Charts are one of the oldest and crucial forms of trading tools that can tell you quite a lot about a certain asset. All you need to do is learn how to properly read them. Charts are like mathematics - not a lot of people will initially be drawn to them or even find them that helpful or simple. But when you really dig deeper and take your time, you will find that charts are everything you will ever need for trading on the Forex market.
A price chart, or simply a chart, is a crucial tool for technical analysis. It’s quite important for traders since it shows them what came before they decided to start trading - all the historic movements of the price of the asset, as well as other trends. Charts are perfect for visual learners since they combine tough and detailed data with pictures and colored lines. So, no matter where you are coming from or what is your educational background - charts are pretty easy to understand.
How do Charts Work?
Since charts are a visual representation of a price movement for a certain period in time, there are some differences between them, which we will cover a bit later. For now, let’s just say that there are many ways to portray a price movement through a chart - by using any time frame from 10 minutes to a solid week.
Charts are quite important because they can be used to represent a price movement of any asset - from stock to the currency, and even a commodity. In other words, pretty much anything that falls into the jurisdiction and a possibility of being analyzed on the market.
How are the Charts Affected?
So, let’s cut to the chase - how do prices move? Basically, the prices of assets are affected by so many different factors - from the current geopolitical situation to the weather and tornado season. Regardless, charts are quite handy here because they take all of that into consideration to create a visual representation in one place.
Charts are also usually analyzing different movements, patterns, and tendencies. All these features are important for the clients, especially in an environment that is so unpredictable like the Forex market. And here is a fun fact - if you think that a chart looks complicated or difficult to read, imagine creating it… BY HAND! That’s right - charts were used way before the computer was invented.
What is a Price Chart?
To put it simply, a price chart shows all the changes in supply and demand for a certain asset. Accordingly, every action of buying and selling the particular financial instrument is displayed on that chart, showing how the individual value of it changes on a daily (or a weekly) basis.
One other important factor that charts take into consideration are the clients’ expectations. Namely, despite the art of trading being so unpredictable, we are only humans, after all. So, it is in our nature to speculate and expect and hope for the best. These expectations are actually pretty affecting the prices and values since they can also make the prices change over time.
There are 3 most common types of charts that you can encounter during trading on the Forex market. You probably already know what they are, you just didn’t think about what they are called or how they work, exactly. Worry not, because we will explain it all in the following passages.
As the name implies, a line chart is showing the price movements and other types of factors that affect an asset. Simply, a line chart draws a line from one closing price of the asset to another one, at the end of the period in time that is being analyzed. The line chart is quite simple to follow and draw since there aren’t any details or other factors that are taken into consideration.
These types of charts are much more complex, which shouldn’t be considered a bad thing. They provide more information on the matter, so they are quite useful to the general population of traders.
The bar charts are showing the price movements for different periods of time, all in the same place. Depending on the price movements, of course, you can find different sizes of the bars accordingly. Also, another important thing to note is that the high volatility of an asset is represented through a larger bar.
A candlestick chart can be considered as a simple bar chart, but with a twist. Namely, it shows more information that is organized a bit differently to avoid clutter and any misconceptions.
Despite this, candlestick charts are visually a lot more appealing and easier to read. They show a high-to-low range for a certain value of the asset at any moment. In addition, each candlestick represents a bullish or bearish sentiment in different colors, for a better understanding.
The candlestick charts originally came from Japan and have become quite crucial within the new market environment. They can help organize a bunch of different information in the same place, and for different time frames, too.
Heikin-Ashi is an expression used to name a type of a candlestick chart and the way it is interpreted. It is also a pride and joy of Japan, and it allows you to assess the market development much faster than with any other chart type. It looks similar to the candlestick chart, with some important distinctions that are easily noticeable when you look at it closely.
The main difference between the two is that the candlestick chart has a separate candlestick for each indicator. While with the Heikin-Ashi, each one of them is based on the previous one, so they are connected within the one neatly organized package.
Charts are a pretty handy tool that came to be as a result of technical analysis. The importance of this study is in its ability to take into consideration so many different factors that contribute to your idea of what market is, as well as the experience you may encounter while trading actively.
Technical analysis looks at indicators such as market psychology, behavioral economics, history, and other helpful insights to create productive and useful results. This is one of the oldest and most reliable forms of analysis, which was also able to produce many other forms of studies over the years.
History of the Technical Analysis
Though some forms of the technical analysis go as far as a few centuries back, it is considered that the modern type of this study was introduced in the 17th century by Charles Dow. And although he is credited the most for his contributions towards the development of the technical analysis, there are few more important names to mention - such as Robert Rhea and Edson Gould. Each one of them created a new wave on the market, that allows us to have more options for applying skills today.