Price Action Forex

Beginning forex traders sometimes get confused with the different chart forms and trying to determine which one is the best and most relevant to use. There are essentially three different forex chart forms that traders use to analyze the market. They are the basic bar chart, the candlestick chart, and the line chart. Bar charts are the most simple and easy to understand and are likely the most widely used chart form. Candlesticks charts are based in Japanese trading history and provide a better visual representation of price action than do bar or line charts, that being said, some people still prefer the bar chart over the candlestick chart. Line charts are often used on financial media outlets such as CNBC and your nightly news to show a general overview of the recent price movement on a specific stock, stock index, commodity, or currency.

The first and most simple to comprehend is the standard bar chart. A bar chart consists of a vertical bar with one horizontal dash on the left and one horizontal dash on the right. The dash on the left represents the opening price for a specific time period and the dash on the right indicates the closing price for that specific time period. The top and bottom of the bar indicate the highest price and the lowest price during the specific time period. The advantage to bar charts is that they are very easy to understand and provide all the necessary data; open, high, low, close, that a trader needs to make trading decisions in the forex market.

The next chart that many forex currency traders use is the candlestick chart. Candlestick charts have been around since the 1700s and are the oldest form of charts used to predict price movement. Japanese traders used them to predict future price movement of rice. Candlestick charts display the same information that standard bar charts do but they do in what most traders agree is a much more visually appealing manner. Candlestick charts have what is called a “real body” and this is a colored vertical rectangular area that represents the range between the open and closing prices for a specific time frame. Usually a dark real body indicates the close was lower than the open and a lighter colored real body indicates the close was higher than the open. The high and low of the specific time period are shown by vertical lines that extend from the top and bottom of the real body and are called the “upper shadow” and “lower shadow” respectively, sometimes they are also referred to as wicks or tails. Candlesticks make price action setups much easier to see and are a much better visual representation of the dynamics of price movement as compared to the way a standard bar chart portrays information.

Line charts are excellent for getting a general sense of long term trend direction. They only show one price however, either open, high, low or close, usually you can set the chart to display whatever one you want it to show. The line chart is shown from close to close or open to open, or however you have it set. Most people utilize line charts set to show the closing prices however, as most traders give more weight to the closing price of any financial instrument. Line charts are generally not used by short term traders or traders that trade off price action setups because they don’t give as in-depth of a view of the market as bar or candlestick charts do. Essentially line charts are normally only used to get a general sense of longer term trend direction. They are often used by longer term investors who hold their positions for many years as compared to days or weeks. It is recommended that forex traders use candlestick charts as they provide the best analytical view of price movement with in the currency market.


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