How to Read Forex Charts
Get to grips with the basics of using charts for technical analysis
Chart analysis is the projection of future price movements via the analysis of historical price movements, where historical price movements can be presented in various ways.
The bar chart, also called the Western chart, is a demonstration of the price development in which, for each period, the highest and lowest prices, and the opening and closing prices are recorded using a bar. The highest and lowest prices are represented by the ends of the vertical bar, the opening price is represented by a horizontal dash on the left of the vertical bar, and the opening price is represented by a horizontal dash on the right of the vertical bar.
The individual bar gives an indication of the market movement for a given day, when talking about a daily chart. For example, the bars in figure 1 show that the opening price on day 2 was higher than the opening price on day 1 but that the closing price on day 2 was lower than on day 1. The bars also indicate that the price movement on day 1 was greater than on day 2. Furthermore, the price increased on day 1, while it fell on day 2.
The candlestick, also called Japanese candlestick and widely used in all trading rooms, uses a match-like shape to represent price movement. The candlestick reveals the difference between the opening price and the closing price of a trading day using a rectangle, also called e body.If this rectangle is dashed (or colored green), this indicates that the closing price on a trading day was higher than the opening price and if it is empty (or colored red), the closing price on that day was lower than the opening price.
The difference between the lowest and highest price on the trading day is represented by a vertical line running through the body. Figure 2 shows the Japanese candlesticks for the same price movements were used in Figure 1.
In a line chart, prices are shown as points on the graph. The frequency with which the prices are recorded depends on the total period presented on the chart. For example, if the chart covers e period of several months, the closing prices for all trading days are included. However, if the chart shows the price development for e a period of several years, only weekly prices or even only monthly prices are shown. The horizontal axis of a line chart represents the time and the vertical axis shows the price.
In addition, weekly and monthly charts compress the price action to allow for much longer range trend analysis. A weekly chart can go back as much as five years and a monthly chart up to 20 years. It`s a simple technique that assists the chartist study the markets from a longer range perspective – a valuable perspective that is often lost by relying solely on daily charts.
A chart can become an extremely useful tool in the art or skill of market forecasting once the rules are understood.
Support and resistance are fundamental concepts in technical analysis. A support level is a price below the current price that, in the case of a downward movement, is not easily broken. A resistance level is a price above the current price that, in the case of an upward movement, is not easily broken.
The support and resistance levels are determined by drawing help-lines on a price chart. A support line is often drawn by connecting a number of previous lowest points (lows) on the price chart. On the chart below, the line that runs through the points 1 and 2 acts as support line.
Technical analysts assume that the price in the downward movement from the high that has been formed after point 2 will continue to fall until it reaches the support level. The most likely scenario is, after having reached that level, that the price will climb again (remember one of the main premises that history repeats itself), but it is not the case presented in the chart above.
A resistance line is often drawn by connecting a number of previous peak points (peaks) on the price chart. The chart above presents the resistance line as the line that runs through the points 3 and 4. Technicians assume that the price in the upward movement from the lowest point reached before point 3 will continue to mount until it reaches the resistance level. The most likely scenario is that, after having reached that level, the price will fall again (which is actually the case).
Support becomes resistance
A support level that is broken often becomes a resistance level and vice-versa. The market tests this by means of a so called pull back movement. A falling back, for example, is seen as a brief reversal of the prevailing upward momentum and is considered a buying opportunity after the underlying has had a large upward price movement. A pull back movement is a test by the market to see if there has been a valid break-out. After breaking through a support level, the market often shows an upward movement to test if the old support level now acts as resistance level. If the price does not rise above this level, the price is expected to continue to fall. This phenomenon is shown is the chart above. The old support line is now seen as resistance.