Why Use Historical Charts

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Why Use Historical Charts

Historical charts, or just charts, are the means by which we do what we do. Trade. Charts of historical price action are incredibly valuable and there is no question of there importance to technical analysis. However, there is widespread debate over the importance of using historical data to back test and its reliability on future results. Well, I’m here to tell you that it is important and it is a reliable means of predicting future results. Seriously, if you doubt it then why are you even considering using technical analysis? Technical analysis is nothing but charts, past price action and its bearing on future price movements. One of the pillars of TA is that the market always repeats itself and those repetitions are measurable and predictable. As for back testing goes, hindsight is 20/20 as the saying goes. It’s easy to look back on a chart and see where a signal formed just so, leading to profits.

An Invaluable Educational And Trading Tool

Historical charts are important for a number of reasons. First and foremost is education. You have to learn in order to be good and using past examples is a well recognized method of teaching. It’s one thing to read about rising and declining triangles, support and resistance, pin bars, retracements, cross overs and oversold levels but it is something else to see it, on a chart, and to see how price action behaved before and after. Think about naturalists for example. There are millions of varieties of insects on the planet. In order to recognize and differentiate the myriad variety of ants from each other and other ant-like insects scientists study examples in the laboratory. For us as traders our lab is the charts. We go to the lab, examine known examples of past price patterns in order to become familiar with them and hone our skills and then we look for those patterns as they begin to appear in order to make trades. The more familiar you are with past price patterns the better you will be at recognizing them as they happen.

The second reason, and equally important, is that historical data has great bearing on current price action. Past highs and lows are often key areas of support and/or resistance that provide targets for entries. These highs and or lows represent areas where past buyers are either able to recoup losses or to get into new trades at ideal prices. They can be areas that attract new buyers or prove to current bears that the market is indeed truly weak. At the same time past price action can also be indicative of direction and duration of a move. A break out from a bull flag has an easily predictable target level, important for binary traders because that is a crucial factor in determining expiry. I have found over the ten plus years I have been trading that a line drawn on my charts never ceases to be valid. If I draw it and prices come back to it tomorrow, next week, next year or many years down the line it will affect price action.

Look at the chart above of the CBOE Gold Index. This is a ten year chart of monthly candlesticks, a very long term chart indeed. It is easy to see that the lows of 2008 are acting as a support level for the index at the current time, 5 years later. This support level has a strong implication than a shorter term level of support or resistance and could adversely affect a trade if not accounted for. This same theory applies down through all the time frames. A trader could use this chart and then drill down to one of weekly prices in order to more closely watch support and then use charts of daily and hourly prices to pinpoint trades based on bounces and breaks of the long term support line. I have also used Fibonacci Retracements on this chart as a means of predicting other areas of support and resistance, all based on past price action. In the end, all recognizable past price movements can have an impact on current price action.

The Hard Right Edge

The part of the chart where new price action happens be it weekly, daily, hourly or shorter is often referred to as the “hard right edge”. This is because, obviously, it is the right side of the chart but also because this is where the hard decisions have to be made. Whether or not to buy, sell or hold. Making a trading decision can be very hard, so hard in fact that it keeps many from ever pulling the trigger. This is why using the historical charts, knowing the historical charts and using past price action is so important. It will help you learn what to look for, boost your confidence level so you know what to expect when you see what you have learned begin to unfold and pave the way to a life of successful trading. Knowing exactly what prices will do once you reach the hard right edge is impossible to do but you can still trade with confidence knowing that you will be right more times than you are wrong.

Why You Should Be Studying the Historical Trading Charts?

The Geek Says…. Binary Options Traders, Study Your Charts!

I know that you have already read and learned about price patterns, technical indicators and how to apply them to your charts. What I am here today to do is inform you that you should spend some time studying your historical charts. Maybe even more time than you spend looking at the current charts. What’s the difference you might ask? Nothing really, except perspective. The current charts are the ones you use to get your signals. These are usually lower time frames, include only a few days or few hours of information and lack the proper perspective to make the really big trading decisions. The historical chart is more than what is happening now, it is everything that happened to an asset over the course of its existence. This could mean years, if not decades, of data and represents the underlying market in which you trades are being made. Failing to take them into account is an easy mistake to make and one that often keeps newbies from realizing profits they would otherwise have made.

Mob mentality and its study is a well known subset of the social sciences. It describes how people are influenced by their peers to adopt certain behaviors, follow trends, and/or purchase items. Examples of the herd mentality include stock market trends, superstition and fashion. It is in fact the very basis of technical analysis and what it is we are studying when we look at our charts. When the market is bullish prices rally, when the market is bearish prices decline, when the market is unsure prices consolidate and when the market changes its mind prices reverse. The thing to remember is that the mob is dumb and will repeat itself even though the individual participants are aware of this fact. It is this repeatability we are looking for when studying our charts and waiting for signals.

When I say that the market is dumb I’m not talking about the individual market participants like you and me, we’re smart. We know how to read the market and stand above it. The market itself though is made up of everyone from the rankest gambler to the most savvy speculator and as such is subject to mob mentality. Conflicting sentiments swirling through the market affect traders on a group level and influence their day to day movements. These swirls are represented on the charts and visible as price action. The key for us traders to remember is that the dumb mob will do the same things over and over again and this will be repeated on the charts through price patterns. These price patterns and their repeatability is why the market is so predictable and what traders are hoping to capitalize on. In order for you to stand above what is happening “in the moment” you must know your history or you will be doomed to repeat it too.

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Know Your Market To Control Risk

Using past price action to predict support, resistance and future targets is the technical aspect of risk management. You can control your risk in one way with money management and position sizing; this limits the amount of your trades and controls how much you are allowed to lose. Studying historical charts limits your risk by helping you to weed out potentially bad trades, to pinpoint major turnings in the market and to predict targets. You do this by identifying important price levels and it doesn’t matter how far back they go. In fact, it has been my experience that the longer a potential area of support or resistance has existed the stronger it is likely to be. When a rally approaches a long term level of resistance it is a good time to sit back and wait to see if the resistance will hold, or if it will reverse the market.

Its likely you are already using historical charts and don’t even know it. Multiple time frame analysis is a popular form of market analysis and one that we here at BOTs talk a lot about. It is a top down approach based on historical data that uses the long term to establish trading parameters in the near term. This could be as simple as identifying past support and resistance or as complex as using longer term trends dictate near term trading direction.

A short visual history of charts and graphs

Most of the charts used today in data visualization among virtually all of the social sciences (economics included–you can’t get out of it this time) derive from the original design of William Playfair (1759-1823), political economist and a product of the Scottish enlightenment, and Johann Heinrich Lambert (1728-1777), a mathematician of the Alpine inclination. Together, they more or less popularized the idea that data could be presented to a mass audience.

(The power of the long tail. Chart by William Playfair, 1786. via Robin Good)

In the 1790’s, as people got wind of his pioneering work, they accused him of lie-telling and fabricating his data. The academe, acclimated to the traditional tabular graph (see my post on data mining vs. visualization), resisted his innovations for, say, 150 years.

(Playfair pie chart, via VML)

Playfair’s Commercial and Political Atlas presented the first line chart in his examination of the imports and exports differences between Britain and various other countries. Like many researchers after him, he grasped on the fundamental strength of visual data: ease of rapid comparison among a large number of variables.

(The Universal Commercial History, Playfair, 1805. via Mrinal Wadhwa)

And, like many political economists that followed, he used data visualization to ease his wild guesstimates a little. That’s alright, though, because in the end he built something truly revolutionary out of Priestly’s work.

Now Priestly was a somewhat different character. More of a natural scientist (he is often credited with discovering oxygen), his charts had an explicitly didactic purpose: Priestley believed [A Chart of Biography (1765)] would “impress” upon students “a just image of the rise, progress, extent, duration, and contemporary state of all the considerable empires that have ever existed in the world”. (Sheps, 146)

Of course, as a Providentialist, he really just wanted to impress on his students the power of God through history (as opposed to, say, the power of compound interest). But his charts were an instant hit:

I’m not sure why. But I would definitely consider Playfair’s graphics an evolution of Priestley’s work. Even his more conventional works are much improved over tabulations:

What I like about his work is that it shows how from its inception, visualized data could easily demonstrate causality in a way that would take much more space to explain in words. Take Playfair’s chart of Britain’s trade balance with North America:

Look at the 1770’s. Notice any changes? Right. Without having to really explain anything, we can clearly see the trade effects of the Revolutionary War. Of course, we need to explain the causal mechanism at work as well as include control variables to explain our parameters…but still.

Playfair, William. 1785. The Increase of Manufactures, Commerce, and Finance, with the Extension of Civil Liberty, Proposed in Regulations for the Interest of Money. London: G.J. & J. Robinson.

Playfair, William. 1805. Statistical Account of the United States of America by D. F. Donnant. London: J. Whiting. William Playfair, Trans.

Sheps, Arthur. “Joseph Priestley’s Time Charts: The Use and Teaching of History by Rational Dissent in late Eighteenth-Century England”. Lumen 18 (1999): 135–54.

Why Do You Use Graphs and Charts?

Graphs and charts are used to make information easier to visualize. Humans are great at seeing patterns, but they struggle with raw numbers. Graphs and charts can show trends and cycles.

Statistics helps make data understandable to people. Computers can understand lists easily; humans cannot. While statistical values, like averages and medians, can relay some information, they do not show patterns in a set of data. Charts and graphs do.

Humans are able to detect complex patterns. In fact, humans are often better able to see patterns than modern computer programs. When presented with a graph or a chart, people can often see trends. These trends can be upward or downward, and they can even be cyclical. If the data is presented on a table, however, detecting these patterns is far more difficult.

The aesthetics of information matters as well. When trying to attract investors, people will have more luck if they can present attractive graphs and charts. Visual information matters in media as well, and newspapers and online sites will often take time to present information in an aesthetically pleasing manner. Computers make the process of creating and customizing graphs and charts far easier than even before, which has made them more popular.

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