Charting Changing Asset Prices

“In the business world, the rearview mirror is always clearer than the windshield.”

-Warren Buffett

Charts are an essential weapon in any trader’s arsenal. They graphically represent the historical price changes and trading volume of an asset. Traders often try to forecast the future direction of an asset’s price by analysing its past behaviour to collect important insights. Trading charts can broadly be classified into three categories.

What are the Different Types of Charts?

1. Line Charts

As the name would imply, line charts are constructed as one single line, moving from left to right. They are formed by connecting the closing prices according to the time period being measured. With the advancements in computer trading platforms, very few traders currently use line charts. However, they remain prized amongst long-term investors who seek to identify breaks above and below the peaks and valleys in a line chart to initiate buy or sell trades.

2. Bar Charts

Also often referred to as Open-High-Low-Close (OHLC) charts, bar charts are composed of a series of vertical lines, with the high and the low of each line (bar) representing the highest price and the lowest price for the specified time frame. A short horizontal line extends from the left, which signifies the opening price for the time frame, while a small horizontal line extending to the right of the vertical bar indicates the closing price for the same period. For years, bar charts were the preferred choice among traders before Japanese candlesticks became more popular.

3. Candlestick Charts

Candlestick charts are the most widely used chart form, both among long-term investors and short-term traders. A candlestick is made up of three primary parts - the real body, the upper tail and the lower tail. The real body can be two colours, each corresponding to a lower or higher movement in price. In this case, we will use green to represent a move higher and red for a move lower.

If the body is green, the opening price is the lower end and the closing price is the upper boundary of the real body. In contrast, a red candle indicates that the closing price (lower end of the body) is below the opening price for the time period being measured.

The upper tail and the lower tail are two thin lines protruding from the top and the bottom of the real body which represent the high and low prices reached during the measured time period.

• Start Analyzing Trading Charts Today With FXTM

What Do the Charts Tell Us?

Traders monitor charts to analyse asset price movements and determine when to enter and exit from trades. Although there are several different types of charts, they essentially display the same information - the past and current prices. Regardless of the chart type, all charts have a time frame on the horizontal axis while the vertical axis of a chart represents the asset’s changing prices.

Why is Reading Charts Helpful and Practical?

Technical trading studies suggest that an asset’s current price reflects all information that is publicly available. While rumours may constantly swirl that its price may surge or plummet, ultimately the current price is the existing balancing point between buyers and sellers. As traders and investors decide to buy or sell, an asset’s changing price reflects the shifting perception of its value.

Technical analysis, which involves studying charts to identify trends, implies that the only tool we need as traders is a simple price chart. Since all information relating to an asset has already been highlighted by the price fluctuations on the chart, this form of analysis suggests that there is no need to concern ourselves with why prices are changing. If buying interest is more than selling interest, prices rise. Contrarily, if selling interest is more than buying interest, prices fall.

The best way to learn how to interpret charts and build an accompanying trading strategy is to begin by exploring all the available chart types. FXTM’s complimentary demo trading account is a perfect starting point thanks to a wide variety of preloaded charting tools which enable you to practice trading in a risk-free investment environment with virtual funds.

Some Final Thoughts on Charting

Charts are a great visual representation of an asset’s price changes over time. Although it needs to be mentioned that an asset’s past price performance is not always a guarantee of how prices will behave in the future, charts provide us with a useful template for understanding how prices might react and shift in the future.

The best way to incorporate charts with your strategy begins by experimenting with chart settings to see how it impacts what you see and the insights you gather. As you begin to develop your knowledge and develop trading strategies, you will eventually discover your preferences and perfect your trading style and tactics.

• Apply Your Charting Knowledge to Financial Markets Today WIth FXTM