Charts

A chart is an indispensable trading tool. It provides a visual representation of market activity, and of price movements. A chart not only reflects the psychology of the market and the interaction between buyers and sellers, it also reflects the entire market sentiment.

There are three major kinds of charts:

• Line charts• Bar charts• Candlestick charts
Line Charts A line chart shows the closing prices for a currency pair over a period of time, the closing prices strung together with a line. These charts serve best to measure the overall direction of long-term trends, and hence are of limited use for most traders.

Here is an example of a line chart.

Bar Charts Bar charts show the following information for a given time frame:

• Opening price • Closing price• High price • Low price
Here is an analysis of how a bar chart conveys information:

Bar charts can be applied to different time frames. A single bar, therefore, can summarize price activity over the past minute, past hour, day, week, month, etc.

Candlestick Charts Candlestick charts were invented over 200 years ago by Japanese rice traders to analyze price movements. The technique evolved over time and is now used by millions of technical traders worldwide.

This is the most important chart used in forex trading. Indeed, for most traders, this is the only chart worth using.

Like a bar chart, a candlestick contains opening price, closing price, low and high price of a specific time frame. The main difference is the candlestick's body, which represents the range between the opening price and the closing price of that particular time frame.

When the body is filled with red, it means the closing price is lower than the opening. When the body is filled with blue (or green), it means the closing price is higher than the opening. Above and below the candlestick's body are the 'wicks'. The wick on the top is the highest price, and the wick at the bottom is the lowest price of that period.

Here is an analysis of a candlestick and its components.

 

Here is an example of a candlestick chart for EUR/USD.

 

Candlestick charts are a favorite with traders, not only because they present a more visually attractive picture of price movements but also because they are easier to interpret and use.

Given their importance, we'll take a closer look at candlesticks in the next section.