Forex Market Trading: An Introduction to Charting

Using Charts in Forex Trading

Charts present a graphic summary of the price movements on a financial market and they have been in use for more than 200 years, with the first recorded chart being used in Japanese rice trading. Charles Dow was one of the people who laid the foundations of technical analysis – or the analysis of charts based on mathematical formulas and patterns to predict future movements – as we know it today, in the nineteenth century.

Until the era of personal computers, analysis was done on paper which is why you will still often hear the term of “trading on paper.” This basically refers to the idea of testing a strategy on “paper” before going live. However, the rise of the internet has made it possible to use demo accounts to test strategies rather than having to do it on paper. The advantage is that the system can be tested under real Forex market trading conditions. This provides an essential step in learning currency trading.

Types of Forex Market Trading Charts

As we have already established, without charts there is no way to determine what the market is doing which makes it impossible to determine whether or not you should enter the market and when. This means that you won’t be able to do any type of Forex market trading unless you know how to analyze Forex charts.

There are three popular types of Forex charts, namely line charts, bar charts and candlestick charts. On a line chart a line is drawn from one closing price to another closing price depending on the time frame being traded. So, if you are trading on a 15 minute chart, each point will represent the closing price for that 15 minute increment.

Bar charts, like candlestick charts, offer more information in that they show opening prices, closing prices, the highest price and the lowest price as well. Each increment of time is represented by a vertical bar where the top represents the highest price that was paid and the bottom the lowest price for a transaction during the specified time frame. Additionally, each vertical bar has two horizontal dashes, one on the left and one on the right. The one on the left represents the opening price while the one on the right represents the closing price.

Candlestick charts, as stated, offer the same information as bar charts except that the representation is easier to interpret because it is more graphic. A candlestick represents one unit of time and it has a body and wicks. The body is a rectangle and if the price is rising then the bottom of the rectangle is the open and the top the close, while the vice versa is true if the price is falling. The rectangles are filled with a color, which most trading platforms allow you to set on your own according to preference. The advantage is that a candle showing a rise in price, i.e. the closing price is higher than the opening price, will have a different color to one that is showing a drop in price. This makes it much easier to analyze as you can instantly see the direction of the market. The wicks, which are on the top and the bottom of the candle, show the highs and the lows.

Candlestick charts are the most popular charts in Forex market trading because they are easier to interpret. The shapes of the candlesticks themselves as well as the patterns they form are also easier to spot and are invaluable in predicting possible market reversals. For example, a candlestick with a long body will indicate either strong buying or selling pressure, depending on whether the opening price is above or below the closing price.

Forex market trading is all about knowing how to read the charts. Even though fundamental analysis, i.e. the study of economic data and its impact on currencies, is critical, without a chart there is no way you can tell what the market is doing. The chart is the most basic and essential tool to Forex market trading.

Related posts:

1. The Currency Market: Forex Trading with Japanese Candlesticks
2. Futures Trading: Common Candlestick Patterns
3. The Forex Market Trade: The Pitfalls of Indicators
4. FX Trading with Chart Patterns: Head and Shoulders
5. An Introduction to the Fascinating Forex World
6. Forex Trading Market Report for 05/03/2012