How to Read a Chart
In trading the market the chart is the basic tool used by all traders. The chart will show information about a currency pair - the chart will illustrate the general direction of prices, the chart also will show the ruling exchange rate of a currency pair and the chart will also show historical movement of chart prices.
Traders will use these charts to figure out where to open trades. From the chart the trader will interpret market movements using indicators so as to determine the direction of the market and determine the trade to open.
Traders must therefore learn how to use charts before they can begin transacting in the online market.
The following are the various things that a trader will need to know about charts.
Types of Charts
There are 3 types of charts
Line Chart - this charting method draws a continuous line that connects the closing prices. For example if a trader is using the 5 minutes chart then this line chart will plot a continuous line that connects closing price of the market after every 5 minutes.
Bar Chart - This chart use bars to illustrate price movements, & plots OHCL - Opening price, High, Low, & Closing price for that period, for example if the period used is 5 minutes, the bar will represent the price data and the OHCL points for the 5 minutes.
Candlestick Charts - The are the most popular chart types because they're the most visually appealing and they represent the price movements in an easily identifiable way which clearly show when a market moves up or when it moves down using different colors to differentiate the direction. These candlestick chart look like a candle & they have a body that resembles the wax part of a candle & an upper and a lower poking line that resembles the wick of a candlestick.
FX Chart Periods - Chart Timeframes
A forex chart will plot charts based on different time periods - these are 1 minute, 5 minute, 15 minute, 1 hour, 4 hour, 1 day, 1week and 1 month. The period used to plot chart data also is referred to as a chart time frame, for example the 5 minute chart period is commonly referred to as the 5 minute chart by trader. This 5 minute time frame will represent data for the five minutes of trading, after those five minutes another set of data will be used to plot another chart representation. For examples if a trader is using candlesticks chart, data of one candlestick will plot data of that five minutes, after those five minute another candle will be plotted using price data of the next five minutes - when these candlesticks are combined they then make a graph representation that shows the general direction of prices often referred to as the trend. Traders can then use this information to make decisions.
Because the most often used charts are candles charts we shall discuss how to read charts specifically candle charts.
How to Use Candle Charts
The candle charts uses candle that have different colors to represent different price moves, blue candlesticks show prices closed higher than they opened, red candlesticks show prices closed lower than they opened. This color representation is then used by traders to determine when the price has headed up or down.
The candlesticks also show OHCL:
O - Opening Price
H - Highest Price
C - Closing Price
L - Lowest Price
These price points are represented using a formation which looks like a candle, the distance between opening price and closing price is represented by what is referred to as the body, this part resembles the wax part of a candlestick. High price is represented by a poking line protruding up-ward, this line resembles the wick of a candle, the low price is represented by a poking line protruding downwards & it also resembles a candlestick wick facing down.
Analysis of Candles
One can also add a indicator on the chart so that they can interpret the trading chart market using these indicators. Traders will need to set indicators on the so that they can get additional information about a trend & therefore be in a better position to make a more informed decision. These indicators can be used to predict the likely market direction that the market is likely to keep moving in whether up or down.
One can use indicators such as the moving averages and Bollinger to determine the trend. Traders also can use other indicators such as the RSI and stochastic oscillators to determine when to open trades.
Trend lines are also used to determine the direction of the candlestick charts trends and these lines can plotted on the charts to illustrate this direction. A upwards trend will be shown by a trend line is moving up while a trend that is moving down will b e shown a trendline which is heading downward.
To learn how to draw a trend line & how to trade using analysis a trader can learn about the trend line lesson under the learn lessons section of this web site, for indicators a trader can learn about indicators and their technical analysis on the indicators section of this site.
