The ability to analyze technical data and to incorporate technical analysis into a trader’s decision making process can be an integral component of the trader’s overall success, regardless of whether he trades in stocks, bonds, derivatives or forex. In trading, technical data typically is presented in the form of charts, which are used as a means to provide a visual presentation of historical outcomes; understanding how to interpret these charts can give you a leg up in making your forex trading decisions, including the placement of your stop-loss and take profit points.
Many of the charts commonly used in forex will be familiar to most investors: line charts, for example, are utilized to chart either opening or closing prices for a specific currency during a specific time frame. While line charts can be stylized in any way utilizing any time frame that the trader prefers, most forex traders who utilize line charts choose to focus on charting closing prices, since closing prices are deemed to be the most significant. Line charts are an admittedly simplistic tool that when used, for example, to track closing prices, can help the long-term trader to spot trends. In addition to line charts, the well-known bar chart configuration is also used in connection with forex trading, in a manner that describes both opening and closing prices for a currency pair (in other words: the higher the bar, the greater the price movement between the currencies within the charted time period). The usage of bar charts to graph and track currency pairs is, therefore, somewhat more sophisticated than line charts, because it provides the trader with an additional level of information.
The most commonly-used and potentially helpful charting tool for forex trading is neither the line nor the bar configuration but is rather the so-called “candlestick”. Although a candlestick and a bar chart are similar in concept—in, for example, the height of the “candle” representing the currency pair’s opening and closing prices—the candlestick configuration adds extra dimension: the chart includes two “wicks”, protruding from both the base and the cap of the candlestick; the tip of the top wick represents the time frame’s high price, and the tip of the bottom wick indicates the corresponding period’s low price. As with a bar chart, the taller the candle, the greater the price movement during the time period charted. Further depth of information is displayed in the candlestick chart through the use of color: traditionally, if the body of the candle is colored or filled-in, then the currency pair in question closed lower during the charted period than during the previous period.
Candlestick charts are useful to the trader not only because of the multiple layers of information that they convey, but also because of their unique shapes and patterns. Becoming familiar with these patterns and developing the ability to interpret these charts based solely on the patterns displayed gives the trader an edge in making quick, market-driven decisions, particularly if the time period that the trader is mapping is short (for example, 15-minute increments or less); understanding the meanings of different chart patterns allows the trader to interpret historical data and to project future movements based on this interpretation. If you can come to understand the critical signals conveyed in candlestick charts, you can use these valuable analytical tools to help plot your financial gains.
Permanent link to this post
(559 words, estimated 2:14 mins reading time)