Forex Trading Charts

Forex Trading Charts

To use forex trading charts to your advantage it’s important to have an understanding of some of the principles of technical analysis. There is often a big debate between the traders that plan their trading using fundamentals and those that use technical analysis. The truth is that there are benefits in both methods – you just need to follow a system that you have the most trust in.
Forex Trading Charts
So where do you start with technical analysis? Well most of the activity is based around the studying of charts. The range of these charts varies enormously depending on the strategy you are using. Day traders will clearly only really be focused on the current days activity and will be using charts that plot prices every minute. Traders working on longer time frames will have mapped out various indicators tracking back over a number of days, weeks or months.

The complexity of some charts created for technical analysis is truly amazing although it’s interesting to note that there are only five bits of data that can be used to construct these. They are opening price, closing price, high, low and volume. So to explain those a little:

  • Opening Price –¬† the price at the start of the session.
  • Closing price – where it was at the end of that days session.
  • High – the highest price it reached during that session.
  • Low – the lowest price it reached during that session.
  • Volume – the amount of trades placed on that pair.

Most traders will have their favourite way of displaying data and although there a quite a number of different chart types, we will look at three of the most popular:

  1. Line
  2. Bar
  3. Candlestick

Line Chart
Many people will be familiar with the classic line graph where points are plotted and joined by a line which is normally evened out to show a smooth line. This type of graph shows limited amounts of information and is usually based on closing price only although it can often be configured to show a mean or closing price if desired. So it really only tracks one of the key parts of data. What you find people do in practice is have a number of lines on a graph which show different indicators to build up a picture of the information they need to display.

Even though the amount of information is less complete it doesn’t mean it is less powerful in some circumstances. There are some really effective day trading strategies that plot two moving average (one 3 minutes and the other 20 minutes) lines on the graph and the trade entry point is when the short line crosses the long line. The exit point is when the lines cross again. Market conditions need to be right and it works best in the early parts of the session but there are traders out there making serious returns on a regular basis from this simple strategy.

Bar Chart
The bar chart adds a few more important pieces of data into the chart and provides a level of detail that is needed to analyse more complex trading manoeuvres. The upright bar is normally coloured either black or red. A black bar indicates the price has closed higher than it started the period. A red bar shows that the price has closed lower than it started.

The height of the bar shows the price movement during the period. A tall bar means that there was a large variation in price for that period of time and a short bar shows there was very little movement.

Again, you can set the duration of the bars to be anything you like. If you were viewing a monthly chart then each bar would be set to indicate a days action. However if you are analysing a day trading pattern you would set your bars to 5 minute periods or even one minute periods – this way you get a really detailed picture of what’s happening during the trading session.

More detail is added to the bar chart through adding indicators for opening and closing price. These are shown by a a small dash on the side of the bar. The one on the left is the open price and on the left is the close.

Candlestick chart
The history of the candlestick chart is very interesting as people believe that they were introduced in the 16th century by a Chinese rice trader. There are certainly hundreds of books available on the subject and reading candlestick charts is thought to be quite an art. Once you get used to this type of chart it is very likely that you will become closely attached to using them. In many peoples opinion they are the most powerful of all the charting devices.

When you look at them it will become obvious why they are called candlestick – there is a main body, a little bit like a bar graph but there is a a wick, called the shadow, coming from the top and the bottom. The shadow shows high and low prices and the body indicates the opening and closing prices.

There is also some wonderful terminology used by candlestick chart aficionados – some of the best are: Doji, hanging man, hammer, shooting star and spinning top.

Choosing your favourite chart type will also be influenced by the type of trading strategy you are using. The main indicators the you will be using can me separated into four main types and these are: Trend, momentum, volume and volatility. With these in mind it’s worth considering some specific techniques that you’d be looking to apply using the charts.

Key tactics are support & resistance, trend line, break out and pivot points. A classic strategy is to identify where the price is being supported and also where there is resistance to stop it going higher. People often trade up and down between these lines when they are identified getting in and out of trades for the same currency pair on a regular basis.

Whatever method you are using you will find that users of technical analysis are fiercely supportive of their methods and understanding the quality of information they are able to gain from their insight from the forex trading charts is truly impressive. Building up the skill does take time  but to gain a usable level of knowledge can be picked up pretty quickly so it is a really powerful tool to add to your trading resources.

Forex Trading Charts

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