Basic Technical Analysis Concepts

Charting & Charting Styles

'Charting' is essentially the most basic expression of technical analysis. There are many different charting styles and methods. We will cover three of the basics: line charts, bar charts, and candlestick charts.

Line Charts

A line chart is a simple visual representation of data. It generally plots the closing price of a given period and over the course of time connects the dots. The following image shows an example of a basic Forex line chart:

( view figure 1 )

Bar Charts

Bar charts are one of the most popular types of trading charts. A Bar Chart displays a price's open, high, low and closing prices. As shown in the following image the top of the bar chart represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The opening price of the bar is shown by a short horizontal line on the left hand side of the bar. The closing price is shown by the same short horizontal line on the right hand side of the bar.

( view figure 2 )

Candlestick Charts

Candlestick charting is widely believed to have first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata.

The candlestick is comprised of a "body" and an upper and lower "wick". The body of the candle is typically a dark color when the close is at a lower price than was the open (a bearish candle). Conversely, if the close is at a higher price than was the open the candle will be hollow or a light color (a bullish candle). The wick of the candle represents the entire range of price for that period. The top of wick of course represents the price at its highest point, while the bottom of the wick represents the price at its lowest point.

Looking for Trends

There are certainly a few things that you are going to want to consider when looking at a chart. Ask yourself what the Forex chart on your screen is telling you, and which of the following questions are worth considering:

Is there an obvious trend or direction of the market within the time frame that you are viewing?

Are there any basic chart patterns formations such as triangles, wedges, pennants, double tops or bottoms or otherwise that might suggest a pending breakout or trend reversal?

Is the market trading within the walls of any obvious support and resistance levels, or is the market trading within a channel?

Have you considered any technical indicators?

Trends

The following chart shows an example of an upwards trend.

( view figure 4 )

It takes two or more points to draw a trend line. The trend line in our example was drawn by identifying the lowest low of the trend and connecting the line to the following low preceding a new high. A solid trend line should continue in this manner until several lows followed by new highs are plotted.

Support and Resistance

Support and resistance represent key junctures where the forces of supply and demand meet.

Support is the price level at which demand is thought to be strong enough to prevent prices from declining further. Support levels are usually below the current price, though it is not uncommon for prices to dip below support briefly. Support does not always hold and a break below support levels signals that the bears (sellers) have won out over the bulls (buyers). A decline below a support level indicates a new willingness to sell and/or a lack of incentive to buy. Once a support level has been broken, another support level will be established at a lower level.

Resistance is the price level at which demand is thought to be strong enough to prevent prices from rising further. Resistance levels are usually above the current price, though it is not uncommon for prices to rise above resistance briefly. Resistance does not always hold and a break above resistance levels signals that the bulls (buyers) have won out over the bears (sellers). A raise above resistance levels indicates a new willingness to buy and/or a lack of incentive to sell. Once a new resistance level has been broken, another resistance level will be established at a higher level.

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