51 diagrams

Diagram library

Every idea on this site, drawn. Each diagram is illustrative — the shapes are real, the prices are made up — and each one is ours, not copied from a chart or a screenshot anywhere else.

These appear automatically on the dictionary terms and lessons they explain. Nothing here predicts anything.

A trailing stop set by ATR. Average true range measures how far a market typically travels in a session, so a stop placed a multiple of ATR under price leaves room for ordinary swings. The step line only ever ratchets up, and the circle marks where price falls onto it.

Bar and candle, same prices. A bar chart and a candlestick chart carry exactly the same four numbers for each period: open, high, low and close. Only the drawing style changes, so pick whichever you find easier to read.

The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

Bollinger bands: squeeze and expansion. The middle line is a 20-day average and the outer bands sit a set number of standard deviations away, so they measure how far price has recently been straying. When moves are small the bands pinch together; when moves grow they spread apart.

Breakout and retest. Price stalls under the same level several times, pushes above it, then drops back to touch it from above before carrying on. That touch is the retest, where the old ceiling is tried as a floor. A break that falls straight back under it is a false breakout.

The bull flag. A sharp advance (the pole) followed by a small channel that drifts gently lower (the flag); here the advance then resumes out of the channel. A bear flag is the same shape upside down: a fast drop, then a slow drift higher.

The parts of a candlestick. One candle sums up a slice of time: the thick real body runs from the opening price to the closing price, and the thin wicks reach out to the highest and lowest prices traded. Colour tells you which way the body ran.

Compounding against a flat return. Two accounts start at $10,000 and earn 10% a year for fifteen years. Leaving the gains in means each year earns on a larger balance, so the curve bends away from the straight line and ends $16,772 higher.

Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

Covered call: payoff at expiry. Shares bought at 100 with a 110 call sold for 3. The 3 cushions the downside to a 97 breakeven, but everything above 110 belongs to the call buyer, so profit stops at 13 while the loss below still follows the shares.

Cup and handle. Price drifts down and rounds slowly back to where it started, making a bowl shape, then pauses in a small shallow dip called the handle. The dashed line across the rim is the level traders watch.

A market depth chart. Each step adds the orders resting at the next price away from the middle, so the bars show how much can be bought or sold before the price has to move. Here the buy side is the taller wall.

Double top and double bottom. Two peaks at roughly the same height with a dip between them make an M; two lows at roughly the same level make a W. The dashed line drawn through the middle is the neckline, and traders watch for price to close through it.

What it takes to get back to even. Losses and the gains that undo them are not symmetrical. Losing 10% needs an 11.1% gain to return to the starting balance, losing 50% needs 100%, and losing 80% needs 400%.

Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.

Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.

Fibonacci retracement levels. Take one move from a swing low to a swing high and mark off fixed fractions of it — 23.6, 38.2, 50, 61.8 and 78.6 per cent. Traders watch those lines to see how much of the move a pullback gives back; here it stalls at 61.8 per cent.

Rolling a futures position forward. Every futures contract has an expiry date, so a trader who wants to stay in the market closes the front-month contract and opens the next one. That swap is the roll, and the two contracts rarely trade at the same price.

Head and shoulders. Three peaks in a row, the middle one highest, with the two dips between them joined by a line called the neckline. Traders watch for price to close back through that line. Turned upside down the same shape is the inverse head and shoulders.

Iron condor: payoff at expiry. Four strikes: the 2 credit is kept in full while the price finishes between 95 and 105, and is lost gradually outside the 93 and 107 breakevens. The bought 90 put and 110 call stop the loss at 3 on either wing.

Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Buying a put: payoff at expiry. A 95-strike put bought for 3 is worthless above 95, so the 3 is lost; it breaks even at 92 and gains a dollar for every dollar lower. The most it can lose is the premium, which is why it is also used as insurance on shares.

MACD, signal line and histogram. The MACD line is the gap between a fast and a slow moving average, and the signal line is a smoothed copy of it. The bars show the distance between the two, and the circle marks where the faster line rises through the slower one.

Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.

The mood around a market cycle. The same price path labelled with the feelings that tend to travel with it, from optimism up to euphoria and down through panic to despondency. Confidence is highest where the most money is already committed and prices are highest.

Fast and slow moving averages crossing. A moving average is the average of the last few closing prices, redrawn each period. An average over fewer periods turns sooner than one over many, so the two lines cross whenever the recent pace of the market changes.

Simple versus exponential averages. Both lines average the last eight prices, but the exponential version gives the newest prices the most weight while the simple version treats them all alike. That is why the exponential line bends first when price turns and then tracks it more closely.

How timeframes stack up. A daily candle is not different data, only coarser data: it opens where the first six-hour candle opened, closes where the last one closed, and its wicks reach the highest and lowest prices any of the four touched.

Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.

Market, limit and stop orders. A market order buys straight away at whatever price is there. A limit order waits below until the price comes to it, and a stop order sits above and turns into a market order the moment price touches it.

Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

A gap between two sessions. A gap is a price range where no trading took place: the market shut at 30.80 and reopened at 31.60, so the shaded band in between holds no candles at all. It stays an open gap until price trades back through it.

Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.

Risk of ruin. The chance of losing the whole account, plotted against the share of it staked on each trade, for a method that wins 52% of the time at even money. The edge is the same all along the curve; only the bet size changes.

Risk and reward on one trade. One trade on a price scale: the entry sits 2.00 points above the stop and 6.00 points below the target, so the shaded reward band is three times the risk band. The ratio compares what is lost if the stop is hit with what is gained if the target is reached.

Divergence between price and RSI. RSI measures how one-sided recent price moves have been on a 0–100 scale. Here price sets a higher peak while RSI sets a lower one, so the second push carried less momentum than the first.

Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.

The stochastic oscillator. The stochastic shows where each close sits inside the recent high-to-low range, on a scale of 0 to 100. Readings above 80 mean closes are hugging the top of that range and below 20 the bottom; the circle marks the fast line turning up through the slow one.

Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.

Support, resistance and the flip. Support is a price where buyers keep stepping in and the fall stops; resistance is a price where sellers keep stepping in and the rise stops. Once price closes above an old ceiling, that same level often acts as the new floor.

Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

The four forex trading sessions. Currencies trade around the clock because the big financial centres open one after another. London and New York are both open between 12:00 and 16:00 UTC, which is the busiest stretch of the day.

How a trend is built. A trend is just a sequence of turning points. While each peak and each dip sits above the one before it the market is trending up; once both start landing below the previous ones the structure has turned down.

Three triangles. Three ways a market can coil up: a flat ceiling with rising lows, a flat floor with falling highs, or both edges closing in on each other. The swings get smaller, and traders watch whichever edge price leaves first.

Vertical spread: payoff at expiry. Buying the 100 call and selling the 110 call costs 3 net. Below 100 that 3 is the whole loss; above 110 the gain stops at 7, because the sold call gives back every dollar the bought call earns beyond 110.

The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.

Volume profile, point of control and value area. Turn the chart on its side and count how much traded at each price instead of at each moment. The longest bar is the point of control, and the shaded band around it is the value area where most of the session's business was done.

VWAP and its standard-deviation bands. VWAP is the day's average price weighted by how much volume traded at each price, so it shows where the bulk of the day's business was done. The bands sit one standard deviation either side, and price here swings between them all session.

Rising and falling wedges. A wedge is two trendlines that slope the same way while closing in on each other. In the rising wedge here price leaves through the lower line, and in the falling wedge it leaves through the upper one.

The win rate needed to break even. How often a method must win just to stay level, for each reward-to-risk ratio. At 1:1 half the trades must win, at 1:2 a third, and at 1:3 a quarter, because each win covers more losses.

Three shapes of the yield curve. The yield curve plots the interest a bond pays against how long you have to wait to get your money back. Normally longer bonds pay more; sometimes every maturity pays the same, and sometimes short bonds pay the most.