In addition to market technology, chart technology is the second discipline in technical market analysis. Using chart technology, analysts try to determine the prevailing trend of a market and gain more insight into its condition. In addition, as part of the chart technique, attempts are made to draw valuable conclusions about further market development by recognizing certain patterns in the course of the price.
- The charting technique examines trends in their direction and internal constitution
- Almost every forex broker offers free charting tools
Forex brokers usually offer a good to very good charting application. However, this can only support trade decisions if it is applied correctly. Typically, every charting software offers a variety of different chart representations, drawing tools, and other useful tools.
Line charts contain very little information
The course of a market can be displayed graphically in different ways. The most common and at the same time the least useful chart type is the classic line chart. It connects the last courses of a period (this can be 1 minute as well as a day, a week or a month) to a simple line.
The advantage of line charts is also their greatest weakness: due to the restriction to a single information per period, this representation is very clear. However, it contains a lot of important information for the viewer about the course of the trading session. A line chart does not show how volatile a market was.
- Line charts say nothing about volatility
- A lot of important information is lost
- However, since the closing price is the most important price in a period, they are not useless
This information is provided by bar charts. A bar chart contains four pieces of information for each period: the opening and closing prices are shown as well as the highest and lowest prices in a period. Bar charts consist of a vertical line, the upper point of which is the highest and the lower point of which is the lowest price of the period. The opening price is shown on the left of the bar as a small horizontal line, the right of the bar shows the closing price.
Professionals use candlesticks
Bar charts thus provide additional information. However, the most common type of chart display among professional analysts and traders are candlesticks. They offer the same information as a bar chart, but are optically designed differently and thus allow a better overview than this.
- Candlesticks contain a lot of information
- In addition to all prices in a period, they also clearly show the market trend
- Candlestick patterns provide more information about the trend
A candle chart consists of a candle body and an upper and a lower shadow. The candle body is defined by the opening and closing price of the respective period. If the closing price is above the opening price (in the case of rising prices), the closing price is the upper and the opening price the lower end of the candle body. In this case, the candle body is white.
The situation is different with falling prices: if the closing price is below the opening price, the candle body is black. The colored background not only makes it easier to see which trend is currently prevailing in a market. Candlestick charts form formations in certain market situations that allow (empirical) conclusions to be drawn about further market developments. For example, a large white candle often initiates the end of a downward trend and the subsequent upward impulse.
Linear vs. Algorithmic chart display
Another important aspect of the chart display concerns the scaling of the chart. There are basically two options here: In addition to linear chart scaling, charts can also be scaled logarithmically.
The linear representation focuses on absolute numbers. The distance that the price chart travels in a certain direction when changing, for example, 100 pips is always the same – no matter which course windows the movement extends over. For example, if the euro against the US dollar gains from 1.1050 to 1.1190 and thus by 140 pips, this corresponds to the same distance in the linear chart as an increase from 1.4550 to 1.4690. However, the second price movement is tiny in percentage terms (0.96 instead of 1.2 percent).
Due to this distortion, for example, a flattening upward trend appears to be very constant because the representation does not take into account that the percentage gains will gradually decrease.
In the logarithmic representation, a percentage price movement always corresponds to the same distance of the price in the chart. This avoids the problem of distortion.
The problem of scaling is rarely of importance in practice for day traders and also for short-term investors with a time horizon of a maximum of a few weeks. However, when considering a long-term currency pair, it should be taken into account.