Trading can be risky at the best of times, but especially if you do not know what is happening around you. So it is essential you learn to read and understand analysis to be able to put the knowledge gained to good use.
In technical analysis, the use of charts is intrinsic to making effective trading decisions. Learning to understand a chart is essential for anyone new to Forex trading. This blog is going to introduce you to the four main charts and explain exactly what you are looking at;
- Candlestick chart
- OHLC (bar) chart
- Line chart
- Mountain chart
Looking At December 2018 Chart Info – What They Indicated
Towards the end of December 2018, most FX traders were keeping a close eye on three currency pairs, to see what their next level might be. These were the USD/JPY, GBP/USD and EUR/USD.
Market strategists using technical analysis charts predicted that this pair was biased to the downside. Political tension in the US and unresolved trade disputes have all contributed to this trend. It was considered that more risk reduction was likely. The thinking was that the USD/JPY was due to break even lower, that is sub -110. As you can see from the chart, the pair went bearish when it dropped below 112.20, moving further through to 111.38, which could accelerate the downside.
Having dropped from its highs in November, the GBP/USD flexed up and down, but little change was expected due to the markets readying themselves for the Christmas and New Years day lull. The prediction was an expected 1.2630 – 1.2700 range and the forecast was bearish.
As winter settled in the northern hemisphere, a dark cloud was hovering over the US. The political pressure of a potential government shutdown over the controversial border wall was influencing the markets. A rapid decrease following the FOMD (Federal Open Market Committee) meeting saw it bottom out at 1.138, before quickly rising to 1.140. The forecast was also bearish.
Charts – An Essential Tool For Any Trader
The charts used in the examples above, when taken into consideration with other data, gave FX traders important information on these three currency pairs. The above charts are candlestick charts, with a MACD (moving average convergence divergence) indicator and a momentum indicator. Understanding technical charts is necessary to trade effectively. They are visual tools that once learnt, can give traders essential information quickly on what is happening in a particular market.
Below we take a look at some of the more popular charts in use. Bear in mind that each on their own gives vital information, but in combination with other tools helps you make better-informed decisions. The use of which particular chart suits you as a trader is a personal choice.
Reading A Candlestick Chart
A candlestick chart is a visualisation tool of what is happening in the markets. They are also sometimes called a Japanese candlestick chart. Each trading day or specific time period is visually represented by a candlestick, so a typical month would have 20 candles that display the price movements on each day. They are popular due to the speed of analysis possible by using a visual presentation of the mass of information available, allowing more informed trading decisions.
The two main candlesticks to be aware of are the:-
Bullish candle – typically presented in a blue, green or white colour that indicates the close is higher than the opening trade.
Bearish candle – commonly presented in red or black that indicates the close is lower than the opening trade.
There are three components to the candle:
- The upper shadow – this is the line that shows you the difference between the high of the day and the bullish close or bearish open.
- The real body – the coloured part of the candle showing the difference between the open and close of trading.
- The lower shadow – the vertical line that displays the low of the day and the bearish close or bullish open.
There are also four price indications for the currency pairs. These let the trader know what is going on in the market and if it is buyers or sellers that are pushing the markets.
Open – the price at the beginning of the trading period
Close – the price at the end of the trading period
High – the highest price in that trading period
Low – the lowest price in that trading period
This is the basics of a candlestick chart. Numerous patterns can also be seen in the candlestick chart that once learnt, gives the trader a graphic description of exactly what is happening with the particular currency pair. To make life easier it is essential to understand these patterns such as:
Doji – a pattern where the market explores its options both upwards and downwards but does not commit to either. Seeing a Doji pattern emerge could indicate it is time to scale back or even exit your position. This pattern is about indecision, not necessarily reversal.
Dragonfly Doji – this pattern is often present at the bottom of downtrends and indicates a bullish reversal. The important part to note is the long lower shadow, which shows the market tested out where the demand was and also found it. This is a useful pattern to observe as traders have a visual of where support and demand are located.
Reading A HLOC Or OHLC Chart
This is a slightly more familiar, less ‘bulky’ bar chart available. The acronym stands for Open, High, Low & Close. It provides the essential information required for trading, similar to the candlestick charts, but the prices are indicated by horizontal lines.
Once again, the lines are colour coded, with green/black being an ascending bullish OHLC bar and red the descending bearish OHLC bar. Seeing a red line is telling the trader the price has decreased over the opening price, finishing lower than it opened. A green line indicates the price finished higher than it opened, with the horizontal ‘notch’ indicating the actual prices.
Reading A Line Chart
A very familiar looking chart from school days, this offers less information than the other two options. What it does emphasise is the closing price, in fact, it is sometimes called the close-only chart. It is a series of data points over any defined period, joined together to reflect the information visually. As the information is limited, traders tend to use this chart to reflect long term trends.
This chart is also popularly used in conjunction with other charts, as it can be less cluttered to view, especially for someone new to charts and trading. Using a line chart can bring simplicity to what can be confusing or too busy on a candlestick or OHLC chart. It provides easier to spot pattern indicators to help promote better trading decisions.
Historical year line chart from 2000 showing USD/JPY activity.
Reading A Mountain Chart
This visually simplifies the line chart, in that it colours in the areas beneath the lines, giving a silhouette of a mountain. Again, this type of chart is used for long-term trend analysis as the open-close and high-low prices are not indicated.
Working With Other FX Tools
Nothing is quite as simple as it sounds and becoming an experienced FX trader is about finding your comfort zone. Nobody can say which chart will resonate with your personal trading style but do not limit yourself to the first one you come across. Remember to combine charts, not only the time frame periods you use but also indicators that help identify the market trends. Overlay indicators like the moving averages and Bollinger bands, or oscillators like RSI. Both Relative Strength Indicators and MACD are handy tools to learn. Remember too that all of these can be tried out for free on a broker’s demo account.
There are many methods FX traders use to analyse the market and make informed decisions on the currency pairs they are interested in. The selection of which graphs to use is a personal choice, but even if technical analysis is not your primary tool, understanding a chart is essential.
The choice also applies to the time period that is covered. Many new FX traders will opt for the one or five-minute charts. This is possibly not the right choice at the onset, as it does not really provide enough time to make informed decisions. Again, time frames are about each trader’s personality, and finding the right one for you means testing out a few time frames to identify your comfort zone.
No matter what your inclination for analysis is, fundamental, qualitative or technical, in Forex trading you will need to understand any chart. Learning to read them is an essential part of becoming a successful trader. The ones you choose will ultimately suit your personality and be the ones that you are most comfortable with. However, do investigate the variety that is available to find the perfect ones that suit your trading style and preferences.