We couldn’t cover the currency trading basics without stopping off at one the most important aspects to this forex trading course – forex charts. Even if you have already learnt about forex uk charting, we strongly advise you to read through our ‘ultimate’ guide on the subject – over 5500 words from our resident trading experts, make sure you bookmark this article for future reference. Lets get started!
1. The Basics of a Forex Chart
The Internet has smoothed the playing field for Forex traders. What once required a broker is now only requiring a few mouse clicks. Lower commission rates, free access to information, and open access to the market have introduced many new players to the world of Forex trading. These new players have the potential to make a lot of money without needing professional help. Technology assists in making sure traders have the same access to information and the same tools to apply to it. The best way to use information for Forex trading is to learn how to chart it, and then to learn what different variations in the chart patterns mean to the trader.
There is a group of traders which would quickly disagree with using technical analysis by charting. These traders are called fundamentalists. Fundamentalists only use economic reports, which analyze the current demand for currency. These traders are unaware, or do not believe in the benefit of using charts to determine Forex trends.
A chart displaying currency ticks is a vital tool for understanding the current happenings of the market. All active traders who practice technical analysis are called technicians. They are going to use their favorite charts to analyze the state of the market. The chart is a technician’s best friend. It is able to reflect all the activity of the market in a single visualized state. This visualization will include pricing movements, buying and selling, and it will reflect the psychology of the current market. A chart has the potential to offer clear insight, and precisely display the current prospective of the market.
There are four main chart types: candlestick charts, bar charts, line charts, and point and figure charts. Line charts, bar charts, and point and figure charts will be covered, but the main focus will be on how their effectiveness compares with candlestick charts. Candlestick charts are utilized by most active traders who are technicians, and they offer the most information in a single chart.
2. Line Charts
The line chart is based around closing prices. The chart reflects the closing price of the currency from one time segment to the next, over the course a selected period. If making very short-term decisions, the line chart is not a bad choice.
Within the line chart, however, there is no other information displayed. Therefore, attempting to develop a strategy through the price action of a line chart would be a losing battle. This chart does not display enough information to be as useful as a candlestick chart.
Long ago, I used line charts for short-term trading. This was in the beginning of my trading experience, when dinosaurs still roamed the planet. I remember having a lot of anxiety due to my lack of information. I think the majority of us feel anxiety when faced with making an important decision based on very little information. I was not using the line chart as my sole source of reasoning to buy or sell, but it created a situation where I felt I needed to collect stacks of information to assist with my decisions. The inherent problem created by the line chart is that the information could not exist in one easily accessible chart.
3. Bar Charts
Bar charts are still used by many traders, and they have been around for a very long time. Many sites and publications will still use bar charts, but many have also switched to using candlestick charts. Most active traders consider candlestick charts to be the industry standard.
The bars in a bar chart reflect the price action from period to period. Each bar represents the difference between the high and low price of that period. With the top of the bar being the high, and the bottom of the bar representing the low. There is also a notch which appears on each side of the bars. Usually, the left notch represents the open price, and the right notch indicates the closing price.
There are many Forex traders who use bar charts. Once a trader learns a candlestick chart, however, most do not return to the bar chart. A candlestick chart can show a trader who knows how to read it a lot of information over the short or long term within a few glances over the chart. The colors of the various candlesticks on the chart can portray the current sentiment of the market. The candlestick chart has many patterns, which are documented, and various names and nuances which can help predict a trend in the currency exchange.
I used bar charts for a long time. I was not fortunate enough to come along candlestick charting until I was a full-time trader. The bar chart can be just as informative as a candlestick chart, but I enjoy using the candlestick much more. There are a lot of intriguing names for patterns and symbols on the candlestick chart, and, at times, I do feel more informed by the candlestick chart as I think the patterns are more easily established and noticeable.
4. Point and Figure Charts
Point and figure charts have been around for an extraordinarily long time in the world of market charting. These types of charts are created on a graph and use x’s and o’s as figures placed on the graph. The chart is based around the reversals of price instead of a set time frame. The x’s show the up moves without a price reversal. The o’s show the down moves without a price reversal.
The point and figure charts are different from most charts in that they display only the price reversals. If the price stays at a particular constant, there is no need to update the chart. However, if the price moves several times, the chart displays the support and resists levels. The trader can make a sizable profit using the chart. Why not use this chart instead of using a candlestick chart? The answer is that the candlestick charts also displays the same information, and a lot more.
The point and figure chart was a particularly prominent method of charting over the last 100 years. The chart has since lost its place. Today, with the advent of the Internet, the candlestick chart displays a lot more information with ease. The point and figure chart is a representation of how prices were charted when using the closing prices found in the daily news, instead of the streaming data available on the Internet.
5. Why Use Candlestick Charting for the Technical Analysis of Forex Trading?
The Candlestick Charting technique has been used in the Far East for hundreds of years. It has been perfected through their study, but it is a complicated, mathematically based charting process, and to be accurate for short-term profits it needs to include date which is quickly updated, which is widely available on the Internet. This is the reason its widespread use is such a recent development in the charting of currency exchange. Without access to the right software, or the best Internet websites, it would take a lot of time to learn to produce a pen and paper candlestick charting method.
People who use the candlestick charting method run the gambit between beginners and the most seasoned professionals. The beginners will find the amount of information a little overwhelming, but it will all make sense quickly. Seasoned professionals are easily able to combine multiple techniques and other technical tools to the candlestick charting method. Candlestick charting unquestionably adds an extra dimension onto the analysis of the Forex, which the other charting methods cannot provide.
I have been using candlestick charting for a little over ten years. Since I implemented it into my daily trading, I have made more money. This is the reason I have chosen to focus on this style of charting for this article. Also, my wife loves it when I try to pronounce the names for different symbols.
6. The Basics of Candlestick Charting
In order to use candlestick charts for Forex trading, traders need to understand the basics of how a candlestick chart is built. The builds of these charts starts with the initial, common pieces of data with the option to extend into multiple additions, and tack on extra pieces of information that can be placed into the chart.
In order to make profitable trading decisions and interpretations, it is essential to be familiar with the fundamentals which create individual candlesticks. The chart itself can display currency information over various time periods. There is also more data usually included in the candlestick chart which can enhance its purpose and readability even further, but the origin information, which creates the chart, is always similar.
For any currency, each segment of time of trading includes four principal keys, in terms of information. The keys are the opening and closing prices, and the highest and lowest price. These four pieces of information are used to build the sticks which create the individual segments of a candlestick chart. The data for several time segments are needed in order create the candlestick chart.
Candlestick charts can be used to report the activity of the Forex over any desired time. They can be as short term as a few minutes per stick bar, or as long as a week or longer per stick. A candlestick chart is a powerful tool whether the sticks are covering a few weeks or several years.
7. Opening Price and Closing Price on A Candlestick
When creating a candlestick, the opening price for the time period is always the first piece used for construction. On the candlestick, the wick is the thin vertical line, and the thick sections are the candles. On a single candlestick, the opening price is always represented at the bottom or top of the candle. The opening price will correspond with the pricing on the chart’s vertical axis. A hollow white candle is known as “bullish.” A bullish candle, or hollow candle, means that the opening price is lower than the closing price. Therefore, on a hollow candle, the bottom of the candle is always the opening price. A black candle is “bearish.” A bearish candle indicates that the closing price was less than the opening price. In this case, the opening price will always be on top.
8. High and Low Prices on the Candlestick
The other information, which is used to create a candlestick, is the high and low price information. This section of the candlestick is straightforward. The high point is the highest price; the low point is the lowest price. These are indicated on the candlestick using the thin vertical line known sometimes as the shadow, but more appropriately deemed the wick by others. The wick on top of the candle is the high price. The wick on the bottom of the candle is the lowest price. Sometimes, the price of the currency will continue to drop all through the time period, and then the wick will not extend above the candle. Also, the price could increase throughout the time period in which case the wick will not extend below the candle.
9. Additional Information on Candlestick Charts
Along with opening and closing prices, and the highest and lowest price information on the candlestick, other information will be displayed, as well. This information is used when trading on the Forex, and is the main reason the candlestick chart is the most widely used for currency exchange.
Volume records the amount of contract trading in currency happening during a period of time. This information is usually in the bottom 25% of the chart. The volume portion of the chart will show the movement and trends during a time segment.
Volume is an important factor in using technical analysis to predict currency trading. Price movements that are shown with high volumes are thought to be more sustained and significant movements. A rising price that is not accompanied by an increase in volume may indicate a weak trend.
Seasoned analysts will always confirm pricing trends with volume movement. Volume can assist in affirming if a rising or lower price trend will continue. If the volume begins to taper off, the trend is likely coming to an end.
There are also technical indicators, which can be placed and used, on candlestick charts. While many traders are quite profitable only using candlestick patterns, there is a wide range of indicators which can be added and may prove beneficial. There are many indicators, which could lead an analyst to believe the particular Forex currency is a bullish trend, while others may believe it is a bear. The best way to counteract the various options for where the currency is heading is by using technical analysis.
A technical indicator can define a current trend. There are many different debates over whether a trend should be followed or if investments should be reversed from the trend. The main focus here is to utilize a trend line on the candlestick chart.
A trend line works to line the chart and show the direction that the currency is trending towards. Many of the software and websites which offer candlestick charting will also offer the trend line mechanic on the charts. Trend lines can create a large advantage when used against interpretation of candlestick symbols.
10. Using Internet Resources to Create Candlestick Charts
After coming to an understanding as to why charting is essential with Forex trading, it will be time to create a candlestick chart. Like almost every other aspect of human life, the Internet has had an impact on trading. There are a lot of low cost and even free financial information websites all around the Internet.
There are many tools that can make charting easier. The tools are websites or software packages that will do most of the work for you. Instead of listing them, suffice to say that a search for candlestick charts on Google will have overwhelming results. There are many things to consider when deciding on a website or software in order to create candlestick charts. It will be worth noting if they are geared towards Forex trading, where they gather data, and how much they cost in considering which one to utilize.
11. Candlestick Charting – Symbols and Patterns
In using the candlestick charting system, it will be necessary to understand that different patterns and “symbols” which appear on the chart can be interpreted in different ways. While this is true, it is certainly essential to understand the basic meanings of the patterns which can appear. Not only is the current pattern important, but the context in which the pattern appears is vital in understanding the trend it may be portending.
I find the names of the candlestick chart symbols to be one of the most intriguing and attractive qualities in the candlestick charting system. While the system itself is remarkably easy to get a hold on, the names can be a little more difficult, but they clearly give the system a unique quality. I genuinely enjoy pointing out the “doji” symbols to those who do not trade or use candlestick charting, and letting them know what it is called and why. It certainly makes what I do as a profession sound more compelling.
12. The Marubozu Symbol
The Bullish White Marubozu
This is the name of the white candle. During a day or time period in which the trading creates the shape of the long white candlestick, the price moves up consistently throughout the time segment. The marubozu name meaning bald in Japanese is especially fitting as a true long white candlestick does not show a wick on the top or bottom, or if there is a wick it is extremely short. A long white candlestick should mean the white section covers at least 90% of the candlestick area. For this candlestick to appear on the chart it means even when sellers come into the market, the buyers are still purchasing enough to keep pushing the price higher.
It is usually pretty clear that when the bulls are driving the price higher by buying heavily throughout a trading day, they will not be stopping as the next time segment begins. If the white candlestick is without a wick, it is a buy signal.
There are two other forms of the white marubozu. They are the closing white marubozu and the opening white marubozu. The closing white marubozu is the long white candle with a wick on the bottom. This marubozu indicates that the time segment began with prices dropping lower, but then went higher and closed at the highest rate. The opening white marubozu has a wick on the top but does not have a wick on the bottom. This marubozu shows that the bullish behavior was not as strong, and the day did not close with prices at their highest levels.
The Black Marubozu Candle
The long black candle is as bearish as a candle can be. It is the direct opposite of the long white candle. It is long when compared with other candlesticks on the chart, and it is made up of a solid candle. This candle indicates that the sellers took over at the beginning of the day and sold all day, which pushes the prices lower and lower. Usually, this candle does indicate an excellent point in which to make some profit.
Selling of this nature means that the bears will continue selling for a few days on which a trader can capitalize. This candle should be showing little to no wick, or the black section should be covering at least 90% of the candlestick. A reversal is possible in the short term, but this candlestick suggests the aggressive selling will continue.
Just as the white marubozus, the black marubozus has three variations. There is a type of black marubozu which opens on its high and closes on its low. The closing black marubozus does not have a wick on the bottom, which indicates that the time segment closed on its low. The opening black marubozus is created when the open is the high price of the day, and the close is right above the day’s low. This creates a small wick at the bottom of the candlestick.
13. The Doji
A doji is created when a day or time segment begins and ends at the same price. There are many different forms of the doji on candlestick charts, but they are all maddening as far as traders are concerned. Doji translated from Japanese means “mistake.” Many believe the symbol on the charts is named for the mistake of the price starting and ending at the same place.
The doji symbol takes various shapes depending on the position of the open and close during the time segment in which the doji appeared. The doji symbol is usually associated with a change in trend for the particular currency. It is an indication that the trading came up close to equal, but the one side, the bulls or bears, will eventually overpower the other. There are various types of doji symbols, which possibly indicate different outcomes.
The dragonfly doji appears as a vertical line with the small crossing horizontal line at, or near, the top. It is a particular case which indicates that the opening, high and close prices are all equal. In one time segment, the stock opened and traded down, then picked back up and closed on a high which equaled the opening price. The bears sold until the bulls started buying. A dragonfly doji is an indication that the price will rise. However, there are cases when the price falls. If the price falls below the lowest price level indicated on the dragonfly doji, it is time to sell.
The gravestone doji is an exceptionally bearish symbol. It will be a long vertical line with a small candle box, or a horizontal line resting on the bottom. This, like the other dojis, indicates that the market open and closed at equal prices. The gravestone doji shows bullish behavior as the buyers drive the price up, which is counteracted by sellers selling enough to drive the price back down.
The hammer doji looks like the opposite of the gravestone doji. The hammer does not signify as strong of a trend change as a dragonfly doji. It is a signal of a trend change.
14. Interpreting Multiple Symbols
Using interpretations of multiple symbols on the candlestick chart is not a way to beat the Forex market. It will not always work. Extensive tests run by various individuals have shown it must be combined with long-term trending information, current exchange information and real world news to be at its most effective. With that said, there are particular strings of candlestick symbols, which many believe at least say something about the state of the market.
The rising three method appears as one white candlestick with wicks on each end, three or four black candlesticks which are each in at a lower price, and, therefore, declining, and another white candlestick which ends higher than the first white candlestick. This signifies a new closing high in the pattern. This is a strong bull indication.
A falling three method is the inversion of the rising three. It is two black candlesticks, with three rising white candlesticks in between, in which the second black candlestick ends on a new low. The falling three indicates a bear trend.
The morning star appears as a long black candlestick with wicks, then a white candlestick drops down and the bodies of the candles do not overlap, however, their wicks may. Then the third candlestick is a long white candlestick which has a top that is equal or higher than the top half of the black candlestick. This indicates a bullish reversal of a downtrend.
The shooting star shows a long candlestick with a second candle far above the first one. The colors of these candles indicate the type of reversal. A third candle must close below the top half of the first candle in order to complete the shooting star formation. This is a weaker symbol of the possible reversal of the current trend.
A doji star is weaker than a morning star because the doji symbol represents a lack of decision. The formation is a long first candle, a high above doji symbol and a third candle which closes below the top half of the first candle. This creates the doji star pattern. Like the shooting star, this pattern may signify the reversal of a trend.
The evening star pattern is a long white candle, with a second white candle over its opening prices and a third black candle which closes lower than the top half of the first candle. This pattern indicates the bearish reversal of an uptrend.
The hanging man is a hammer doji which appears after an uptrend. When the hammer is in the position on the candlestick chart, it is signaling a reversal. This bearish symbol warns of a reversal of the uptrend.
The dark cloud appears on the candlestick chart as a strong white candle. It is a strong white candle which is followed by a black candle which finishes lower than the first half of the white candle. This pattern shows a reversal to a down trend.
The piercing line, however, show an uptrend. A long black candle is followed by a white candle showing its closing price over half of the black candle. With this pattern, expect to find a reversal after a down trend.
The harami candlestick and cross symbols both indicate the reversal of a strong trend. Harami is translated as “pregnant.” The second black candlestick or doji must hold within the price range, or body of the first candle, though the wicks may pass it slightly. This will indicate that a strong trend is ending.
Engulfing candlesticks are showing when the second symbol can “engulf” or swallow the first. This symbol often signals the reversal of a short-term trend. A black candle in first position being engulfed by a large white candle is bullish. A white candle in the first spot being engulfed by a black candle is an indication of a bearish trend.
15. Using Charts for Forex Trading
Many scholars and investors are critical of technical analysis and candlestick charting. They believe that the market is efficient, and there is no move to be made in the long term which can outperform it. There are many investors who have made a lot of money using charts, and would disagree with these opinions.
There are investors who insist that there are no differences between a bar chart and a candlestick chart. Since the symbols and their usual interpretations have been covered, suffice to say the candlestick chart is much more aesthetically appealing and contains more easy-to-read information than a bar chart. The candlestick chart undoubtedly makes it easier to understand the intricacies of the exchange market when compared with the methods of the bar chart.
With all the math, charting, and learning that go into charting the Forex with a candlestick chart, it is surprising to learn that many think technical analysis is no more than trying to see into the future. Of course, when reviewing the success of the candlestick chart and technical analysis with some investors, it is easy to see the proof of these methods working.
There is another school of thought that charting is only affective for short-term traders. Charting is immensely useful for picking points to buy and sell in the short term. It is also perfect for charting long-term trends, and even for longer-term investments.
16. Some Tips Concerning Technical Analysis and Charting
As those who are new begin trading in the Forex using technical analysis through charting, they will encounter various opinions. There are those people who believe it is not a sound device for investing. The only question to ask is if it is working.
It is vital to remember that there are and will always be false signals from charting. Around 40 – 60% of the signals charting gives can be false. If the money is invested, and stops are used, the money loss can be limited. The most noteworthy thing to remember is to sell quickly and never look back.
Some people, who understand the risk of trading, but not the ins and outs of charting and technical analysis, may decide it is a form of gambling. They do not understand the benefit that proper charting and analysis provides for a Forex trader. They also do not know how many millionaires have been created by using charting for trading.
When information is applied to a current chart and a trade is made based from it, it can sometimes be perfect, and other times it is the wrong decision. No move will be correct every time a pattern appears. Unfortunately, no amount of information is going to change this fact. It is possible to collect too much information, review too many charts and see the market going both ways. In this case, it becomes impossible to decide between a bullish or bearish outcome.
17. Combining Candlestick Charting With Other Indicators
There are quite a few traders who are trading on the Forex using only candlestick charting. Some are using the technique to make a significant deal of profit, but others are not able to sustain using only these charts. Instead of focusing on only one technique to strengthen the advantage in Forex trading, why not use the charting technique along with other methods and any technical indicators available? Using candlestick charting and determining the market context in which the symbols and patterns appear when trading on the Forex, should create results which are not only more dependable, but also more profitable.
For instance, suppose that a trader is using trending, technical analysis, or a trusted adviser to determine that the market is utterly bearish at the moment, but then a long white marubozu appears. Taking this candlestick as a sign of reversal could be a mistake, or it may be a brilliant move if a trader is attempting to predict a reversal. This is the risk of trading on the Forex market. The more information the trader can create with various forms of technical analysis the more comfortably he can invest in his own forecasting.
18. The Relative Strength Index and a Candlestick
While there are many technical indicators which work exceedingly well alongside a candlestick chart, the RSI alongside a candlestick pattern indicator makes for extremely convincing information. These two indicators in a certain situation can make a trader exceedingly comfortable in buying or selling to create a profit. These indicators are used together for longer trades.
The Relative Strength Index (RSI) is a fairly complicated formula for those who are new to it. There are pieces of software, sites and publications that can assist with finding an RSI, but it is essentially the speed at which price is changing. When a trader uses the formula by plugging in the correlating numbers, the output lets the trader know when the market is supersaturated with buying or selling.
The Formula looks like this:
RSI = 100 / (1 + D(P,n)/U(P,n))
Inside the formula, U(P,n) is a moving average of increased growth of the P price within n periods. The D(P,n) is a moving average of the decreasing of P price within n periods. Instead of focusing on how to plug in numbers to the formula, for which a number of articles and guides exist, the focus will be on how to use the RSI in combination with a candlestick chart. The most crucial piece of information for the RSI is that a number at 70 or above indicates overbought, and a number at 30 or below indicates oversold.
So should the RSI be the only indicator? Of course not, there are too many other factors affecting the market to let one indicator indicate when to buy or sell. Instead, the RSI should be used in conjunction with the candlestick chart. For instance, the RSI comes in at less than 30 and a piercing line appears on the candlestick chart. These two indicators combine to create a compelling reason to attempt a profit with a buy.
19. Whatever Works
There are so many different theories, formulas, and ideas on what will actually indicate a trend, or reversal of a trend. There are ideas on the best sites to use for information, the best sites for trading and the best sites for current market news. The result is that the trader must create their own toolbox. The tools in your toolbox may not work for another trader in the same way they work for you. If you find a system is constantly failing you, then try an entirely new system. You will find tools that when combined with knowledge, instinct and patience will make you a successful trader.
Remember, while past profits do not always indicate results in the future, stick with what is working. If it is a “silly system” it may be a good idea to not tell everyone on the block, but if, for instance, every time your sibling calls you buy a currency and make a profit, keep doing it. No system is silly if it works consistently. Candlestick charting is a great method of charting the Forex which can combine a lot of information in one place, but it is indispensable to develop and use as many indicators as possible when applying technical analysis.
I remember a time I was using two candlestick charts, at this point I had two different websites for data collection and sometimes the data varied, so I felt more comfortable using two charts. I was also employing the RSI formula. I was watching a long-term trend that I had bought into when there was a weak reversal pattern, but a strong 30 with the RSI.
My investing partner, or wife, was happy with the amount we made on the uptrend and worried about a reversal in which the profit would not be as high from this trade. At that time, the trading was going remarkably well, and she had become intensely interested in what I was doing up at all hours. I convinced her that we should stay in the trade.
The next day when she came in to check on it, I showed her that we had lost some of our profit, but I also saw a morning star. This morning star, with the RSI still not anywhere near 70, had convinced me to stick with it when I was truly considering a sell before I lost all my profit. In the end, it was a risky move, but I made one of my largest profits of that year. I stayed with it based on the RSI, the candlestick chart morning star pattern, and other market conditions.
Sometimes, all the factors come together and create a textbook example which results in a gain, sometimes those same factors result in a loss. The main point is to use charts, technical analysis and market conditions to create more educated moves, and be ready to sell, or place a stop, in order to ensure that losses, when they occur, are not devastating.