Lagos Time
Making trading decisions requires a trader to have a good working knowledge of what drives the market and in what direction. Basically, one can determine where the market is going and why it is moving towards a particular path using the two main analytical tools – Technical and Fundamental Analysis.
Technical Analysis
This is the use of
chart to study past behavior of currencies prices in order to forecast their
future performance. It involves the use
of technical indicators found in trading charts to analyse and predict price
movements. There are three types of
charts in a typical trading platform – Line Chart, Bar Chart and Candle Chart.
Line Chart
The
line chart is the original type of chart. A simple line chart draws a line from one closing price to
the next closing price. When strung together with a line, we can see the
general price movement of a currency pair over a period of time. Although any point in the day can be plotted, most traders focus on the closing price,
which they perceive as the most important.
Daily line charts are useful when looking for the big picture or the
major trend. The line chart is a
continuous chart hence it is impossible to chart price gaps and see the price activity for the balance of the day. Below is an example of a line chart.
Bar Charts
A bar chart shows
closing prices, while simultaneously showing opening prices, as well as the
highs and lows. The bottom of the vertical bar indicates the lowest traded
price for that time period, while the top of the bar indicates the highest
price paid. So, the vertical bar indicates the currency pair’s trading range as
a whole. The horizontal hash on the left side of the bar is the opening price,
and the right-side horizontal hash is the closing price.
Bar charts are also called “OHLC” charts, because they
indicate the Open, the High, the Low, and the Close
for that particular currency. Here’s an example of a price bar:
Bar charts as shown below have the advantage of displaying the currency range for the period selected.
Candlestick Charts
The candlestick
chart is closely related to the bar chart.
The charts show the same information as a bar
chart – open, high, low and close prices, but
in more attractive and easier to read format. Candlestick bars still indicate
the high-to-low range with a vertical line. The candle chart
is probably the most popular type of chart currently in use. The opening and closing prices form the body
of the candlestick while the wicks represent the high and low as shown in the
diagram below.
A black or solid color
real body indicates prices moved lower from the open to the close
for the period and
is a bearish sign while the reverse is bullish.
Although the color of the real body generally sets the bullish (light)
or bearish (dark) tone of a trading session, the wicks are also important,
showing how far traders were willing to push prices during the period before
coming back to close in the real body.
Below is an
example of a candle chart.
