As I explained in the previous lesson, A Chart is the primary tool in technical analysis. There are 3 types of popular charts.
- Line Charts
- Bar Charts
- Candlestick charts
You have learned line charts and bar charts in your secondary school. Hope you didn’t hate your Mathematics teacher as much as some of us did:-) Anyway,I am not going to talk much about line charts and bar charts.
Why? I never use them in my trading. Instead, I use candlestick charts. They are the backbone in my trading and there is no way you can trade without understanding how to read them.
When you open an account with a Forex broker, they will give you free access to their trading software. When you launch the software, most likely you will get a charting window as your work space. And by default it will show you the candlestick charts for the major currency pairs.
MetaTrader4 is the universally offered and most popular trading software. Brokers may offer you their own trading software. But remember to open a MT4 account and download the MT4 application from the link emailed by your broker. If you are having trouble with accessing a broker, just reach out to Forex Robot Nation, and they will guide you through this process easily.
The Japanese were the first to use technical analysis in trading. They used it in world’s earliest futures market – ” The Rice futures” back in 1600′s. It was the Japanese who invented candlestick charts and they managed to hide it from the western world for over a century. It was brought to the western world by Steve Nison in mid 1980′s. Candlestick charts has gained tremendous Popularity over the past 3 decades and now has become the default charting option provided by almost all trading software.
When opening a chart, you can select different time frames. It can be a monthly chart, weekly chart, daily chart, 4 hour, 1 hour, 30 minutes, 15 minutes, 5 minutes or a one minute chart. If you select a daily chart, each candle represents the price action throughout a day. If you opted for a 5 minutes chart, the candle will show you what happened during those 5 minutes. And a series of candles will make the chart.
A candle will tell you the opening price, the closing price, highest price reached during the period and lowest price reached during the period.
A line chart is made by connecting closing prices and it will only give you closing price information. A bar chart will only give you the opening price and closing price. That is where the candle charts have the edge. It gives you more information to make better trading decisions.
Let’s see the story a candle can tell us. I have added numbers to give you a better understanding of how this works.
The real body represents the range between the opening and closing prices. Again, if you run into any issues with this, you can reach out to Forex Robot Nation for a better understanding.
Bull Candle (Forex Robot Nation)
The green color candle’s closing price is above the opening price. It means that the price have climbed up during the candle’s formation period. In this example it has gone from 50 to 100. Let’s Assume that we are looking at a one hour candle here. At the beginning of the hour the price was 50. And at the end of the hour it has gone up to 100.
The vertical lines that extends above and below the real body is called the upper shadow and lower shadow. The top of the upper shadow is the session’s highest price. The bottom of the lower shadow is the session’s lowest price.
Continuing with the same example, we can see that the price has gone up to 130 at a particular time within this one hour period. And it has reached a low of 20 in the same hour.
If we are looking at a daily chart, each candle represents the day’s price action. Assume you are looking at a daily candle. It tells you that the day’s opening price was 50. And at the end of the day, it has gone up-to 100. During the day, it has gone for a session low of 20 and reached a highest price of 130.
Bear Candle (Forex Robot Nation)
What you see above in red is a bear candle. The closing price is below the opening price. It means that during the time period in consideration, the prices has come down.
Let’s assume that this is a 4 hour chart and you are looking at a 4 hour candle;
The price was 100 at the beginning of this 4 hour period. And it has reached a maximum of 130 and a low of 20 during this 4 hour period. But in the end it closes at 50.
That is how you read a candle chart.
One more thing. Candle’s does not have to be green and read. Do not think a bull candle has to be green and a bear candle has to be red. You can change the colors by right clicking on the chart and going to properties. This graph also shows where you have to click in order to move between time frames.
That's it for today folks, thanks for reading, and please visit us at Forex Robot Nation for more ways on how to become better traders.