Types of diagrams for Forex technical analysis

We will skip describing all the approaches of technical analysis in detail – we would have to publish an encyclopedia-sized book. Instead we are going to study some of the main types of charts which are used in TA. These are Line, Tick, Bar and Japanese candle charts.

The basic principle of building a Forex chart is simple: you should draw two datum lines and apply time to the horizontal one (abscissa axis) and prices to the vertical datum (ordinate axis).

The scale of the trading time axis (interval or trade period) can be changed in the trading terminal. Traditionally, the following intervals are used: year, month, week, day, 4-hours, an hour, a half of an hour, a quarter of an hour, five or one minute and “unit quote” or tick. A tick is an unstandardized unit of time. In other words, in comparison with the “one minute” scale, the next value of a tick will be shown on a diagram not after a minute or a lapsed period of time but immediately after a new price appears on the market. Forex price charts price time.

As all price diagrams are formed in accordance with some scale, every period is characterized by four values:

• Opening price (Open) is the price of a currency at the beginning of a trading period. Strictly speaking, there are two prices – Ask and Bid at the beginning of any interval and the opening price is calculated by taking the arithmetic mean of the two prices, which is (Ask + Bid)/2. So the opening price is actually an arithmetic mean (between supply and demand).
• Closing price (Close) is the price at the end of a trading period. Strictly speaking, there are two prices – Ask and Bid at the end of an interval but the closing price is calculated by taking the arithmetic mean of the ask and bid prices, which is just the same as in the case of opening price (Ask + Bid)/2. The closing price is an arithmetic mean (between supply and demand) of the last quotation in the given interval.
• Period maximum (High) is the highest price quoted during a trading period (the Ask price is used, as the Ask is always higher than the Bid price).
• Period minimum (Low) is the lowest price quoted for a trading period (Bid price is used as the Bid is always lower than the Ask price).

Sometimes these four values are accompanied by one more indicator – the Tick volume – which shows the quantity of changes of a price for a given period. Sometimes the vertical axis of a diagram contains tick volume values.

Tick chart

This is a diagram with the smallest scale of one tick. One tick is a unit change of purchase and sell. In other words, a tick chart is a diagram of Ask and Bid quotations that is represented by
columns on the price chart. At the top of one column on the tick diagram is the Ask price, at the bottom of another column is the Bid price. Usually a tick chart is used for a more precise determination of support and resistance levels or to increase accuracy in the selection of quotations while purchasing or selling (entering on local minimum and maximum levels). On the whole, Tick scale is too small for technical analysis as it displays merely a snapshot of the market, and without data of a greater scale it is difficult to make worthwhile predictions.

Line chart

Line charts are built by one of the prices characterizing the trade period (Open, Close, High, Low) or by synthetic values, for example: average price = (High + Low)/2; or typical price = (High + Low + Close)/3. Here is an example of a line chart.The advantages of diagrams of this type are that they can help in searching for patterns, and their lack of information overloadedness which helps focus the analyst’s eye on the main features of the chart curve. The corresponding disadvantages are absence of detail, and the fact that gaps don’t show up between opening and closing prices.

Bar chart

One can see all of the four main prices on a bar chart: Open, Low, High, Close.The top of the line marks the maximum price for the whole period (High), the bottom the minimum price for the period (Low). In other words, the vertical line is the full range or the amplitude of quotations during that time period. The short horizontal line to the left of the line is the opening price (Open), the same line but to the right of the vertical line is the closing price (Close). If the Open line is higher than the Close line (as on the picture), the price has fallen for the given period. If the closing price is higher than the opening one, the price has risen during the period. This is straightforward. The advantage of a bar chart is that one can see all the main prices for the period at once and even evaluate events which happened during that period. Also, one can determine gaps in prices. It is impossible to determine the character of a price movement inside a period – whether, for example, the high or the low was made first. However, this is true only within the bounds of one scale (this is considered to be a disadvantage of this type of chart).

Japanese candlesticks

This type of diagram resembles the previous one and has the same functionality, but many traders consider it to be more visual. All four main price values are used to build Japanese candle charts as well (Open, High, Low and Close). Every candle by analogy with a bar stands for a period (for example, an hour). A Japanese candle looks like this: The central part (narrow) of the candle is called the “real body” or “jittai”. It is the range of deals for the given period, the space between opening and closing prices. If the body of a candle is empty, the closing price was higher than the opening one, in other words, the price has increased for the given period (rising candle – “yo-sen”). If the body is painted, the closing price was less than opening one, in other words, the price has fallen during the given period (falling candle – “in-sen”). The line on the top of a candle is called the upper shadow or “uwakage” and indicates the maximum level the price reached during the period.

The line at the bottom of a candle is called the lower shadow or “shitakage” and its lower point displays the minimum that was reached by the price during the period. In different programs the bodies of a rising and falling candle can be painted in different colors. However there is a rule – the falling candle is always darker than the rising one. There are other types of diagrams but we suggest waiting to investigate them after you have some trading experience in creating your own trading system. If you have attentively read this book there should be no difficulties for you to find
all the information you need from other sources about other chart types, such as Equal Volume Bars charts, Three-Line Break diagrams, Renko or Kagi diagrams and so on. It is only after you have clearly understood what these charts are that you will need to use them. It can even sometimes be harmful to run ahead and fill your head with unnecessary details at too early a stage, as it may result in unintelligible and fuzzy predictions and confused, impulsive trading. It is better to concentrate on some basic concepts. For example, price is often represented on a logarithmic scale. This is different than arithmetic scale, where equal axis points represent equal changes in price. In logarithmic charts equal axis points represent equal percentage changes in price. The wrong application of these two types of chart could lead a novice trader to become confused while he tries to determine wave counts and patterns in wave analysis. Speaking of which, let us now focus on the features of a major branch of technical analysis which is wave analysis.