What a chart can and cannot tell you
A price chart is like a diary of a price. It tells you where the price has been. It cannot tell you where the price will go tomorrow, just like your diary cannot tell you what will happen next week.
- Education only. This lesson explains ideas. It is not a recommendation to buy or sell anything.
- Technical analysis means studying past prices and volume on charts. Fundamental analysis means studying the value of what is being traded (for a company: its sales, profits and debts; for a currency: interest rates and the economy). Many people use both.
- A chart shows history only. Every chart idea in this course is a way of describing the past, not a promise about the future.
- What the research says (honestly): a 2007 review by economists Cheol-Ho Park and Scott Irwin looked at 95 modern studies of chart-based trading rules. 56 found positive results, 20 negative and 19 mixed. The authors warned that many studies had problems, such as data snooping (trying so many rules that some look good by luck), choosing rules after seeing the results, and difficulty measuring risk and trading costs. They said profitability could not be considered proven.
- Every trade has costs (fees and the spread, see course 5.5). A chart idea that looks good before costs can lose money after costs.
| A chart CAN show you | A chart CANNOT show you |
|---|---|
| Where the price has been | Where the price will go next |
| How fast it moved | Whether news will change everything tomorrow |
| How much was traded (volume) | What other traders are planning |
| Where it turned before | Whether it will turn there again |
- Open any free charting website or the chart in a demo (practice) account. Do not log in to a real-money account.
- Type the name or symbol of any large, well-known market into the search box (for example, a big stock index).
- Find the timeframe buttons (often labelled 1D, 1W, 1M, 1Y or similar; names can differ by site) and choose 1 year.
- Look at the chart for one minute and write three sentences describing only what already happened (for example: "It went up from March to June").
- Now try to write one sentence about next month. Notice that you are guessing, not reading.
- Check: your three history sentences can be checked on the chart; your "next month" sentence cannot. That is the limit of every chart.
Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.
Read the video script
[Host] "A price chart is a diary. It tells you where a price has been."
[Screen: a one-year price chart with the right side blank] "What it can't tell you is what happens on the blank side, the future."
[Text on screen: 95 studies: 56 positive, 20 negative, 19 mixed (Park & Irwin, 2007)] "A big research review found mixed results for chart-based trading, and warned that many studies had serious problems."
[Text on screen: past patterns do not predict future prices] "So in this course we learn to read charts, not to predict them."
[Host] "Reading is a skill. Predicting is a guess. Let's learn to read."
Pick one market. Write a five-line "chart diary" for the last year: where it started, its highest point, its lowest point, where it is now, and one big move you can see. Do not write any prediction. Do not place any trade.
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I'm learning "Reading Price Charts: candlesticks, trends, support and resistance (education only)" on The Future Market. Lesson 1: "What a chart can and cannot tell you". What the lesson teaches: - Education only. This lesson explains ideas. It is not a recommendation to buy or sell anything. - Technical analysis means studying past prices and volume on charts. Fundamental analysis means studying the value of what is being traded (for a company: its sales, profits and debts; for a currency: interest rates and the economy). Many people use both. - A chart shows history only. Every chart idea in this course is a way of describing the past, not a promise about the future. - What the research says (honestly): a 2007 review by economists Cheol-Ho Park and Scott Irwin looked at 95 modern studies of chart-based trading rules. 56 found positive results, 20 negative and 19 mixed. The authors warned that many studies had problems, such as data snooping (trying so many rules that some look good by luck), choosing rules after seeing the results, and difficulty measuring risk and trading costs. They said profitability could not be considered proven. - Every trade has costs (fees and the spread, see course 5.5). A chart idea that looks good before costs can lose money after costs. - A chart CAN show you - A chart CANNOT show you - Where the price has been - Where the price will go next The exercise I'm working on: Pick one market. Write a five-line "chart diary" for the last year: where it started, its highest point, its lowest point, where it is now, and one big move you can see. Do not write any prediction. Do not place any trade. I'm stuck. Please: 1. Explain the main idea in plain, simple words with one everyday example. 2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step. 3. Don't just give me the final answer. Help me do it myself, and check my work when I share it. 4. This is for learning only. Remind me to check with a licensed professional before I make a real decision about my own money, health or legal situation.
I'm a parent helping my child (about 8 years old) with a lesson called "What a chart can and cannot tell you" from the course "Reading Price Charts: candlesticks, trends, support and resistance (education only)". Here's what the lesson says: A price chart is like a diary of a price. It tells you where the price has been. It cannot tell you where the price will go tomorrow, just like your diary cannot tell you what will happen next week. The activity: Pick one market. Write a five-line "chart diary" for the last year: where it started, its highest point, its lowest point, where it is now, and one big move you can see. Do not write any prediction. Do not place any trade. Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words. Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time. Keep it general and educational. This is not advice for a real situation.
Sources
- Park, C.-H. and Irwin, S. H. (2007), "What Do We Know About the Profitability of Technical Analysis?", Journal of Economic Surveys 21(4): econpapers.repec.org/RePEc:bla:jecsur:v:21:y:2007:i:4:p:786-826
- CME Group Education, Technical Analysis course: www.cmegroup.com/education/courses/technical-analysis.html
- U.S. Energy Information Administration via FRED, WTI crude oil daily prices (DCOILWTICO), used for the chart in this lesson: fred.stlouisfed.org/series/DCOILWTICO
Line, bar and candlestick charts
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Timeframes and trends
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Support and resistance
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Volume
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Moving averages
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The RSI and the limits of indicators
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Practise on charts with no money
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Final project
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Quiz
What four prices does a candlestick show?
Open, high, low and close.
On a common colour setting, what does a green candle mean?
The close was higher than the open.
What is an uptrend?
A series of higher highs and higher lows.
Why must you always say which timeframe you mean?
The same market can be rising on one timeframe and falling on another.
What is support?
A price area below the current price where falling prices stopped before; it is not a guarantee.
What is a false breakout?
When price breaks through a level and then quickly comes back.
What does volume show, and what can't it show?
How much was traded; it does not show which way the price will go next.
Name two ways moving averages fail.
Lag (they turn late) and whipsaws in sideways markets.
Does an RSI above 70 mean the price is about to fall?
No. In strong trends it can stay above 70 for long periods.
What did the Park and Irwin (2007) review warn about?
Many studies of chart-based trading had problems like data snooping, choosing rules after the fact, and hard-to-measure risk and costs.
What is hindsight bias in chart reading?
Old patterns look obvious afterward, though they were not obvious at the time.
Final exam
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Certificate
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