Get to know the basics of using charts for technical analysis

Chart analysis is the projection of future price movements via the analysis of historical price movements, where historical price movements can be presented in various ways.

Bar chart

The bar chart, also called the Western chart, is a demonstration of price development in which for each period the highest and lowest prices and the opening and closing prices are recorded using bars. The highest and lowest prices are represented by the ends of the vertical bar, the closing price is represented by a horizontal dash on the left of the vertical bar, and the closing price is represented by a horizontal dash on the right of the vertical bar.

The individual bar gives an indication of the market movement for a given day, when talking about a daily chart. For example, the bars in Figure 1 show that the opening price on day 2 was higher than the opening price on day 1, while the closing price on day 2 was lower than it was on day 1. The bars also indicate that the price movement on day 1 was greater than on day 2. Furthermore, the price increased on day 1, while it fell on day 2.

Candlestick

The candlestick, also called the Japanese candlestick and widely used in all trading rooms, uses a match-like shape to represent price movement. The candlestick reveals the difference between the opening price and the closing price of a trading day using a rectangle.

The difference between the lowest and highest price on a given trading day is represented by a vertical line running through the body. Figure 2 shows the Japanese candlesticks for the same price movements that were used in Figure 1.

Line chart

In a line chart, prices are shown as points on a graph. The frequency with which the prices are recorded depends on the total period presented on the chart.

In addition, weekly and monthly charts compress the price action to allow for much longer-range trend analysis. A weekly chart can go back as much as five years and a monthly chart up to 20 years.

A chart can become an extremely useful tool in the art or skill of market forecasting once the rules are understood.

Support and resistance

Support and resistance are fundamental concepts in technical analysis. A support level is a price below the current price that, in the case of a downward movement, is not easily broken. A resistance level is a price above the current price that, in the case of an upward movement, is not easily broken.

Support becomes resistance

A support level that is broken often becomes a resistance level and vice-versa. The market tests this by means of a pullback movement. pullback is a test by the market to see if there has been a valid breakout. After breaking through a support level, the market often shows an upward movement to test if the old support level now acts as a resistance level.. gold trading basics

How to Start in Forex

Got all that? Great! Then you’re well on your way to becoming a forex investor. If you’re ready for the next lesson on technical analysis, head on over by clicking here. Not yet ready to proceed? Re-read this section and do your research so you fully understand how support, resistance, and other technical analysis factors can play a role in your investing success.