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Fx Technical Analysis: Trading With Charts And Trends

Forex technical analysis is one of two ways to analyze the foreign exchange markets. It works by studying the movement of prices, while the other method, fundamental analysis, looks at external economic factors such as the strength of the national economy, political events and so forth.

Studying price movement with forex technical analysis involves charts. The theory of it is that if you look at the historical records of how prices have moved in the past, you can identify tendencies and trends which will mean that you can predict how the prices will move in the future. Then as soon as you spot an emerging pattern that fits your system, you have a trading opportunity.

There are three types of forex charts:

1. Line charts

Line charts simply plot each closing price and join them with a line. The rise and fall of the line shows the general movement of a currency pair. However, it does not show movements within the trading period, only the close.

2. Bar charts

A bar chart will show a series of vertical lines or bars. The top of the line represents the highest price during that time period. The bottom of the line represents the low. A short horizontal bar on the left side indicates the opening price and a short horizontal bar on the right side indicates the closing price.

Since they show the open, high, low and close, bar charts are also sometimes called OHLC charts.

3. Candlestick charts

Forex candlestick charts show all of the same information as a bar chart, but presented in a different way which most people find easier to read at a glance.

You have the same vertical line with the high at the top and the low at the bottom, but there is also a wide block in the middle showing the gap between the opening and closing price. The blocks will be filled white (for a rising price) and black (for a falling price) or more often these days they are colored. Colors can vary but a common combination is green or blue for rising and red for falling.

Most people prefer candlestick charts over bar charts because they are easier to interpret. It is much easier to see turning points in the market using candlestick charts. You can immediately see where the market reversed from an upward to a downward trend and vice versa.

When you see a trend forming, you can make money by trading in the same direction as the emerging trend. ‘The trend is your friend’, as currency traders say. For this reason, identifying the trend is the most important thing to learn in forex technical analysis and using candlestick charts is probably the easiest way to do this.

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Tuesday, June 23rd, 2009 Strategy, Trading with Charts No Comments

Candlestick Charts For Forex Traders

Among the many types of technical analysis available to forex traders, the single most useful and popular are probably candlestick charts. These were originally developed in Japan during the 18th century by a prominent commodity trader who used them to chart the fluctuations in the price of rice. For this reason they are often known as Japanese candlestick charts, and many of the patterns that they form have Japanese names.

Simple line graphs plotting the price of a commodity at regular intervals in time had been used for centuries, but traders were in need of something that could plot more variables within a two dimensional graph. The bar chart showing the opening, high, low and closing prices of a commodity was useful and helped traders to predict future price movements in a more reliable way than line charts, but candlestick charts were even better.

They were introduced to the American stock market and from there to the worldwide financial markets by Charles Dow at the beginning of the 20th century. Dow was the founder of the Wall Street Journal and co-founder of the Dow Jones company.

Candlestick Formation

The chart is made up of a series of ‘candlesticks’ which typically have a chunky body with vertical lines stretching up from the top (the upper shadow or wick) and bottom (the lower shadow or wick). The different points measure the differential in prices over a certain period of time, which might be 5 minutes, 15 minutes or longer.

The top of the wick is the highest point reached during the time period and the lowest point of the lower wick is the low. The top and bottom of the body are the opening and closing prices. If price rose during the period the body will be white (or green or blue if colored). The bottom of the body marks the opening price and its top marks the close. If the price fell during the period the prices are the other way around and to show this at a glance the body will be black (or red if colored).

How To Use Candlestick Charts In Forex Trading

A chart showing 5 or 15 minute candles over a period of several hours can provide the forex trader with many patterns on which he can base a system for determining when a trend is developing. For example, when the candle body is white or green and higher than the preceding candles, it indicates that buyers are very bullish. When it is black or red and lower than the preceding candles, it indicates that buyers are very bearish.

Being able to see these implications at a glance is vital in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick charts are one of the most useful visual aids for any forex trader.

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Monday, June 22nd, 2009 Introduction No Comments