Here we shall explore charts’ role as technical indicators in Forex trading.
What is a chart?
- Technical analysis relies heavily on charts to do its work. In technical analysis, we track the performance of an asset over time by charting its price history or price changes. It’s a visual depiction of the stock market’s historical performance.
- Asset price changes may be shown over a short time frame (30 minutes), an extended time frame (e.g., a day, week, or month), or a very long time frame (e.g., many years). Two axes, x (horizontal) and y (vertical), are present. Price is shown on the chart’s vertical (y) axis, while time is shown on the horizontal (x) axis. Consequently, any asset’s (stock, commodity, or FX) trading history may be visually represented by displaying a currency pair’s price over some time (time frame).
- The volume of an asset’s trading activity over time may also be shown graphically. For example, shares (in the case of stock) may be traded over a period, which can be shown.
Types of Charts
A wide range of asset price charts are available (e.g., stock, currency pair, commodity). It is up to the individual trader or investor to decide which style they want. One or more of the following factors may have influenced this verdict:
- Ease and familiarity
- Effortless operation
- Fundamental Reason
The line chart
- Connecting the last closing price of an individual stock or market through time creates a line chart. This implies that we can build a line chart of the USD/INR currency pair in 30 minutes simply by connecting the prices from before the 30-minute mark and the prices at the end of the 30-minute mark with a straight line. The charts make it easy to see the overall trajectory of a market or an individual currency over time. Technical analysts, traders, and investors may benefit significantly from its use as an analytical tool.
- Most often, line charts are used to compare two or more trends. For instance, they are comparing the USD/INR closing price to that of all the other listed currency pairs in the area or comparing the closing prices of two other firms listed on the same exchange and operating in the same domain (ex., Asia).
- The line chart is a bar chart that displays data (price or volume) as a straight line or lines.
- One year of USDINR data is shown as a line graph below.
- Technical analysts often utilize bar charts because of their simplicity and clear presentation. For example, a bar for each day’s fluctuation is the “bar” in a bar chart.
- Although daily bar charts get the most attention, weekly, monthly, and annual bar charts are just as feasible. The bar graph depicts the range of prices within a specific time frame, with the high point at the bar’s upper end and the low point at the bar’s lower end. Open and close prices for an asset are represented by the horizontal lines on each side of the vertical bar (stock, currency pair). The little tick indicates the initial price on the left side of the bar and the closing price on the right.
- During the day’s trading, many traders rely on bar charts constructed in a few minutes.
The USDINR 5-Day Bar Chart below shows data updated every 5 minutes.
The USDINR monthly chart with a 1-day time frame will look like this:
- One of the most commonly used charts in trading is a representation of prices using candlesticks. This graph illustrates how the market feels right now. A candlestick chart, like a standard bar chart, shows an asset’s open, high, low, and closing prices but does so in a way that reduces the correlation between those two points. Each candlestick symbolizes a discrete period (a day, for example). Each component of a candle is shown in the accompanying diagram.
Elements of a Candle
- Create a candlestick chart by recording the high, low, and close prices for each period of interest. “The body” refers to the filled section in the center of the candlestick. High and low ranges are represented by the long, thin lines above and below the body, respectively; they are termed “shadows” (also “wicks” and “tails”).
- The candlestick’s body (stock or currency pair) shows a security’s starting and closing prices.
This is a 1-day candlestick chart of the USD/INR currency pair for the last three months. For example, if the day’s trading ended on a high note, the candlestick would be colored green, while a red candlestick would indicate a lower closing.
The pair was considered bullish when the USDINR finished at a higher level than the previous day, as seen by the red candles in the preceding chart. Conversely, the candle will be green when the USDINR ends the day at a greater rate than it did the previous day.
Candlestick charts are popular among professional traders and investors because they may reveal actionable patterns. However, understanding candlestick charts takes effort and practice.
What is the chart pattern to use when trading?
Professional traders often use many chart styles to examine the same investment. Some people prefer certain types of charts over others. After settling on a chart type, the next step is to investigate past data for recurring patterns such as trends, support, and resistance.