Appearance of certain chart patterns can give you priceless clue about the direction in which the market is about to turn. Traders have become very sophisticated in understanding charts and the information contained in them over time. Don’t confuse the Head and Shoulder pattern with the name of a shampoo. Head and shoulder is an important trend reversal chart pattern. Know these forex broker games.
Now you can predict the likely direction of the currency pair whether it be sideways, upward or downward by studying the patterns that appear on the forex charts. This field of study is known as Technical analysis. Without technical analysis, you won’t be able succeed in forex trading. Technical analysis depends on the study of different types of charts to understand and predict the likely direction of the currency market.
There are four main types of charts that are used in the world of finance and for that matter in forex trading. The four main types of forex charts are: 1) Line Chart, 2) Bar Chart, 3) Candlestick Chart and 4) Point and Figure Charts (P&F Charts). Let’s briefly describe each one.
Line Charts: This chart simply connect the closes from one period to another. The resulting chart resembles a line. A line chart doesn’t show you where the currency pair opened for the period. It only shows where it closed. Nor does it points the high and lows for a period. So critical data is missing from a line chart!
Bar Charts: The bar chart addresses many of the shortcomings of the line chart. It is also often called the OHLC (open-high-low-close) bar chart. The bar chart can provide the hourly, daily, weekly and even monthly information.
The periods high and low are the top and bottom of the bar. A horizontal line protruding from the left of the bar represents the opening price of the currency pair. A horizontal line protruding from the right of the bar represents the currency pair’s closing price.
Candlestick Charts: This chart clearly depicts the currency pair’s open, high, low and close. Traditional bar charts do the same. But candlestick charts do it more effectively. A candlestick chart is made up of two components.
The range between the open and the close is called the real body of the candle. It is also called the candle body. The price movement above and below the body is called the shadows. It is also known as the candle shadows. If the currency pair closing price is above the opening price, the candlestick body is white and it is taken as a bullish sign. Similarly if the closing price is below the opening price, the candlestick body is painted black and it is taken as a bearish sign.
Point and Figure Charts (P&F): The main advantage of the P&F charts is that they filter out noise. The only downside is that they don’t represent the time well. Point and figure charts plot the currency pair price using a column of Xs to represent rising price movements and Os to represent falling price movements.
The Xs and Os are plotted only when the currency price moves by a predefined amount. The new plot is only made when the price exceeds the predetermined threshold by a fixed amount. A plot may not be made if the currency price does not move significantly.
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