Price Charts and Their Importance to Forex Trading
Forex trading is a job that requires numerous skills for it to be the lucrative career it is touted to be by many. Although relatively easier than trading stocks, trading in the forex, like most professions, also require specialized skills which are necessary for anyone who intends to be successful and strike it rich in the world of foreign exchange.
One such specialized skill that is a must for forex traders worth their salt is the ability to read price charts, tools which play important roles in forex trading.
So what are price charts? Price charts are basically graphical representations that show the range of currency prices within a specified time frame. They can be in forms ranging from simple line graphs to complex bar and candlestick graphs.
Compared to their stock market counterparts, price charts used in the foreign exchange market are easier to read and comprehend. This characteristic of forex charts can be attributed to the stable and consistent qualities of the foreign exchange market. Apart from that, price charts are also simpler because one does not have to go through thousands of stocks that are listed in an ordinary stock market chart. In contrast, forex charts contain only a handful of currencies for one to study.
As mentioned earlier, there are several kinds of price charts used in the foreign exchange market. However, some chart styles are more commonly used than others because of the ease of use and comprehension that they offer. Here are two of the most commonly used chart styles in the foreign exchange market, the bar chart and the candlestick chart:
The Bar Chart
In a bar chart, price is represented in a bar along with the time interval used. Each bar in the chart corresponds to the trading activity done within the time interval indicated for each bar. The time interval can be any amount of time, may be it a minute or a year as it depends on the purpose by which the chart is made for.
The Candlestick Chart
Candlestick charts are similar to bar charts in the sense that they both illustrate trading information through the use of bars. The main difference of a candlestick chart from a simple bar chart is the use of color in the bar. Green and red are the most common colors used in a candlestick chart and they are used to denote the closing price for each time interval. A green-colored bar indicates a high closing price while a red-colored bar indicates a low closing price.
Another distinctive feature of candlestick charts is the wick and tail attached to each bar in the chart. These appendages can serve many functions and it depends on the purpose of the chart as to what information the wicks and tails will indicate.
Forex price charts are useful in analyzing important aspects of forex trading like market trends. Although price charts are but one part of the multitude of tools necessary for a lucrative career in the foreign exchange market, it is one of the most important to learn as trading in the forex without knowing the basic of these charts is tantamount to crossing the street blind - they are both stupid and always result in death (financially that is, in the case of the forex).