Forex technical analysis is among two methods to analyze the currency exchange markets. Yesterday we discussed about the forex fundamental analysis. Today let’s us learn about technical analysis. While fundamental analysis, considers external economic factors such as the strength of the national economy, political issues etc, in forex technical analysis we will be studying the movement of prices.
The basic principle behind the technical analysis is that if you consider the historical data of foreign exchange rate movements in the past, you will be able to distinguish trends and tendencies. Once you identify the tendencies of a specific currency combination you can anticipate how the prices will shift in the future. Dissecting price trend with forex technical analysis involves the use of forex charts. With proper use of these forex charts and forex charting software you can identify an emerging pattern that fits your system and will result in a profitable forex trading opportunity. To make the best of the opportunity it is essential that you are able to read the forex charts accurately.
How do I read the forex charts? Before we go in deep about analyzing the charts, let’s take at the types of charts.
In general there are 3 types of forex charts. They are,
1. Line charts
Line charts are created by connecting a series of data points where each data point is a closings price. The ups and downs of the line illustrate the movement of a specific pair of currency. However, the forex line charts show only the closing prices and do not illustrate movements within the specific trading period.
2. Bar charts
A bar chart consists of a series of vertical bars with varying height depending upon opening and closing price of the currency. In forex trading, bar charts are also called as OHLC charts since these forex charts demonstrate the Opening rate, High, Low and Closing rate.
Take a look at the figure on the right side to get a better understanding about the bar charts used in forex trading.
As you can see the small dash positioned on the left of the bar represents the Open. The highest price that recorded during the trading period is represented by the top of the bar and the lowest bar indicates the bottom price. And the small dash on the right of the bar is used to specify the Closed.
3. Candlestick charts
Forex candlestick charts illustrate the same data what we saw in a bar chart. However most traders find it easier to interpret with a quick look since, the Forex candlestick charts are displayed in a different manner.
In Forex candlestick charts we have the identical vertical line with the High at the top and the Low at the bottom, but there is also a wide block in the center representing the gap between the opening and closing rates. In case of a rising price the blocks will be filled white and in case of a falling price with black. But in modern forex charting software and analysis they use various colors. In most cases green or blue color is used to indicate rising prices while red is used for falling prices.
Candlestick forex charts are much easier to interpret and you can quickly and easily identify the turning points in the forex markets where the market overturned from an upward to a downward trend or the other way round.
The forex traders will tell you that “trend is your friend. But how do I make money using these forex charts? In simple terms when you notice an emerging trend forming, you can start trading in the same direction to profit from it. However, remember that at some point the market will start the downward trend depending upon various factors. If you trade beyond this point you will end up losing money. How do you predict the turning points? That is where custom forex charts like LMT forex formula can help you.
Forex Chart to make Profits
Automated forex software like FAP Turbo are not an alternative to forex education. If you are the type of trader who love forex technical analysis over fundamental analysis then you should know that identifying an emerging trend is one the most important skills you must develop during your forex education. The use of forex charts like candlestick charts and forex charting software will make your task easier.