in order to gain insights from minute to minute. The shorter the period of measurement the better it is for short term traders. This point is very important because lots of traders make this basic mistake. Many will look at a weekly bar chart, for instance, only to continually lose money and scratch their heads wondering why. Now you know!
Bar Chart Interpretation
Reading and interpreting a bar chart is super easy. The opening price is displayed as a small horizontal line (this is your bar) on the left of the vertical line. Closing prices are also displayed on a vertical line, but instead of appearing on the left, they appear on the right of the vertical line. Colors are very important in bar chart interpretation. Black and green is typically used to show a close price that is above the open price. When the opposite is true, the color used normally is red. The colors used may vary considerably according to the platform, but on the whole, when colors are used they usually mean the same thing.
Where the rubber meets the road is in interpretation. A trader’s ability to turn a bar chart into meaningful evidence is crucial. The difference is the skill at this stage of the process can mean the difference between making $1 million and losing thousands.
Take volatility as an example. This is the degree to which prices move and spans strong to weak. Long vertical bars on a bar chart represent a huge gap between opening and closing prices, which signal a huge increase in volatility. The opposite is true when the vertical bars are flat. The distance between the open and the close is also important. A huge gap here suggests that buyers were active and are bullish about the particular stock. This bullishness is important for traders looking to ride the upside and capitalize by making huge gains. And since gains mean more money for a trading account, quickly assessing these conditions on a chart is very important.
Another important element of the bar chart trading strategy is being able to spot downtrends. Let’s say a stock climbs 30% on a previous bullish trend, but analyzing the bar chart shows a relatively low close to the initial spike; this might be a sign that sellers are now pouring into a stock. This is a bearish signal and maybe an opportunity for a trader to exit a stock before it loses all its upward momentum.
The overarching signals are uptrends, represented most times by long green bars, and downtrends, represented by long red bars. The trades executed between the two extremes are the bread and butter of day traders whop make as much as $10,000 a day after mastering bar chart strategies. This gap, or “money spot”, as some traders call it, is where the real money is made.
Bar charts are still the go-to chart source for serious traders who want to scale their incomes quickly and minimize risk. The sweeping glances that bar charts are able to give provide an added advantage over other kinds of charts, such as candle sticks.