Forex charts are based on market action involving price. Charts are major tools in Forex trading. There are many kinds of charts, each of which helps to visually analyze market conditions, assess and create forecasts, and identify behavior patterns.
Most charts present the behavior of currency exchange rates over time. Rates (prices) are measured on the vertical axis and time is shown of the horizontal axis.
Charts are used by both technical and fundamental analysts. The technical analyst analyzes the “micro” movements, trying to match the actual occurrence with known patterns. The fundamental analyst tries to find correlation between the trend seen on the chart and “macro” events occurring parallel to that (political and others).
What is an appropriate time scale to use on a chart?
It depends on the trader’s strategy. The short-range investor would probably select a day chart (units of hours, minutes), where the medium and long-range investor would use the weekly or monthly charts. High resolution charts (e.g. – minutes and seconds) may show “noise”, meaning that with fine details in view, it is sometimes harder to see the overall trend.
The major types of charts:
- Line chart
The simplest form, based upon the closing rates (in each time unit), forming a homogeneous line. (Such chart, on the 5-minutes scale, will show a line connecting all the actual rates every 5 minutes). This chart does not show what happened during the time unit selected by the viewer, only closing rates for such time intervals. The line chart is a simple tool for setting support and resistance levels.
- Point and figure charts – charts based on price without time. Unlike most other investment charts, point and figure charts do not present a linear representation of time. Instead, they show trends in price.
Increases are represented by a rising stack of Xs, and decreases are represented by a declining stack of Os. This type of chart is used to filter out non-significant price movements, and enables the trader to easily determine critical support and resistance levels. Traders will place orders when the price moves beyond identified support / resistance levels.
- Bar chart
This chart shows three rates for each time unit selected: the high, the low, the closing (HLC). There are also bar charts including four rates (OHLC, which includes the Opening rate for the time interval). This chart provides clearly visible information about trading prices range during the time period (per unit) selected.
- Candlestick chart
This kind of chart is based on an ancient Japanese method. The chart represents prices at their opening, high, low and closing rates, in a form of candles, for each time unit selected.
The empty (transparent) candles show increase, while the dark (full) ones show decrease.
The length of the body shows the range between opening and closing, while the whole candle (including top and bottom wicks) show the whole range of trading prices for the selected time unit.
Pattern recognition in Candlestick charts
Pattern recognition is a field within the area of “machine learning”.
Alternatively, it can be defined as “the act of taking in raw data and taking an action based on the category of the data”. As such, it is a collection of methods for “supervised learning”.
A complete pattern recognition system consists of a sensor that gathers the observations to be classified or described; a feature extraction mechanism that computes numeric or symbolic information from the observations; and a classification or description scheme that does the actual job of classifying or describing observations, relying on the extracted features.
In general, the market uses the following patterns in candlestick charts:
- Bullish patterns: hammer, inverted hammer, engulfing, harami, harami cross, doji star, piercing line, morning star, morning doji star.
- Bearish patterns: shooting star , hanging man, engulfing, harami, harami cross, doji star, dark cloud cover, evening star, evening doji star.
GO 2:
1 – Technical Analysis: background, advantages, disadvantages
2 - Various techniques and terms
