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Graphic analysis

Concept of "graphical analysis". Methods for price movement chart display. Reversal and continuation patterns.

Graphic analysis is a work with illustrated (graphic) presentation of price and its dynamics. Graphic of prices is used by analytics who track definite graphic models, figures ("patterns") or tendencies. The instruments that are needed for graphic analysis are fully provided by Lite Forex MetaTrader 4. In particular, there are lines (for representation of lines of support and resistance, identification of trends and figures like "flags", "pennants" etc.) Besides MT4 allows to work with wide range of graphic objects. For more details read MT4 documentation.

There are different ways of depicting price movement depicting - line charts, bar charts and candlestick charts. There are some other ways of representation of graphic of price movement - "crisscross", renko, kagi etc, but in this course they are not described.

Line chart is a simple graphic representation - it is two dimensional curve built by prices of closing of definite periods, with X- and Y-direction coordinates, where X is time and Y is price.

Picture 8. Line chart on closing prices

The price of closing of period - is the last price that took place in the end of the given period. For example, if we consider the time zones, then time of closing - is the last price that has been formed before a new hour began. Depending on the speed of formation of new prices it may be the last second of an hour or last few seconds.

This way of graphic representation of price movement is not useful in practice. It does not depict price fluctuation at short time periods. It is just an envelope curve of some average value of the price.

The other way of depicting the price graphs is more widespread. It is bar-chart. It is a number of vertical lines, each of which corresponds to a certain time period. Each bar shows four features: the price of opening at given time period ("open"), the price of closing at given time period ("close"), the highest price of given time period ("high"), and the lowest price of given time period ("low").

Picture 9. OHLC Bar chart

But this way of depicting of price graphs has its disadvantages - the point of opening ("open") is situated on the left, the point of closing is on the right ("close"). Consequently during long work the prices of opening and closing merge and it leads to mistakes, although many traders a broad use exactly bar chart. In Russia the third way of price graphs is more widespread. It is Japanese candlesticks. the example of price graph with the use of candlesticks for currency pair USDPJY is given on the illustration below.

Picture 10. OHLC Candlestick chart

Candlestick chart looks like bar chart, but the "body" of a candlestick has white colour, if the opening price ("open") is lower than the closing price ("close"), i.e. the quoting of the illustrated by the candlestick currency pair has grow up during the corresponding to this candlestick time interval. The candlestick will be filled up with colour (any colour), if the opening price during  the time interval that corresponds to the given candlestick is higher than the closing price. 

The name itself "Japanese candlestick" came from the legend about sellers of Ancient Japan, which noted successful trading day by putting white candlestick to a box, and unsuccessful - by putting black one in the same box. In the end of the month to make a certain balance, they took the candlestick and counted them.

In graphic analysis apart from separate candlesticks there are definite combinations of them. On the price graphics in the whole number of cases the pictures appear that help to denote the most probable scenario of development of events for the future. These pictures are the candlestick combinations that are more useful for analysis of the way of representation of price graphics. In classical technical analysis there are two models of combinations of candlesticks: the continuation pattern and reversal pattern.