The foreign exchange market is considered to be the most liquid financial market among all in existence. Due to its volatility, profit making chances are high as well. Forecasting and prediction are primary before investment and must be done with accuracy. In this view, almost all brokers or service providers present you with real-time currency exchange chart of currency pairs which depict its market quote against time. Here is a guide listing the type of charts and indicators available to enable you to carry out, what is known as, technical analysis.
Types of currency exchange charts:
While carrying out technical analysis of the foreign exchange market, a trader may come across charts depicted by various patterns and figures. Each chart takes into account the same set of data and plots them against increasing time. However, each of them depicts a specific set of information and accurate interpretation is necessary. There is generally three basic form of charts used by traders.
- Line Charts
This is the most basic and simple form among all. Closing prices of currency pairs in a particular time-frame are plotted against time and are connected by straight lines. This charting pattern does not depict opening prices, market highs or lows and is now becoming obsolete in the fx domain. However, it is still used in stocks and precious metals market.
- Bar Charts
This form of currency exchange chart is an improvement on the line chart, adding the key missing features. Both opening and closing prices in a particular time span are depicted on this figure. A vertical line depicts connect the high and low prices of the market in that time frame while small horizontal lines on either side mark the opening and closing values.
A left dash indicates open and a right dash indicates close. If open is lower than close, the vertical bar is represented with a black shade. In the opposite case, the bar is colored red indicating a fall in the market.
- Candlestick charts
Further improvement on the above two resulted in this. Certainly, this is the most prevalent and widely used among all currency market charts. The candlestick chart has a vertical line with a wide vertical bar placed on it. The line represents the period of trading while the bar is an indication of the market open and close quotes.
This also employs different color shades to represent relevant information. If currency valuation appreciated in that time frame, the wide bar is depicted with white or green. If it depreciates, the shade is converted to black or red respectively. At times, it is noticed that the vertical line continues to extend even after the wide bar has ended. This indicates a constant market phase without fluctuations.
There is yet another form of currency exchange chart that found use in the early days for fx technical analysis. It was known as point and figure chart. It depicted price movement and was not concerned with either time or volume. A particular figure was used to represent an upward market shift while another figure depicted a downward shift. You may not come across this pattern now due to the growing popularity of candlestick, still, there is no harm to be informed.
Types of currency exchange chart tools:
Charts provide you with the real-time market quote. It is humanly not possible to predict market movements based on this only. That is why you need technical indicators or tools. These are algorithms that scan through the present and past data and give you a future analysis. The most common form of tools that every trader must put to use is listed below.
- Trend-Following Tool:
Every financial market follows a particular trend. In other words, if the market has moved towards a particular direction after following a particular pattern in the past, it is expected to show a similar trend in the present also. These tools are designed to detect such an occurrence from the past and notify you accordingly.
Applying these tools on your currency exchange charts will help you to decide whether to go long or short with a particular currency pair. Moving average crossover (MAC) is one such trend-following tool which takes into account the averages of all closing prices over a particular time span.
- Trend-Confirmation Tool:
This acts as a confirmation of the results presented by the above tool, hence the name. Trend-following tools, at times, may deviate from accurate predictions and Trend-confirmation tools check that fact. If both these tools predict a particular market to be bullish over the next few days, a trader can go long with this pair. If both predict a bearish market, it is advisable to go short.
Moving Average Convergence Divergence or MACD fall in this category. When used with your currency market charts, this indicator calculates the difference between two moving averages and performs a host of calculations to predict a result. Generally, both MAC and MACD are used together during technical analysis.
- Overbought/Oversold Tool:
Understand this tool in simple words. For instance, consider that the above two tools have predicted that the market will be bearish. Now it is up to you to decide whether to purchase that currency pair immediately or wait for some time to see if the market really appreciates or not. A similar case can arise when it is bearish. To buy/sell instantly or wait a bit. This is where an overbought/oversold tool comes in.
Three-day RSI or relative strength index is the most popular indicator which you can use on your currency exchange chart. This considers a combined sum of days when market appreciated and depreciated separately in a particular span and generates a value from 0 to 100. If market appreciated, then the result is 100. If depreciation took place, then it is zero. 50 indicates market was neutral.
Another form of tool that is generally available to trader is a profit-taking tool. Based on this, traders can put in timely orders and decide to go long or short. Indicators like three-day RSI and Bollinger Bands fall in this category.
Tips to consider while using these charts:
Without doubt, with all these tools and indicators available, a trader may feel tempted to congest their currency exchange charts to generate better results and accurate predictions. However, veterans in trading often warn of this situation and ask traders to keep their charts less congested. An increased number of tools may generate contradicting results and forecasting may not be accurate. So, it is advisable to limit the number of tools and indicators to a maximum of two each.
Also, few traders argue that while carrying out technical analysis, the fundamentals of fx market fall in a completely separate avenue. Global economic events affect this market the most and, at a time, currency market charts fail to capture this. Technical tools take into consideration data from the past. Fall of a country’s interest rates and or announcement of its annual GDP are recent events that are likely to affect the market.
For instance, the South China Sea issue has forced China to reduce its import rates and look for new avenues in overseas trading. By this, Australia has been affected the most has it is heavily dependent on its exports to China. Then again, Australia has shown a steady GDP growth percentage from 2.9% in 2015 to 3.3% in 2016. With its Government awaiting the latest report, AUD has currently seen appreciation. These aspects are not captured by currency exchange charts with indicators placed.
Too much of anything is not good. Again, a lot of factors must be considered along with technical analysis of the market. Not all indicators go in tandem with a particular currency exchange chart. There are more tools and oscillators available and find out which all work together with the best. Learn how to interpret currency charts in fx and derive maximum information from them. As Warren Buffet as rightly said, “In order to make a profit, you just have to do a few things right rather than doing a lot of things wrong.” Do your research and then step into trading.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.