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Basic Concepts

Basic Technical Analysis Concepts

Charting & Charting Styles

'Charting' is essentially the most basic expression of technical analysis. There are many different charting styles and methods. We will cover three of the basics: line charts, bar charts, and candlestick charts.

Line Charts
A line chart is exactly as its name suggests – a line connecting the closing prices. Line charts give a very basic view of how the market is moving. Line charts do not have as many uses in trading as other charts as they only indicate the closing price. Traders should also take into consideration the open, high and low prices.

Bar Charts

Bar charts represent the open, high, low and closing prices of a particular time period using a shape known as a bar. The dash on the left hand side represents the open price, the dash on the right hand side represents the closing price, and the highest and lowest points on the bar represent the high and low of the period.

Candlestick Charts

Candlestick charts are very similar to bar charts, showing the open, high, low, and closing prices of a particular time period; however candlestick charts also have a coloured body. The colour of the body is dependent upon the price movement of the time period, whether the price of the currency pair appreciates or depreciates.

Candlesticks use 2 colours - usually black and white. White or hollow candles represent a time period where the price of the currency pair has appreciated, so that the open price is represented by the bottom of the BODY and the closing price is represented by the top of the BODY – not the bottom and top of the candle but the body of the candle.

Black or filled in candles indicate that the price of the currency pair has depreciated over the time period, and have the open price represented by the top of the body and the closing price represented by the body. The high and low of the time period are represented by the very top and the very bottom respectively of the candle.
The vertical lines at the end of the body representing the high and the low are called wicks.
Every candle represents the Open, High, Low and Close price.

Looking for Trends

There are certainly a few things that you are going to want to consider when looking at a chart. Ask yourself what the Forex chart on your screen is telling you, and which of the following questions are worth considering:

Is there an obvious trend or direction of the market within the time frame that you are viewing?

Are there any basic chart patterns formations such as triangles, wedges, pennants, double tops or bottoms or otherwise that might suggest a pending breakout or trend reversal?

Is the market trading within the walls of any obvious support and resistance levels, or is the market trading within a channel?

Have you considered any technical indicators?

Trends

The following chart shows an example of an upwards trend.

It takes two or more points to draw a trend line. The trend line in our example was drawn by identifying the lowest low of the trend and connecting the line to the following low preceding a new high. A solid trend line should continue in this manner until several lows followed by new highs are plotted.

Support and Resistance

Support and resistance represent key junctures where the forces of supply and demand meet.

Support is the price level at which demand is thought to be strong enough to prevent prices from declining further. Support levels are usually below the current price, though it is not uncommon for prices to dip below support briefly. Support does not always hold and a break below support levels signals that the bears (sellers) have won out over the bulls (buyers). A decline below a support level indicates a new willingness to sell and/or a lack of incentive to buy. Once a support level has been broken, another support level will be established at a lower level.

Resistance is the price level at which demand is thought to be strong enough to prevent prices from rising further. Resistance levels are usually above the current price, though it is not uncommon for prices to rise above resistance briefly. Resistance does not always hold and a break above resistance levels signals that the bulls (buyers) have won out over the bears (sellers). A raise above resistance levels indicates a new willingness to buy and/or a lack of incentive to sell. Once a new resistance level has been broken, another resistance level will be established at a higher level.