A picture is worth more than a thousand words. The forex chart is perhaps the best proof of this clich. Have you heard of Candlestick Charting? It was developed by the Japanese in the 17th century to profit from rice trading.
Over time, traders have become very sophisticated in understanding charts and the information contained in them. In fact appearance of certain chart patterns can give you priceless clues about the direction in which the market is about to turn. Dont confuse the Head and Shoulder pattern with the name of a shampoo.
Now you can predict the likely direction of the currency pair whether it be sideways, upward or downward by studying the patterns that appear on the forex charts. This field of study is known as Technical analysis. Without technical analysis, you wont be able succeed in forex trading. Technical analysis depends on the study of different types of charts to understand and predict the likely direction of the currency market.
There are four main types of charts that are used in the world of finance and for that matter in forex trading. The four main types of forex charts are: 1) Line Chart, 2) Bar Chart, 3) Candlestick Chart and 4) Point and Figure Charts (P&F Charts). Lets briefly describe each one.
Line Charts: This chart resembles a line hence the name line chart. This chart simply connects the closes from one period to another. Critical data is missing from a line chart as a line chart doesnt show you where the currency pair opened for the period. It only shows where it closed. Nor does it points the high and lows for a period.
Bar Charts: A bar chart shows the opening price of a currency pair, the closing price and the low and high price for each period. The bar chart can provide the hourly, daily, weekly and even monthly information. It is also often called the OHLC (open-high-low-close) bar chart. Bar chart addresses many of the shortcomings of the line chart.
A horizontal line protruding from the left of the bar represents the opening price of the currency pair. A horizontal line protruding from the right of the bar represents the currency pairs closing price. The periods high and low are the top and bottom of the bar.
Candlestick Charts: This chart clearly depicts the currency pairs open, high, low and close. Traditional bar charts do the same. But candlestick charts do it more effectively. A candlestick chart is made up of two components.
The range between the open and the close is called the real body of the candle. It is also called the candle body. The price movement above and below the body is called the shadows. It is also known as the candle shadows. If the currency pair closing price is above the opening price, the candlestick body is white and it is taken as a bullish sign. Similarly if the closing price is below the opening price, the candlestick body is painted black and it is taken as a bearish sign.
Point and Figure Charts (P&F Charts): Sometimes Point and Figure Charts are used by traders in technical analysis. The only downside is that they dont represent the time well. The main advantage of the P&F charts is that they filter out noise or unimportant price movement. Point and figure charts plot the currency pair price using a column of Xs to represent rising price movements and Os to represent falling price movements.
The new plot is only made when the price exceeds the predetermined threshold by a fixed amount. The Xs and Os are plotted only when the currency price moves by a predefined amount. A plot may not be made if the currency price does not move significantly. Understanding and knowing the different chart types used in forex trading, when and how to use them can give you an edge as a trader.
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Know These Forex Charts. Learn Forex Trading!
Tags: betting, business, credit, debt, finance, forex, gambling, investing, mutual funds, poker, retirement, stock trades, stocks, trading, wealth building