Understanding Currency Trading Charts

0

In the world of online currency trading, numerous methods of analysis exist that traders use to approach the market and find trading opportunities, and understanding currency trading charts provides a viable method to approach foreign exchange (forex) markets, as part of a successful strategy to online trading.

Whether via automated trading systems, following breaking economic fundamental and geo-political news, or manually observing historical and current price action, observing currency trading charts are a key way to gauge current market conditions, as well as recent and historical trends. The reason this method can work is because recent trends can often persist into the future, or reveal a coming change in direction, as will be explained below.

Charting Forex Markets

According to the efficient market hypothesis, no one knows for certain which way market prices will move as such data is already factored into the markets’ price as information emerges. However, because so many people and computers are using similar methods of approach to chart forex markets, the highly observed nature of currency markets cause an amplifying affect, where more momentum begets more momentum, and when there is less momentum for example it is often following by more periods of less momentum.

Nonetheless, using currency trading charts can help reveal higher probability trading opportunities, where there may exist better chances for an expected market move to occur, which if approached properly can lead to a profitable outcome, or worst case lead to a loss, however, the profit or loss has more to do with risk-management and the overall trading strategy, than the trading opportunity itself, and therefore understanding currency trading charts is the first step in applying a successful forex trading system.

Common Currency Trading Charts

Below we will reference some common chart types, and methods of approach to currency trading charts, and technical analysis, on a very basic level, in order to provide the beginner trader with an understanding of what currency trading charts are all about. In addition, we will review different angles of approach that even the experienced trader can benefit from, such as different ways to use charts to find trading opportunities.

One of the most common types of charts used to analyze foreign exchange price history include ‘candle stick’ charts, where each candle represents a specific duration of time- such as a monthly, weekly, daily, or hourly time period, and where the existence of a candle wick on either or both sides of the candle (top and bottom) indicate the high/low prices reached during the time period, and the base and top of the candle represent the open/close.

Common Charts Types Include:

  • Line Chart
  • Renko Chart
  • Three-Line-Break Chart
  • Ichimoku Chart
  • Point & Figure Chart
  • Candle Stick Chart
  • Bar Chart
  • Percentage Chart
  • Tick Chart

 

In addition, when a candle’s price at the end of the period was higher it will be a bullish candle (normally identified by color) whereas when a candle ends on a price lower than its opening price – it is considered a bearish candle (and again identified by color typically).

The Search for Trading Opportunities is at The Heart of Using Currency Trading Charts

By looking at various time frames, using candle stick charts, the Open, High, Low, ad Close (known as OHLC) can be observed for each candle stick. Traders and market technicians, such as technical analysts look at such charts and try to determine where trends exist, where they may emerge, and when and where they may persist or change direction.

Below is an example of technical analysis conducted by Edward Moya, Technical Strategist at WorldWideMarkets Community Blog, using a candle stick chart, with a daily time frame selected (each candle represents one trading day), with data from about June 2013 to the present:

WWM NZDUSD JULY 29 2014

Objective and Subjective Approaches to Analyze Currency Trading Charts

This approach, while totally subjective, in terms of choosing where to draw your trend line, and how thick to make it and where it should start and end, as well as the slope or angle of the line, or whether it will be a horizontal line, or even curved, is all a matter of subjective  opinion of the user.

However, there is also a number of objective information that can be observed such as using various tools and measurements, or observing certain price levels, where either support and/or resistance can exist, even on diagonal trend lines which are not fixed to prices, and change over time.

Common Chart Time-Frames:

  • Tick Chart (not time fixed, streaming)
  • 1 Minute Chart
  • 5 Minute Chart
  • 15 Minute Chart
  • 30 Minute Chart
  • 60 Minute Chart
  • 120 Minute Chart (Also known as 2 hour chart)
  • 240 Minute Chart (also known as 4 hour chart)
  • 8 Hour Chart
  • Daily Chart
  • Weekly Chart
  • Monthly Chart

For example, in the chart above, there exists a 50, 100, and 200 day moving average, which is devoid of any subjective features, as it is a mathematical measurement based on fixed rules (i.e. the average price over the number of days), although interpreting its meaning is of course left to the observer. Therefore a combination of objective and subjective approaches are need when understanding currency trading charts.

Currency Trading Charts are Numbers Translated into Graphs

Moreover, there are numerous chart types beyond candlesticks, such as a three line break chart, Ichimoku, Renko, Point & Figure, to a simple ‘line chart’, and some chart types are measuring data or rates, such as pivot point levels, and taking a static snapshot of the present, rather than including preceding price action, behind the latest price.

Below is an example of Technical Analysis done across a number of instruments, in order to determine levels where support or resistance may be encountered, using an objective measurement known as pivot points, as recently published by WorldWideMarkets Community member Akhilesh Ganti, a registered commodity trading advisor (CTA), using weekly pivot calculations. 

FOREX_072614_w

All About Support and Resistance

Support and Resistance are core components of most currency trading charts, although not all technical analysis looks at support/resistance levels alone. Some approaches might not even pay attention to them at all, nonetheless, when price levels are supported buying is taking place, whereas when prices are not supported selling is taking place.

Put differently, when prices are resisted, such as when the market is trying to move higher, selling takes place, whereas when prices are not resisted buying continues. Therefore, “Support” is mentioned to imply buying action, which should lift or keep prices at current levels, whereas “Resistance” implies that selling is taking place which should push prices lower or remain at current levels.

How FX Prices Move Across Time Compared to the Physics of Bouncing a Ball

One rudimentary analogy of how forex market prices move across time, with regards to support and resistance, for the purpose of visualizing such behavior on a currency trading chart, can be compared to a ball that is dropped on the floor and bounces, the floor is acting as support, and every time the ball hits the floor – that line (the floor) is the support level, whereas gravity will cause the ball to lose its momentum and make a smaller successive bounces, and the resistance encountered near the highest point of each bounce will be progressively lower, and that descending line -acting as a ceiling – is considered resistance.

Analogy of a bouncing ball moving through time, compared to how forex prices move through time, intended to highlight how support acts as a floor, whereas resistance acts as a ceiling, and together combine to form a channel:

800px-Bouncing_ball_strobe_edit

One key difference with actual market conditions, and comparing a ball, is that not only are there a multitude of external factors affecting the markets trajectory, velocity, and momentum, the floor or support line is not always flat or horizontal. In addition, at any given time, market prices may be influenced by short-term, medium term and long-term factors, all simultaneously, or interchangeably. It would be like bouncing a ball across a floor that rather than being flat had intermittent steps both up and down, and in a random order.

Looking for Meaningful Patterns in All the Random Market Data

In all the randomness, technical analysis aims to find non-random data, patterns, and trends that could reveal what may happen next, in addition to understanding what is happening now, and understanding what has already happened, with regards to a specific trading instruments’ price behavior, or particular asset-class.

WorldWideMarkets (WWM) offers four different trading platforms, each specialized for a different purpose, and with its own respective charting capabilities, including chart types and analysis tools, and studies.

WWM Platforms Include:

  • AlphaTrader
  • FlashTrader
  • MetaTrader
  • ZuluTrade
  • EquityTrader

In addition, another dimension of currency trading charts that doesn’t use market price data alone, but rather looks at the underlying driver of market prices, such as the economic, and geo-political news, known as fundamental analysis, which like technical analysis are highly observed and affect market participants who react to such breaking news throughout each trading day.

WorldWideMarkets Chief Market Strategist Joseph Trevisani provides such fundamental insight on both the company’s blog, and social media channels, as well as on popular financial television stations from time-to-time.

Below is an example chart from a recent post by Steven Hatzakis, author of the Ideas You Can Trade series on WorldWideMarkets Community blog, showing horizontal Fibonacci retracement levels, as well as ascending and descending trend lines that aim to identify support and resistance, and some of which were extended into the future as potential price trajectories:

gbpusddaily july 30 2014 note

 

About Author

Leave A Reply