Basic Forex Technical Analysis Tools/Basics of Charting – Part 2

Technical Analysis tools help traders analyze, identify and understand market conditions and behavioral patterns, and predict price movements. A trader, depending upon his predetermined duration in the forex market, should decide upon which type of chart(s) to use. For example, a short-term trader should select day charts for market analysis, which reflect price movements in terms of hours or minutes, while a medium-to long-term trader should consider weekly or monthly charts. Short-term charts are unable to predict the true market picture.

The following are the final 2 of 5 basic technical analysis tools/charts for the forex market:

Candlestick Charting: displays similar information to the Bar Chart, presenting price information of OHLC for a time interval. The graphical representation is, however, different. This form of charting bases representation upon whether the closing price of a currency pair is higher or lower than the opening price. If the closing price is lower than the opening price, the color of the candle will be dark.

If the closing price is higher, the color of the candle will be white (or any other light color). The candle’s length represents the range of opening and closing prices while the whole figure represents the range of trading prices for different time periods.

Japanese Candlestick Patterns: were used in Japan to analyze rice contract prices in the 17th century. They help determine who is winning the forex market: Bulls (buyers-traders who expect the market to go up and start buying currency pairs) or Bears (sellers-traders who expect the market to go down and start selling currency pairs). Therefore, the following two patterns are used in Japanese candlestick charts:

Bullish Patterns: Hammer, Inverted Hammer, Engulfing, Morning Star, Morning Doji Star.

Bearish Patterns: Hanging Man, Evening Star, Evening Doji Star, Engulfing.

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