In this second article about FOREX technical analysis we will look at the various kinds of charts and provide some basic information and guidelines to help you read various charts you will need to become familiar with. If you already have any familiarity with the technical analysis of stocks, you will recognize most of the charts and techniques mentioned.
Price Charts provide the investor with information about FOREX prices at specified intervals of time. Intervals can be anywhere from one minute up to several years and everything in between. Prices may be plotted using simple line graphs or, in another model, the price variation for each interval can be shown by a bar or candlestick pattern.
For a broader view of price movements, line charts are probably the most suitable option. They show the close price for each of the chosen intervals. Line charts are very clean to read and make it easy to spot patterns, but they do lack the detail and depth of information of bar and candlestick charts.
offer much more information than line charts. The length of each bar normally indicates the price spread for the given period - a
long bar indicates a large difference between high and low prices. The left tab on the bar shows the opening price and the right tab shows the
closing price. At a glance you can see whether the price fell or rose for that particular period, and what the price variation was. Bar
charts printed on paper (especially for short periods) can be difficult to read, but software charts usually have a zoom function that makes it
easier to read the information on closely spaced bars.
Forex Candlesticks Made Easy!
Candlestick charts were invented by the Japanese for the purpose of analyzing rice
contracts. They are similar to bar charts in that they indicate open, close, high and low prices for a given period. They are easier to read
than bar charts, however, because of their color coding. Green candlesticks show rising prices and red candlesticks show falling
prices. How simple is that? If you are not sure, however, you might be interested in a resource called
FOREX Candlesticks Made Easy.
Candlestick shapes - when viewed in their relationship to neighboring candlesticks - can
provide indicators of market movement that can aid an investor in chart analysis.
Various shapes of candlesticks are formed according to price spread and
the proximity of opening to closing prices. Candlestick patterns have
been given fanciful names like 'morning star' and 'dark cloud cover'
and once the shapes have been learned, they are easy to pick out on a
chart for the purpose of identifying trends in the market.
Price charts are usually supplemented with various technical indicators. There are
many Technical Indicators broadly divided into different categories.
Trend indicators, strength indicators, volatility indicators, and cycle
indicators are just a few of the analytical tools used to anticipate
movement and market volume.
Some of the more common technical indicators used in FOREX are:
Average Directional Movement Index ADX
is used to determine if a market is entering a trend (either downward
or upward) and how strong the trend is. Readings over 25 indicate a
trend with higher values indicating stronger trends.
Moving Average Convergence/Divergence MACD
(usually pronounced Mac D) shows the momentum of the market and the
relationship between two moving averages. When the MACD line crosses
the signal line it indicates a strong market.
Oscillator The stochastic
oscillator indicates the strength or weakness of a market by comparing
a closing price to a price range over a period of time. When the
stochastic is above 80 it indicates the currency is overbought while a
stochastic below 20 indicates the currency is oversold.
is a scale of 100 indicating the highest and lowest prices over a given
period. When the price rises above 70 it is considered overbought and
when the price falls below 30 it is considered oversold.
The moving average is the average price for a given time interval when
compared with other prices during similar time periods. For example,
the closing prices over a 3 day period would have a moving average of
the total of the 3 closing prices divided by 3.
The Bollinger bands are bands which contain the majority of a
currency's price. The bands are three lines – the upper and
lower lines following the price movement and the middle line showing
the average price. During times of high volatility the distance between
the upper and lower bands widen. If a bar or candlestick touches one of
the bands it indicates overbought or oversold conditions.