PostHeaderIcon Trading Chart Limitations

The use of trading charts in technical analysis is one of the common trading methods used by many traders. Analyzing charts and looking for trends and patterns seem to help traders determine what the next market movement may be. But it may be easier said than done.

Although the use of trading charts to map out potential future market movements and time trades may look like it may be quite a dependable means of reading the market, they also have their own limitations. What data that the different trading charts may provide may not always show the whole picture of the market.

Charts do not always show what happens in between market periods.

Most of the charts that technical analysts use to determine price and market movements usually only show a summary of data for a certain period. Candlestick and OHLC (Open High Low Close) charts only show the open, high, low and closing prices of a certain security. But these charts may fail to show what may have happened in between.

By looking at the charts, it may seem that the price of a security may have gone straight from a high to a low price, or vice versa. But in reality, the security may have experience several gyrating price movements during that time period. The charts may not provide any indication of these events, which may sometimes have false breakouts happening within the time frame.

The limitations may have negative effects.

There are many instances where traders may seem confounded by how the market seems to move despite all their analysis and careful back testing. The reason for this is because previous information does not always determine future price movement in the market for most securities. All they can provide is a means to determine where a movement may “likely” be going.

For this reason, novice traders who rely on chart analysis may usually find it difficult doing live trading. Faced with chart data that only provide entry and exit prices, they might be caught by surprise that price fluctuations in between the opening and the closing of the market are actually more frequent that what the charts show. This may affect some traders to act quite differently from what was determined according to plan.


Comments are closed.