Technical analysis – reading FOREX charts

Price charts can be simple line charts, bar charts, or even candlestick charts. They are charts that show prices over a specific time frame. These timeframes can cover any period from minutes to years, or any time frame in between.
Line charts are the easiest to read, and will show you a broad overview of price movement. They only show the closing price for a specific time frame, and they make it very easy to catch patterns and trends, but they don’t provide as much fine detail as bar or candlestick charts.

On a bar chart, the length of the line shows the spread of prices over that time frame. The larger the bar, the greater the difference between the high and low prices in that interval. It is easy to tell at a glance whether the price has risen or fallen since the left tab shows the opening price and the right tab the closing price. The bar then shows the price change. When bar charts are printed, they can be difficult to read, but most charting software has a zoom function, so you can easily read even closely spaced bars.

Originally developed in Japan for analyzing candlestick contracts, candlestick charts are very useful for analyzing FOREX prices. Candlestick charts are very similar to bar charts, both showing the high, low, open, and close prices for the time indicated. However, color coding makes candlestick charts much easier to read, usually, a green candlestick indicates a rising price and a red candlestick indicates a falling price.

The actual shape of the candlestick with the candles around it will tell you a lot about the price movement and will greatly help your analysis. Depending on the price spread, different patterns will be formed by the candlesticks. Many of these formations have rather exotic names, but once you learn the formations, they are easy to pick up and analyze.

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Price charts are not usually used by themselves, to get the full effect you need to supplement them with some technical indicators. Technical indicators are usually grouped into several fairly broad categories. Some of the more common ones used to monitor and track market movement are trend indicators, strength indicators, volatility indicators, and cycle indicators.

Below is a list of some of the more commonly used indicators and a brief description of them.

Average Directional Movement Index (ADX) – This indicator will help indicate whether the market is moving in a trend in either direction and how strong the trend is. If the trend has readings above 25, then it is considered a stronger trend.

Moving Average Convergence/Divergence (MACD) – This indicator shows the relationship between moving averages, which helps determine the market’s momentum. Whenever a signal line is crossed by the MACD, the market is considered strong.

Stochastic Oscillator – Compares the closing price to the price range over a specific time frame to determine the strength or weakness of the market. If a currency has a stochastic greater than 80, it is considered overbought. If, on the other hand, the stochastic is below 20, the currency is considered unsold.

Relative Strength Indicator (RSI) – this is a scale from 1 to 100, which is used to compare high and low prices over time. If the RSI rises above 70, it is considered overbought, and anything below 30 is considered oversold.

The moving average – is formed by comparing the average price in a given period to the average price in other periods.