What Are Charts?
In essence, charts are a graphic display of price actions. You can trace the behavior of a currency pair over a long period in the past, monitor the current price action, and predict its further movement using various signals. Thanks to charts, traders complete technical analysis and make financial decisions.
Charts come in several forms but they are similar in structure and perform the same function. Any type always has two axes:
- The X axis (horizontal) shows date and time
- The Y axis (vertical) shows price or quotation
Types of Charts
All types of charts are almost the same. The main difference is the display of the price movement curve. We will consider three main types in detail.
Line Chart
This type of chart was the first one on Forex. Now it is practically not used by traders because of its low information content. It displays only the opening and closing points of the new period which are interconnected and form a line. Some traders use it to determine a price direction. Below is a screenshot of a line chart.
Bars
This type is already more informative. The periods in this chart have the OHLC structure:
- Open price - a dash on the left
- High - the top edge
- Low - the lower edge
- Close price - a dash to the right
This structure makes this type of charts more informative. Traders use highs and lows to draw the support and resistance lines which helps them analyze the chart, set Stop Loss and Take Profit levels, etc. On a multi-colored chart, buy bars are displayed in green and sell bars are displayed in red. Below is a screenshot of a bar chart.
Japanese Candles
Steve Nison was the first one to speak about them in Western markets. He adopted this idea from Japanese rice traders. The candlestick chart has the same OHLC structure as the bars, but it is a rectangle where the body is the distance from open to close prices and the tails show highs and lows. Buy candles are hollow (or green), and sell candles are filled (or red).
This type of chart is the most common among traders. Several technical analysis methods were developed for candlesticks, including searching for different signals such as head and shoulders, triangle, double and triple bottom and top patterns. We’ll talk about these patterns in another article.
How to Use Charts in Trading
Most traders prefer trend trading - buy with a bullish trend and sell with a bearish trend. What to do if the chart doesn’t have a clear direction and moves sideways within the range?
Let's first learn how to define a range market. Open a daily chart and draw key support and resistance lines at the lowest lows and highest highs. If the market doesn’t form ascending or descending levels and moves between two horizontal lines, then the market is sideways. You can also measure trend strength using the Average Directional Movement (ADX) index. If the indicator is below 25, then there is no definite trend in the market.
Here’s what to do if you face the range market:
- When the price is around the key support you need to open a buy trade and set Stop Loss right below that support.
- In the resistance area, open a sell trade and set Stop Loss immediately above this level.
Final Words
Charts are an indispensable tool that gives you the ability to monitor past and current price movements to predict its future actions. The most popular type of chart is a candlestick chart that has a number of technical analysis methods, including determining the reversal of the main trend with specific patterns.
For successful trading, it is necessary to study all known signals and learn how to apply them to your trading. The first steps in training should be done on a demo account. After spending about two months there, you will become familiar with all the possible situations on the market and learn how to make money from them.