All technical analysis of the online currency market starts
with the plotting of prices. There are traders who never look at forex charts
to obtain Forex information about their forex strategy, only to technical
indicators - in essence these are derivatives of price charts - but they too
need charts of price developments in the first place.
All hail the Personal Computer
How often would a
book / article attempting to describe the development of a particular subject
begin with "Since the introduction of the personal computer ......."
The PC has
changed a lot, a lot in the world of those who can afford it. Computing power
for everyone, knowledge for everyone, entertainment for everyone, communication
for everyone, with everyone. With regard to the financial markets, the impact
was enormous; and the aftershocks are still being felt, for example in the ever
increasing popularity of online forex among young people.
Technical
analysis of the Forex has made huge leaps over the past 3 decades. Thanks to
the computer, much more complicated calculations have become possible, which
can also be done much faster, more accurately and for longer periods. With 2
pushes of the button, anyone can call up a graph of the EUR / USD over the past
10 years, with various technical indicators explaining moments of fading,
break-outs, line bouncing and many more goodies.
Technical
analysis of a financial market (stock exchange, options, currency etc) used to
be reserved for people who could do a lot more than a bit of mental arithmetic;
they plot their own charts and developed formulas to interpret these graphs -
one with more success than the other ......
But the only
thing we need today is a PC, decent internet connection and knowledge about
what all those graphs and technical indicators actually mean (to us). After a
little study, the graphs below are no longer as complicated as they may seem
now.
Plot prices
There are three basic ways to display price developments
on an xy-axis card:
1) Line chart
2) Bar chart
3) Candlestick chart
If you have already acted a bit, then you probably
already know that the candlestick chart is by far the most used way. Still, it
is useful to also think about the first 2, because it provides insight into the
primary basis of technical analysis.
Line Chart
This is the simplest way to display price actions. For each period you take 1 prize; this can be the highest price in that period, the lowest or the average. Then you plot the price on a card with the x-axis showing the time unit and the y-axis the price. For example, like this:
Self-appointed forex heroes often want (undeservedly) to pick up their noses for the line chart, but even though this display method is a bit simple compared to the candlestick chart, for example, it is very easy to set up and gives quite a bit information. For example, the graph above unmistakably reflects the uptrend of the Euro vs the Dollar in the period mid-2008-mid-2008.
The disadvantage of the Line chart is that you get little to see about the build up of the price in a certain period. The map above shows a price for every day, but what happened on that day? How did the market open, how did the price evolve, and how did the market close? This kind of information is especially important in day trading, because it tells a lot about market sentiment. In the longer term, however, it makes less difference whether you use a line, bar or candlestick chart.
Bar chart
This way of display shows a lot more about the
development of the price in a certain period. Each period is shown with a
vertical bar, with the lower side indicating the low and the top the high for
that period. The horizontal bar on the left shows the opening price, and the
horizontal bar on the right shows the closing price. If opening and closing are
close to each other while the bar is quite long, then there has been a lot of
activity, without it being redeemed. This is, for example, something that never
emerges from a single line chart.
Candlestick chart
This is by far the most common way of plotting prices
nowadays. The method was invented by Japanese rice traders in the seventeenth
century, so this method is not that young at all. :) In the following article,
we pay more attention to the candlestick, but an example below. The beauty of
the candlestick is that it perfectly reflects what has happened to the price
within a certain period of time. In addition, there are all kinds of candles -
doji candle, long - legged doji candle, gravestone doji etc - and patterns -
harami, hammer, dark cloud cover, three black crows, three white soldiers etc.
- that have a lot of value in predicting future market sentiment. One thing is
for sure: if you want to become a successful trader you have to learn to
recognize these patterns. Can you deliver a lot ..... oh, enne, blue / green be
good, red be bad!
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