In many ways, traders need to find out how to deal with currency pairs, commodities, and other instruments, and the most important and reliable way is to follow charts. Traders who use charts are called technical traders and prefer observation tools to find accurate price points when they want to enter and exit the market.
With a number of options, traders have to figure out how to follow trends in forex market pairs, commodities, and other instruments; the most important and trusted method is to follow the charts. Traders who use charts are called technical traders (Lo et al., 2000; CMT Association, 2023), who prefer to follow charting tools to accurately find the peaking trends and price points when they would like to enter and exit the market. It is very important to check the forex broker review before trading in any stocks.
Many traders like to follow news sources that provide information on economic growth, interest rates, political situations, and threats. We will guide you in reading price charts and making accurate predictions. To help you in your financial trading career, we will also outline a few tips to help you get along well with charts as a good trader.
First, we would like to know what a chart really is and what information it provides. A chart is a depiction of exchange rates around the world and trades involving financial instruments on a digital graph. The ability to read a chart shows how well you can keep track of it and also helps you find developing trends in the graph.
Understanding the Trends
We find a number of data points plotted in a particular direction, which allows us to easily find the overall direction of the instrument. Every chart has a graph that is different from others, and some easily show the trend, while other charts are a bit more complex. The trend is a series of peaks and valleys that move in that direction (Murphy, 1999). When you see a “bullish” trend, you are looking at rising highs and lows, and when you see a “bearish” trend, it means a sequence of descending lows and highs.
There is another trend called “sideways,” which is characterized by lateral movement of the market on the graph. This depicts the forces of supply and demand as relatively equal, producing a more horizontal pattern rather than a clear sequence of rising or falling valleys and peaks. Trends are not only seen by their direction but also by their duration. There are long, short, and intermediate trends that coexist and could move in the same or opposite directions. They are easier to understand because they are based on time and form part of the trend line when we look at or read a chart (Brock et al., 1992).
Different Trading Charts
To fully understand a chart, first and foremost, consider the information it brings to trading and traders. When we start online trading, three types of charts are the main and most common types. Each chart has its own information level according to the trader and his/her individual skill level:
To fully grasp the knowledge and clarity of any chart, it is necessary to understand firsthand the information that it brings to trading and traders. When we start online trading, there are three types of charts, the most famous of which are the following. Each chart has its own level of information according to the trader and his/her individual skill level:
Line Chart
The most basic chart is a line chart and a starting point for a new trader. This chart represents only the closing price over a period of time, and the closing price is often considered valuable data for analysis. It is formed by connecting closing prices over the time frame. There is no visual trading-range information showing highs and lows, nor any information about opening rates.
Bar Chart
Extending the line chart, the bar chart contains additional data. It consists of a series of vertical bars, and each bar represents trading information. It also represents increases and decreases during the trading period, as well as the opening and closing prices. The opening and closing prices are shown by short horizontal lines.
Candlestick Chart
Once you gain experience with line and bar charts, you move to the next level, the “candlestick” chart, which is easier to understand than a bar chart. The vertical lines of both charts illustrate the trading period’s price range, and the body of a candle uses different colors to represent how the market changes over the time period (Edwards et al., 2018). “Coloured” and “hollow” elements are called the candlestick body. Long, thin lines above and below the body represent high or low areas and are known as wicks, tails, or shadows. The lines at the top of the body indicate the high and closing prices, while the bottom of the body indicates the low and opening prices.
References
Brock, W., Lakonishok, J., & LeBaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. The Journal of Finance, 47(5), 1731–1764.
CMT Association. (2023). What is technical analysis?
Edwards, R. D., Magee, J., & Bassetti, W. H. C. (2018). Technical analysis of stock trends (11th ed.). CRC Press.
Lo, A. W., Mamaysky, H., & Wang, J. (2000). Foundations of technical analysis: Computational algorithms, statistical inference, and empirical implementation. The Journal of Finance, 55(4), 1705–1765.
Murphy, J. J. (1999). Technical analysis of the financial markets. New York Institute of Finance.
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