This is a subject we are quite passionate about at PFX. Charting is the core of the analysis done by a technician. Reading and analyzing charts is something that you get better at with time and experience. But if it's not harnessed correctly, it can also become almost hypnotizing and lead to “ticker-itus,” a dangerous condition that borders on obsession as a trader spends more and more time staring at charts and indicators and less time making trading decisions and controlling risk.
I think the reason why it is so easy to abuse chart analysis is because it is highly subjective. Show the same chart to two technicians (which is fun to try), and they are likely to come to similar conclusions but possibly through very different means and details. And in some cases, they may not come to the same conclusion at all.
We have assumed for this section that you understand that a chart plots a currency pair’s price movements over time. On most charts, time is plotted from left to right on the X, or horizontal, axis and price is plotted from bottom to top on the Y, or vertical, axis. While most charts are built on this basic setup, each type of chart—from line charts to candlestick charts—illustrates price movement differently. Each chart type has specific advantages and disadvantages, and you will need to find the chart type that works best for you as a trader. Here a few things you need to know.
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. 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. You can see in the image below of two charts both spanning the same length of time. The shorter-term (4-hour) chart on the right shows a lot more detail than the daily chart on the left.
What's your type?
There are different ways to illustrate each interval of time on a chart. It really depends on what kind of trader you are and personal preference.
Here are the most common types of charts and samples below:
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. We use candlestick charts for our own analysis and on the PFX site.
Line charts: Some traders use line charts—which only shows one price, usually the close price, for each period. Line charts are certainly easy to read, but they leave out a lot of detail.
Bar charts: Bar charsts are similar to candlestick charts, but many traders feel they are more difficult to read. A bar chart shows the open and closing prices as horizontal tick marks on a vertical bar that shows the period’s total trading range.
Exotic styles: Some traders have come up with other, more unusual, ways to chart price movement—typically to accommodate a specific style of analysis as well as to show price movement. For example, the chart below is a Renko chart, which shows price movement but does not progress linearly through time
Many traders will layer drawn trend lines, technical studies and moving averages on top of their price charts. Most dealer charting applications include many of these studies, indicators, and line tools. At PFX, we use trend lines and Fibonacci analysis frequently—which you will learn more about later in the course.
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.
If your charts start to look like the one on the left rather than the one at the right, it may be time for you to reevaluate how much time you are spending adding indicators.
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