Studying the dynamics of an asset with the help of a chart can help determine the direction it is moving in. There are a lot of graphs and charts of all shapes and, whereas some of them are pretty self-explanatory, others are a bit more complex.
How to Read Forex Charts
Forex trading is all about anticipating trends: their ups, downs and reverse movement starting points.
No matter the asset you are dealing with, you must know your charts. Trading is all about reading charts, so naturally, the better your technical analysis is, the more success trading can bring you.
If there is one thing we all know about learning, it’s that practice is everything. This article offers the fundamental techniques you can apply, when studying charts, to improve your trading experience.
Traders that make decisions based on the charts are known as technical traders. They rely on chart and indicator tools to identify peaking trends and price points, which enables them to enter and exit the markets at just the right moment.
Then, there are the fundamental traders, who make their decisions based on what the news are. They rely on changes in economic growth, oil supply, employment data, interest rate changes, war and political instability to make the correct prediction.
Before jumping to patterns and indicators, it is important to understand what a chart actually is. To put it simply, a chart is a sequence of changes in prices of assets depicted over a certain time frame and illustrated in a graph.
There are two types of trends you will hear most often about: the Bullish trend and the Bearish one. The Bullish trend is an upward trend (because the bull is pushing the prices higher, when charging upwards with its horns), whereas the Bearish trend is its opposite ー a downward one (because the bear pushes the prices down with its claws). There is also the horizontal (also known as sideways or flat) trand, that moves across.
Whenever an asset’s price hits the same highs (resistance line) and the same lows (support line) at least three times in a row, we call it a ranging market ー because it is trading in a range.
Types of trading charts
There are three types of trading charts that are most popular among professional traders. Each chart represents pieces of data helpful for the traders. How useful the chart is, of course, also depends on the skillfulness of the trader.
The line chart is the most basic chart, but also a first step to successful technical analysis. The chart only offers one piece of information ー the asset’s closing price displayed over time. The closing price is known to be considered the most important part of data analysis. The line chart is formed by connecting the asset’s closing prices over time, neglecting the visual representation of the trading range or any information about the opening prices.
The bar chart offers more information on the market as it includes a few more fragment details to each data point on the graph. The bar chart consists of a sequence of vertical lines, each of which represents trading data. Unlike the line chart, it offers information on the asset’s highs and lows, as well as the opening and closing prices. The opening and closing prices are visualised by a short horizontal line.
The opening price is indicated by a “dash” on the left side of the vertical bar, whereas the closing price is the “dash” on the right side. Therefore, if the left dash is lower than the right one, we can tell that there has been an increase in the price. Moreover, in this case, the dash will be green, black or blue. If we are looking at a price decrease, the dash will be red.
The candlestick chart is pretty similar to the bar chart, but offers more information. Both charts have the vertical lines representing the price range within a certain trading period, but the body of the candle also shows us changes in the market with the help of colors.
A closer look at the Candlestick chart
All the way back in the 17th century, the Japanese started applying technical analysis when trading on rice. This led to the modern-day popularity of the Japanese Candlesticks.
The data displayed with candlesticks includes the asset’s highs, lows, opening and closing prices.
The empty and the colored parts are called the body. The thin lines above and below the body represent high and low ranges and are also known as shadows, wicks or tails.
The lines illustrated on top of the body will let you know the high and its closing price, whereas the bottom line will show the low and its closing price.
The colors of the body can vary, depending on the broker, but they remain pretty self-explanatory: the green represents a price increase, the red ー a decrease.
An empty candlestick lets you know that the closing price is higher than the opening price, which puts a huge “buy” sign on the asset. A colored candlestick represents the opposite, which means you should sell immediately.
You should also pay attention to the size of the body, which is an indicator of how big the difference in the price is. A short body, also known as Doji, shows that the price movement is insignificant and is perceived as a consolidation pattern.
Doji is an essential component of the candlestick charts, as they provide information in a sequence of candlestick patterns. They form whenever the asset’s opening and closing prices are not too different from one another.
The Doji candles prove to be useful when they show traders that the buying pressure is starting to fade out following a long green candlestick or when the selling pressure is weakening and supply and demand are evening out after a small red candle.
There are numerous patterns you can identify when looking at a chart. The chart patterns are conditioned by the fact that human psychology is not that flexible, which leads to history repeating itself over and over.
Chart patterns reflect the psychology of the financial markets and are paid attention to based on the assumption that if they worked in the past, they will work in the future too.
They can offer clues regarding what direction the asset is going to be moving in. Patterns help form a connection between trends based on the significant price movements. Analysis of chart patterns is a separate trading strategy you can use to your advantage.
There are a few most essential patterns, Triangles is one of them. It is a continuous pattern that shows the battle between the rising and the falling prices. It lets you assume the price will eventually be moving in the direction it was taking before the pattern was identified.
Another important pattern is the double top, which includes a price having two highs – this leads us to being sure the price will soon be going down again. The opposite of this is the double bottom – two lows, that will naturally be followed by an upward trend.
Hopefully, these examples help you understand just how important it is to be able to identify a pattern.
Using Indicators and Studies on Your Chart
As you become more familiar with reading and analyzing charts, you will eventually start using additional tools (like technical indicators) to measure the market volatility’s rate and shifts in value.
Technical indicators help you see when the markets are “oversold” or “overbought”. When these situations occur, markets tend to struggle with sticking to a certain direction, which often is a sign of inevitable reverse movement.
Then, there are momentum indicators, like oscillators, that measure the speed of the asset’s price changes. Most commonly used momentum indicators are the RSI, Stochastic or the MACD. Other forms of analysis, like the Bollinger Bands, will help you identify the time to enter or exit a trade.
Trend line indicators, like the Moving Average, will help determine the direction a trend is moving in by neglecting all the smaller price movements.
All of these indicators are offered on most trading platforms and can be used together to ensure you are making the right call on the market.