Price charts and technical indicators in FOREX
Currency price forecasting is the forte of technical analysis in foreign exchange trade. Traders and technicians use quantitative methods to predict the trend and behavior of prices. Historical data of price across time is gathered and these are charted to create a visual representation to the trader or the technician. Technical analysis through charts is helpful to forex traders by providing them valuable inputs in their decision making activities. We would want to think that traders also act and decide rationally, and a rational tool brought to them is the technical analysis.
There are several types or kinds of price charts that we might want to tackle today. Price charts, as said earlier, give traders visual representation of the actual behavior of the market. Herewith are examples of price charts and some brief explanation:
Chart or graph patterns: The most commonly used chart is the bar chart or the bar graphs. It is very simple to use because every bar represents the quantity of an event over a singular period of time. Several bars would indicate the rise or fall of an event over a series of time. Of course, there are other charts aside from the graph. But basically, the time and quantity are the two basic functions in the chart.
Candlestick trends and patterns: Like the bar charts, candlestick patterns are used to predict market movements. However, unlike the bar charts, candlesticks use colored bodies that make the presentation better and easier to understand.
Point and figure patterns: Essentially, they are the same patterns seen in bar graphs. However, to mark changes in price directions, Xs and Os are utilized.
Now, let us tackle the most common indicators employed by technical analysis:
Trend indicators: These show the degree of movement of price over a period of time. In addition, the movement may point at only one of three directions: up or down and sideways. Examples of trend indicators are moving averages and trend lines.
Strength indicators: Volume is the most commonly used indicator of market strength. It examines behavior of market participants over a price to see its concentration in the market. Basic elements of the strength indicators are open interest and/or volume.
Volatility indicators: This describes the magnitude of fluctuations in a day-to-day basis of a price within their trend direction. Volatility is the factor that leads to differences in prices. An example to this indicator is the Bollinger Bands volatility indicator.
Momentum indicators: Momentum describes the speed of price movements over a specific time. It measures the amount of strength in a trend over a period of time.
