In this second article about FOREX technical analysis we will look at the various kinds of
charts and provide basic guidelines for reading charts.
Price Charts
Price Charts show information about FOREX prices at specified intervals of time.
Intervals can be from one minute up to several years and everything in between. Prices
can be plotted with simple line graphs or the price variation for each interval can be
shown by a bar or candlestick pattern.
Line charts are suitable for getting a broad overview of price movements. They show the
close price at the chosen intervals. Line charts are very clean to read and make it easy
to spot patterns, but they lack the detail of bar and candlestick charts.
Bar charts offer much more information than line charts. The length of each bar indicates
the price spread for the given period – a long bar indicates a large difference between
high and low prices. The left tab on the bar shows the opening price and the right tab
show the closing price. You can see at a glance whether the price fell or rose for that
particular period, and what the price variation was. Bar charts printed on paper
(especially for short periods) can be difficult to read, but software charts usually have a
zoom function that makes it easier to read closely spaced bars.
Candlestick charts were invented by the Japanese for analyzing rice contracts. They are
similar to bar charts in that they indicate open, close, high and low prices for a given
period. They are easier to read than bar charts, however, because of their color coding.
Green candlesticks show rising prices and red candlesticks show falling prices.
Candlestick shapes - when viewed in relationship to neighbouring candlesticks - provide
indicators of market movement that can aid in chart analysis. Various shapes of
candlesticks are formed according to price spread and the proximity of opening to closing
prices. Candlestick patterns have been given fanciful names like 'morning star' and 'dark
cloud cover' and once the shapes have been learned, they are easy to pick out on a chart
for identifying trends in the market.
Price charts are usually supplemented with technical indicators. There are many
Technical Indicators broadly divided into different categories. Trend indicators, strength
indicators, volatility indicators, and cycle indicators are just some of the analytical tools
used to anticipate movement and market volume.
Some of the most common technical indicators used in FOREX are:
Average Directional Movement Index (ADX) – is used to determine if a market is entering
a trend (either downward or upward) and how strong the trend is. Readings over 25
indicate a trend with higher values indicating stronger trends.
Moving Average Convergence/Divergence (MACD) – shows the momentum of the market
and the relationship between two moving averages. When the MACD line crosses the
signal line it indicates a strong market.
Stochastic Oscillator – indicates the strength or weakness of a market by comparing a
closing price to a price range over a period of time. When the stochastic is above 80 it
indicates the currency is overbought while a stochastic below 20 indicates the currency is
oversold.
Relative Strength Indicator (RSI) – is a scale of 100 indicating the highest and lowest
prices over a given period. When the price rises above 70 it is considered overbought
and when the price falls below 30 it is considered oversold.
Moving Average – is the average price for a given time interval when compared with other
prices during similar time periods. For example, the closing prices over a 3 day period
would have a moving average of the total of the 3 closing prices divided by 3.
Bollinger Bands – are bands which contain the majority of a currency's price. The bands
are three lines – the upper and lower lines following the price movement and the middle
line showing the average price. During times of high volatility the distance between the
upper and lower bands widen. If a bar or candlestick touches one of the bands it
indicates overbought or oversold conditions.
charts and provide basic guidelines for reading charts.
Price Charts
Price Charts show information about FOREX prices at specified intervals of time.
Intervals can be from one minute up to several years and everything in between. Prices
can be plotted with simple line graphs or the price variation for each interval can be
shown by a bar or candlestick pattern.
Line charts are suitable for getting a broad overview of price movements. They show the
close price at the chosen intervals. Line charts are very clean to read and make it easy
to spot patterns, but they lack the detail of bar and candlestick charts.
Bar charts offer much more information than line charts. The length of each bar indicates
the price spread for the given period – a long bar indicates a large difference between
high and low prices. The left tab on the bar shows the opening price and the right tab
show the closing price. You can see at a glance whether the price fell or rose for that
particular period, and what the price variation was. Bar charts printed on paper
(especially for short periods) can be difficult to read, but software charts usually have a
zoom function that makes it easier to read closely spaced bars.
Candlestick charts were invented by the Japanese for analyzing rice contracts. They are
similar to bar charts in that they indicate open, close, high and low prices for a given
period. They are easier to read than bar charts, however, because of their color coding.
Green candlesticks show rising prices and red candlesticks show falling prices.
Candlestick shapes - when viewed in relationship to neighbouring candlesticks - provide
indicators of market movement that can aid in chart analysis. Various shapes of
candlesticks are formed according to price spread and the proximity of opening to closing
prices. Candlestick patterns have been given fanciful names like 'morning star' and 'dark
cloud cover' and once the shapes have been learned, they are easy to pick out on a chart
for identifying trends in the market.
Price charts are usually supplemented with technical indicators. There are many
Technical Indicators broadly divided into different categories. Trend indicators, strength
indicators, volatility indicators, and cycle indicators are just some of the analytical tools
used to anticipate movement and market volume.
Some of the most common technical indicators used in FOREX are:
Average Directional Movement Index (ADX) – is used to determine if a market is entering
a trend (either downward or upward) and how strong the trend is. Readings over 25
indicate a trend with higher values indicating stronger trends.
Moving Average Convergence/Divergence (MACD) – shows the momentum of the market
and the relationship between two moving averages. When the MACD line crosses the
signal line it indicates a strong market.
Stochastic Oscillator – indicates the strength or weakness of a market by comparing a
closing price to a price range over a period of time. When the stochastic is above 80 it
indicates the currency is overbought while a stochastic below 20 indicates the currency is
oversold.
Relative Strength Indicator (RSI) – is a scale of 100 indicating the highest and lowest
prices over a given period. When the price rises above 70 it is considered overbought
and when the price falls below 30 it is considered oversold.
Moving Average – is the average price for a given time interval when compared with other
prices during similar time periods. For example, the closing prices over a 3 day period
would have a moving average of the total of the 3 closing prices divided by 3.
Bollinger Bands – are bands which contain the majority of a currency's price. The bands
are three lines – the upper and lower lines following the price movement and the middle
line showing the average price. During times of high volatility the distance between the
upper and lower bands widen. If a bar or candlestick touches one of the bands it
indicates overbought or oversold conditions.
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