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[T107]Technical Analysis Chart Patterns

by Steve Welker, Ste

Price charts can be simple line graphs, bar graphs or even candlestick graphs. These are graphs that show prices during specified time frames. These time frames can be anywhere from minutes to years or any time interval in between.
Line charts are the easiest to read, they will show you the broad overview of price movement. They only show the closing price for the specified interval, they make it very easy to pick out patterns and trends but do not provide the fine detail of a bar or candlestick chart.

With a bar chart the length of a line displays the price spread during that time interval. The larger the bar is the greater the price difference between the high and low price during the interval. It is easy to tell at a glance if the price rose or fell because the left tab shows the opening price and the right tab the closing price. Then the bar will give you the price variation. When printed bar charts can be difficult to read but most software charts have a zoom function so you can easily read even closely spaced bars.

Originally developed in Japan for analyzing candlestick contracts candlestick charts are very useful for analyzing FOREX prices. Candlestick charts are very similar to bar charts they both show the high, the low, open and close price for the indicated time. However the color coding makes it much easier to read a candlestick chart, normally a green candlestick indicates a rising price and a red one indicates a falling price.

The actual candlestick shape in reference to the candlesticks around it will tell you a lot about the price movement and will greatly aid your analysis. Depending on the price spread various patterns will be formed by the candlesticks. Many of the shapes have some rather exotic names, but once you learn the patterns they are easy to pick out and analyze.

Price charts are not usually used by themselves to get the full affect you need to supplement them with some technical indicators. Technical indicators are normally grouped into some pretty broad categories. Some of the more common ones used to monitor and track the market movement are: trend indicators, strength indicators, volatility indicators, and cycle indicators.

Here is a list of some of the more commonly used indicators as well as a brief description.

Average Directional Movement Index (ADX) ? This index will help indicate if the market is moving in a trend in either direction and how strong the trend is. If a trend has readings in excess of 25 then this is considered a stronger trend.

Moving Average Convergence/Divergence (MACD) ? This shows the relationship between the moving averages which allows you to determine the momentum of the market. Any time that the signal line is crossed by the MACD it is considered to be a strong market.

Stochastic Oscillator ? This compares the closing price to the price range over a specific time frame to determine the strength or weakness of the market. If a currency has a stochastic of greater than 80 it is considered overbought. However if the stochastic is under 20 then the currency is considered undersold.

Relative Strength Indicator (RSI) ? This is a scale from 1 to 100 to compare the high and low prices over time. If the RSI rises above 70 it is considered overbought where as anything below 30 is considered oversold.

Moving Average ? This is created by comparing the average price for a time period to the average price of other time periods.

There are two major approaches to analyzing the currency market, fundamental analysis and technical analysis. The fundamental analysis focuses on the underlying causes of price movements, such as the economic, social, and political forces that drive supply and demand. The technical analysis focuses on the studies of the price movements themselves. Technical analysts use historical data to forecast the direction of future prices.

The premise of technical analysis is that all current market information is already reflected in the price movement. By studying historical price movements, investors can make informed trading decisions. The following articles aim to give a thorough presentation of technical analysis tools and theories.

The primary tools of technical analysis are the charts. The articles first introduced common kinds of charts available on charting software. Charts are also used to identify trending and ranging markets. The articles continued on how to identify support and resistance price, trend lines and price channels. Next, it presented simple trading strategies in trending and ranging markets.

Through careful observation, technical analysts have found recurring patterns on the charts that can give us indication about future price movements. The articles introduced the important patterns, such as the trend reversal and trend continuation patterns. In addition, the Japanese Candle Stick has its own implications in terms of patterns, the articles then introduced how to read the Japanese Candle stick and the inference of its patterns.

Technical indicators are mathematical calculations based on historical prices, they are used extensively in technical analysis to predict changes in trends or price patterns. The final part of the technical analysis is a serious of articles introducing two major types of indicators: trend following indicators and oscillators.

A chart is the most important tool for understanding the total sum of what is going on in the market. Almost all traders today, particularly those who trade actively, use their favourite types of charts to analyse the market. In the end, a chart is a visualised representation of the price movements, a reflection of the psychology of the market and a visualization of the interaction between buyers and sellers in the market. Because it is a reflection of all the activity that has taken place for a particular traded instrument, a chart also shows how the market values a particular asset based on all the information available. And because a chart has the potential to offer such insight and to accurately reflect the entire perspective of the market, it is an indispensable tool in the arsenal of any trader.

There are three major kinds of charts: bar charts, candlestick charts, and line charts. These charts are described below. Within the articles, we will use primarily candlestick charts, because they are the most commonly used charts amongst active traders.

Three major types of charts

1. Bar Charts

Bar charts provide traders with four key pieces of information for a given time frame: the opening price during that time frame; the closing price; the high price; and the low price. Bar charts can be applied to all time frames, and hence a single bar can summarize price activity over the past minute or over the past month. Different traders use time frames in various manners, although a good rule of thumb is that the longer the time frame, the more significant it is as it will account for more data -- and hence will be a better reflection of the market's psychology.

Below is an analysis of how a bar chart conveys information.

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2. Candlestick Charts

The candlestick charts were invented by the Japanese in the 1700s. Just like a bar chart, a candlestick contains the market's open, closing, low and high price of a specific time frame. The main difference is the candlestick's body part, which represents the range between the opening price and the closing price of that particular time frame. When the body part is filled with red (or black), it means the closing is lower than the opening. When the body part is filled with blue (or white), it means the closing is higher than the opening. While the bar charts put more emphasis on the progression of closing price from the last bar to the next, while the candlestick charts put more emphasis on the relationship between the opening and the closing price within the same time frame. Above and below the candlestick's body are the ‘wicks', while the wick on the top is the highest price and the wick at the bottom is the lowest price of that period. Candlestick charts are more popular than the bar charts and the line charts, because they tend to be more visually appealing.

Below is an analysis of a candlestick chart and its components.

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3. Line Charts

Unlike bar and candlestick charts, line charts present much less information; they only show the closing price for a series of periods. As a result, line charts serve best to measure the overall direction of long-term trends, and hence are of limited used for most traders.

Below is an example of a line chart. Note how it clearly and simply shows the direction of the trend.

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Steve Welker has sinced written about articles on various topics from Forex Guide, Family Concerns and Acne Treatment. Ready to .Learn our completely free.. Steve Welker's top article generates over 201000 views. to your Favourites.

Actionforex.com has sinced written about articles on various topics from Forex Trading Forex, Finances and Forex Guide. provides analysis reports, live pivot points on majors and cross. Actionforex.com's top article generates over 1900 views. to your Favourites.