It’s my contention that the long-term profitable trader must be an educated one. One part of a trader’s beginning education must include learning to read price charts. Price charts are a graphical way to show price movement over time, and are the beginning and foundation of all “technical analysis”.
Simply put, technical analysis is the method of applying formulas and measurements to a price chart in order to predict what the market will do in the future. There are many good books available on the subject, and it is essential that you add them to your trading library.
There are two major types of price and time charts that the forex trader uses. The elements they have in common are that both show the open price, the high price, the low price, and the closing price of whatever time frame they are charting.
1. Bar Chart
These are the ones that look like long or short vertical lines, with a small horizontal line on the left side, and a small horizontal line on the right. The very top of the vertical line signals the high price of the bar, the bottom of the vertical line signals the low price. The short horizontal line on the left is the price at which the bar opened, and the short horizontal line on the right is where the price closed for that period. Not too difficult, eh?
2. Candlestick Chart
These are the ones that most traders use today. They are drawn showing a long or short body with a small line sometimes extending out of the top, and out from the bottom of the body. They are commonly plotted in colors, usually green meaning the price moved up during that period, and red meaning the price moved down during that period.
The top and bottom of the body (the fat part) represents the opening and closing price, and the “wicks” (the small lines out the top or bottom) represent the high and low prices.
There are other types of charts that some traders use, but these 2 types are sufficient for 99.9% of all traders in the market. Price charts can represent different time increments, from 1 minute per bar or candle, all the way up to 1 month per bar or candle. It all depends on your trading plan, and what time frame you want to trade.
Understanding price charts will become second nature in a very short time with use; what will take longer (and should never stop) is your continued education in all the other aspects of Forex trading. Treat it as a business, don’t be in a hurry, and you will become proficient over time.
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