Introduction to Charting

Charting in the Forex

Charting is a primary tool of use by the forex trader. Combined with solid fundamental analysis, it give traders insight into trade timing and potential profitability.

Reading and analyzing charts is something that you get better at with time and experience. But it’s also easy to abuse, as it’s a highly subjective exercise that you must learn to adapt to your trading style. Be sure to understand whether you’re long- or short-term focused, and decide if you’re aggressive or more conservative, as those factors impact your use of charting and technical analysis.

We will assume for this section that you understand that a chart plots a currency pair’s price movements over time.

Time is important

Each data point on the chart, whether it is shown as a line, candle, bar or box (all discussed later in this lesson) represents price at or within a specific point or interval in time.

Different time-frames are used for different types of analysis, and an important part of developing your forex trading strategy will be deciding what time-frame you plan to trade, and what time intervals you use on your charts.

Very short-term traders may have their charting intervals set for 30-minute increments or shorter, while longer-term traders will often use daily, or 24-hour, increments. Shorter-term charts show a lot more detail than a daily chart. But understand that while detail can be nice, but it can also be confusing.

Here's an example showing a daily chart (Right) compared to a four-hour chart over the same time period.

In addition to time increments, your charts can be adjusted for time-frame as well. For instance, you can analyze an hourly increment chart on a three-day time-frame, or a daily increment chart with a one-year time-frame.

What's your type?

Charts are also available in different types. Here are the most common:

Candlestick charts: Most forex traders use candlestick charts in their trading and analysis. Candlesticks show the open, high, low and close prices for each trading period. The body, or rectangular portion, of the candlestick shows the open and close prices, and the wick, or shadows, of the candlestick shows the high and low prices.

Line charts: Some traders use line charts—which only show one price per increment, usually the close price. Line charts are certainly easy to read, but they leave out a lot of detail.

Bar charts: Bar charts are similar to candlestick charts, but can be more difficult to read. A bar chart shows the open and close prices as horizontal tick marks on a vertical bar that shows the period’s total trading range.

Here are some samples of different chart types:

Indicators and drawing tools

Many traders will layer drawn trend lines, technical studies and moving averages on top of their price charts. Your Alpari trading platform includes many of these studies, indicators, and line tools.

Technical studies can be useful, but they can also be abused by traders. The biggest danger traders face when using charting tools is “analysis paralysis.” At some point, you have to make a decision about your trade, and simply adding more analytical tools that may just end up muddying the water does not necessarily increase your probability of success. “Indicator piling,” or adding several indicators to a single chart, will probably only obscure your real trading opportunities, as you can see below.