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Technical analysis is critical if you aim to become a trader, especially understanding trading graphs, and knowing how to read a chart can add significant value to your trading skills. Are you also looking for the same? Read on.
To learn how to read trading charts, you need to have an eye to see the data plotting on the chart. By looking at it, you can analyze the direction the financial instrument is about to move.
What is a forex chart? A forex chart represents a graphical representation of how the price of a currency pair changes over time. The price values are plotted on the vertical y-axis, while the horizontal x-axis shows time. Below is a presented forex chart example:
How to Read Forex Charts?
To read forex charts, traders need to learn to identify low and high prices, trading patterns, and trends during various time frames. However, there are three types of trading charts: line charts, bar charts, and candlestick charts. Usually, candlesticks charts represent the complete type of charts that contain the most information, such as open, close, high, and low price level for each candlestick.
How to catch a trend in forex?
To find a trend on any trading chart, traders use technical indicators and trend lines to confirm the overall direction or a currency price. In the first step, traders determine breakout move on a forex chart where a new high or low is made, and resistance or support is broken. Then, traders draw a trendline as diagonal support or resistance level on a price chart. Finally, traders can confirm trends using moving average indicators or seek logical confirmation of a movement based on macroeconomic parameters.
Example of the bullish trend on forex trading chart
Finding trends, whether they’re going up, down, or around, and even understanding when they’re about to reverse, is the secret to your Forex trading. You need to know how to follow charts no matter what commodity you’re trading. Analyzing trading charts is crucial in this field; you will eventually become a good trader with time and practice.
The purpose of this article is to get you started on your path to knowing and using charts to improve your trade.
If you use a trading chart, you can be called a technical trader. Technical traders choose to adopt chart tools and metrics’ forecasting abilities to define peak patterns and price ranges to enter and leave marks in markets.
Also, traders tend to monitor news outlets that provide updates on economic activity, oil production, job data, interest rate shifts, and geopolitical drivers such as conflict and political uncertainty.
We will start by knowing what the trading map is before we focus on trends and indicators. In short, the graph displays the market prices that exist between two financial products that are shown in a chart.
When you learn of the bullish cycle, you’re looking at the general upward trend (presume a bull trying to charge), whereas the Bearish trend is a declining trend of downs (presume a bear hidden in the forest). There is a third form of the movement that is sideways, horizontal, or flat.
An extensive demand happens when the commodity price approaches the same highs (resistance level) and lows (support level) three times. It’s said that they’re trading in a spread.
What are the Different Types of Trading Charts?
Three main types of charts come forward when we talk about technical charts. They are unique and give certain kinds of information about the market; it is on traders to comprehend it and make sense to earn profits.
Line Chart
A line chart represents a simple chart type that displays trends over time. This graph usually reflects just the closing price for the span of time. The closing price is also considered to be the most significant factor in the data analysis. In fact, the line chart is formed by linking the closing rates over a defined timeline. There is no graphic data or spectrum of trade, which means no peaks and falls and nothing about opening rates.
Line chart
Bar Chart
A bar chart is a graphical representation of OHLC (open, high, low, close) price values consisting of an opening foot—facing left—a vertical line, and a closing foot—facing right.
Extending the line chart in greater depth, the bar chart contains many more crucial snippets of details applied to every other data set on the graph. Made up of a vertical line series where each line is a depiction of trading knowledge. They reflect the high and low levels of the trading day and also the open and close rates. A short horizontal line defines the free and the near price.
Bar chart
The open value is a ‘dash,’ which is positioned on the left of the vertical bar, and the near price shown by a parallel horizontal line is on the right of the bar. Comprehending the trading chart is straightforward; if the left dash (open price) is lower than the right dash (closing rate), the bar will be colored in orange, black or blue, indicating a price rise and a valued instrument. The reverse is valid, and the diminished value of the stock is seen in red.
Candlestick Chart
What is a candlestick in forex trading?
Candlesticks represent a type of price chart that displays the high, low, open, and closing prices of a security for a specific trading period. The Candlesticks Body represents the price range, open-to-close. The Wick or the shadow shows the highs and lows.
After you have learned the line and bar charts, it is time to switch to the candlestick chart. It is quite similar to the bar chart. The vertical lines of the two charts show the trading period’s price points, while the structure of the candle uses various colors to reflect the market fluctuations of the span.
Going back to the 17th century, the Japanese started to use a scientific method for the trade-in rice known as technical analysis. It is fascinating that Japanese candlesticks are widely used even today. The data reflected from the candlestick involves low, high, close, and open values.
The body can be seen as ‘hollow’ and ‘colored’ parts. Long thin outlines above and below ‘body’ reflect lower or higher ranges and are often pointed as the shadows, wicks, or tails. If the lines are positioned at the top of the body, this will show you the high and closing rates, whereas the lines at the bottom of the chart show the low and the closing price of low.
Example on candlesticks charts for EURUSD
The body colors vary from broker to broker but are usually green, indicating a price rise, or red, reflecting a price decline.
A hollow candlestick is a place where the near price is better than the market value, informing traders to buy. Filled or colored candlesticks in which the value is less than opening would show the selling spot. Long and short bodies would offer the BUY or SELL tension between traders.
Short-term bodies reflect very little market change and are mostly viewed as a convergence phenomenon known as Doji. Doji is an essential aspect of the candlestick graph as it offers details in a variety of candlestick trends. These shape when instruments open and close to nearly identical rates, and there is not much price disparity.
Doji candles’ importance is to indicate to investors that after a long green candle, the purchasing pressure starts to wane, or after a strong red candle, the panic selling will start to reduce. It leads to a balance between supply and demand.
Learn the Graphical Analysis of Charts
There are a lot of trends that you can recognize only by glancing at the graph. The concept of chart patterns is premised on the idea that human behavior does not alter quickly, and so history continues to replicate itself.
Chart patterns illustrate the psychology of capital markets, assuming that they have succeeded in the past, so will they work next time. They send you hints as to the possible path the pattern is likely to go. They are at the center of all important market fluctuations that form a correlation across trends. It would help if you used chart trends as a stand-alone strategy for your investing.
A few crucial patterns to know are the Triangles, a continuity pattern that indicates a war taking place amongst soaring and declining values. This means that the price is ultimately likely to proceed in the direction it headed until the trend was detected.
Another prominent trend to recognize is the double top, showing the value reaching two highs and suggesting the price reversing to the bearish way from the bullish pattern. Its opposite – the double bottom – describes a trend turnaround from bearish to bullish, implying an inevitable uptrend. From such instances, you can realize how essential it is to recognize trends for your trading performance.
Learn to Use Indicators
When you get more acclimatized with reading and analyzing graphs, you can add additional instruments, like technical measures, to calculate price movement and change in value.
These statistical metrics can help you learn whether stocks are oversold or over-purchased. If a stock is oversold or over-purchased, it fails to sustain its course, which sometimes indicates a turnaround is inevitable. You can use momentum sensors, such as oscillators, to calculate the asset price’s speed or velocity. Instances of the most widely used dynamic metrics are MACD, Stochastic or RSI.
Other ways of analysis can allow you to determine when to take a trading position or leave a trade, including the Bollinger Bands. Trend line metrics such as the Moving Average clearly help you determine how the market moves by cutting off all the noise from small price fluctuations.
You may use a couple of these measures in unison to validate the signal. They all appear on most of the trading sites.
FAQs on How to Read Trading Charts
What is the Data on the Trading Chart?
Traders use several metrics to read the market graph, but at its heart, it holds two essential bits of information – value and quantity. Anything other than past prices and volume details is nothing other than speculation. Yet, these halves of knowledge are crucial to anticipate possible price movements. Volume shifts are often ignored, but growing volumes indicate a much more substantial change, one that is likely to persist, whereas declining volumes display a lack of confidence among traders.
What Do I Need to Search for in a Trading Chart?
The first thing that most technical traders measure while considering a market graph is the trend line. Markets are not necessarily trending all the time, and you may not have a strong trend pattern. You would need to focus on a longer time span to see what the pattern is. The support and resistance ratios are similar to the trend line, and this could be the upcoming thing you’re looking for on your graph. Here, it might sound right to broaden the possibilities that you may find long-term support or resistance levels that can be incredibly significant.
What’s the Most Crucial Technical Indicator While Reading a Chart?
It’s hard to find the most significant indicator on any graph. The trend line and the level of support or resistance are critically important, and traders who depend on these factors would find trading very critical. As far as technical metrics are concerned, the moving average in all of its various time frames may be the most relevant predictor precisely since so many traders implement them as a base of their trades, particularly the 50 days and 200 days moving averages.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
