How to use charts properly

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In this article we will explore the art of reading candlestick charts properly – and explore how to understand them, so that they can assist you in your Forex trading. This article will provide professional traders with an explanation of what candlestick charts are, what they represent in currency trading, the structure of candlestick charts, and a detailed breakdown of how to read candlestick charts.

What Is A Candlestick Chart?

There are a lot of different Forex charts. However, there is a specific type which traders around the globe find useful – candlestick charts. What do they represent? A candlestick chart is a financial chart that is applied in order to describe the price moves of a currency, a security, or a derivative.

With the ability of being able to be used in various time frames, the candlestick represents four key pieces of information for the time frame in question – the open and the close, as well as the high and the low. It goes without saying that Forex candlesticks charts are frequently utilised in the technical analysis of currency price patterns.

Let’s begin with a short history of candlesticks. The Japanese first started using technical analysis in order to trade rice in the 17th century. Whilst this early version of technical analysis was comparatively different from the US version initiated by the pioneer of American technical analysis, Charles Dow back in 1900, most of the guiding principles were very much alike. What is a candlestick chart? Let’s outline some crucial facts to give you a basic idea.

  • The ‘what’ (meaning price action) is more significant than the ‘why’ (i.e earnings, news, etc)
  • All the present and available information is reflected within the price
  • Sellers and buyers actually move markets based on anticipations and emotions such as fear and greed
  • Markets tend to fluctuate
  • The real price might not reflect the underlying value

Steve Nison, who introduced candlesticks to the western world, outlined that so-called candlestick charting first came to light sometime after 1850. A considerable amount of credit for the development of candlestick and charting goes to a legendary rice trader who was known under the name of Homma from Sakata town. It is most likely that his innovative ideas were consequently modified, and then refined over many years of trading, ultimately resulting in the system or model of candlestick charting that we encounter everyday as Forex traders.

What Do Candlestick Charts Represent in Currency Trading?

As specified earlier, candlesticks are a way of presenting the price action over an established period of time. Moreover, they can provide useful information like the market sentiment, or possible reversals in the selected markets, by demonstrating the price move in a particular manner. Understanding this is a good starting point in terms of how to use candlestick charts in trading.

When you trade something, especially Forex, you will apply price charts to observe price moves in the markets. If we compare line charts and candlestick charts for example, you will see some vivid distinctions. The line chart is a very easy method of demonstrating the price movement. It displays the information with a simple line, using a series of data points. It is the kind of the chart that you might be used to seeing in different magazines and newspapers, which present the price motion of stocks and shares.

By understanding candlestick charts, one should know that they represent price movement, though they are made up not with a simple line, but with individual candlesticks. Forex traders tend to prefer to read candlestick charts owing to the fact that they include considerably more information compared with a line chart, and can be much more useful when making prudent trading decisions. A line chart uncomplicated and shows price moves within a line, whilst candlestick charts present more information within each individual candlestick.

At the beginning of this article, we mentioned that candlestick charts are used in various time frames. Technically, if we set the candlestick chart to a 30 minute time period, each candle will actually form over 30 minutes. Similarly, if the chart is established in a 15 minute time period, then every candle will take 15 minutes to form.

Imagine that we have two charts displaying the price action for the EUR/USD currency pair. With 30 minute candles, you will see two big candles in the shaded area. This shows the exact identical period, as if we had the five minute chart with its 12 shaded candles. This leads us to the point that if the time period is established for 30 minutes, then every individual candle will take exactly 30 minutes to complete the formation.

Let’s delve deeper into candlestick chart analysis. The two charts represent the price action of the identical asset. Only the 30 minute time frame shows the price action over a considerably longer period, compared with the five minute chart. Thus, a five minute chart means that every candlestick will take five minutes to form. However, with the 30 minute chart, you will gain a much broader time scale of the particular price action.

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The Structure of Candlestick Charts

If you take a look at a candlestick chart, you will see a figure in the shape of a rectangular box. This is what is known as the body, and it is the widest part of the candlestick. This is the first step of how to read candlestick charts. This body demonstrates the open and the close of the specific period. This implies that if the chart is a one hour chart, then every candlestick body will demonstrate the opening price for that one hour period, as well as the closing price for that one hour period.

In addition, the wicks at the bottom and at the top of the candlestick present the lowest and the highest prices reached during that one hour period of time. In fact, a chart that represents the open, high, close, and the low price for a given period is actually referred to as an OHLC Forex chart. Furthermore, different colours of the body tell you whether the candlestick is bullish (meaning that it rises) or bearish (meaning that it falls).

People can set the colour of the candlestick according to their personal preferences with the help of trading software. How can you form technical analysis candlestick patterns? Logically, if the candlestick is bullish, then the opening price is most often at the bottom, and the closing price is nearly always at the top. If the candlestick is bearish, the opening price is invariably at the top, and the closing price is always at the bottom.

Using varying colours provides a good way for you to immediately tell whether they are bullish or bearish. Let’s put this theory into the practice with another example, which will help show how to analyse candlestick charts. Imagine the candlestick has a period of one day (so it took one day for the candle to form). The EUR/USD currency pair will serve as an example once more. In our case, the bearish color is orange, and the bullish is blue. Imagine that you have the following candle: it is bearish as it has an orange color.

This means that over the course of one day the price of the EUR/USD pair dropped. Moreover, there were more sellers than buyers throughout that day. The price was actually lower at the close of the day compared to when it opened. If it started with a price of 1.38269, then at the end of the day it hypothetically could be at 1.34488. The wicks will indicate the highest price of the day, and the lowest.

This example simply shows the OHLC for that particular day. If you wanted to see the price movement in more detail, you would just go to a lower time frame. By using the example of Forex candlestick analysis above, in order to find out more about what occurred during the course that day, you could go to a one hour time frame Forex chart.

This chart would demonstrate candlesticks that more accurately display the price movement throughout that particular day. If you want to get more detailed information about the price behavior, then going to a 15 minute or a five minute time frame would be a wise decision. Let’s finish with another final example:

Imagine that we have a candlestick which is bullish (as it is blue). This tells us that during an hour, the price of the EUR/USD increased. Moreover, there were more buyers than sellers during that hour. The price was much higher at the close of the hour, compared with when it actually opened. For instance, the price at the beginning of the hour opened at 1.3009, although at the end of the hour the price closed at 1.3171. Again the wicks indicate the highest and the lowest price of the EUR/USD pair during that hour.

Conclusion

As you can see, candlestick charts can really help with the trading process. They are a very comfortable structure to work with, and you shouldn’t have any difficulties in applying them on a daily basis. How do you interpret candlestick charts? Simple. An ordinary candlestick can show you much more information than a line chart, as you have all the necessary price information displayed, even the bullishness and the bearishness of the market. If you would like to learn more about candlesticks, make sure to read our related article: Everything You Need to Know About Candlestick Trading

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

How To Use Technical Analysis Properly

Technical analysis is the main form of market analysis used by traders participating in financial markets.

Modern technical analysis has been around since the early 1900s with the formation of the DOW theory by Charles Dow. Since then there has been many different uses of technical analysis and what began as a simple tool for analyzing markets has grown into something which has multiple disciplines and interpretations.

Today’s article is going to be a kind of introduction into what technical analysis is, why people use it, the three assumptions technical analysis makes about financial markets and finally…… where traders go wrong with technical analysis.

What Is Technical Analysis ?

Technical analysis is one of two discipline traders use to trade the forex market.

Its centered on using price charts as the primary means for making trading decisions.

Nearly all retail traders trading the forex market are using technical analysis in their trading, the strategies they implement are all focused on using either price patterns to enter trades or price points to find locations they can use to take trades.

Whenever a trader makes a trading decision based on a price chart he is using technical analysis whether he realizes it or not.

Technical analysis itself has been around for hundreds of years. The first record of a person using a price chart to place trades was Muneshia Homma back in the early 17th century, since then many advancements have been made to the technical analysis theory which forms the basis for what we know today as technical analysis.

One of the big big breakthroughs came when Charles Dow formulated the Dow theory which came up with the idea financial markets move in trends, he also developed the method used to determine trend direction which is still implemented by most traders today i.e monitoring swing highs and swing lows.

In the 80s with the advent of computer technology a new form of technical analysis become popular.

Technical indicators have been around for decades but it was with the dawn of computers that they really took off and were put in use by traders around the world. Before computers were available if a trader wanted to use an indicator ( lets say a moving average for example ) they would have to manually calculate all the prices which was a really time-consuming process, When computers came into the mainstream indicator calculations could completed in minutes which made using indicators much more popular with traders in the market.

In addition to shorting the time it took to calculate different technical indicators traders were also able to create new indicators from scratch using the power of computers to mathematically find new price points which could be used to show information about the market prices which wasn’t available before.

Most of the technical indicators still in use by traders today come from the surge in popularity indicators suffered back in the 80s, where it not for this time things like the MACD – ATR – Bollinger Bands, probably wouldn’t exist for traders to use.

A Controversial Theory

Technical analysis itself has never been proven to actually work.

It remain a source of great controversy in financial circles with many academics testing different component of technical analysis to try to find out if using technical analysis can be profitable or not. Many of the great traders of our time have come out and said they have made most of their money using technical analysis but the majority of these made their money during the 80s when huge trends were present in the markets and making money was as simple as just following the trend.

Not only this, before the 90s the only things traders had to deal with in the market were other trades, nowadays we have computer algorithms which have reduced a large number of the edges which were present in the market before the 1990s.

If you bring a chart up of how the market used to move during the 70s and 80s you’ll see they move in a completely different way as opposed to what we see today. Back then there were big trends with little to no pullbacks or consolidations taking place whereas now the markets hardly manage to trend for any decent length of time before stalling and moving in the opposite direction.

The Three Technical Analysis Rules

The whole theory of technical analysis is based on three big assumptions about how financial markets work.

These assumptions reflect what technical traders in general believe about financial markets and make up the foundation of the technical analysis trading strategies they will use to trade the markets.

Some of these assumptions have caused controversy in the past when academics have tried to prove them as being right or wrong, I don’t necessarily believe the assumptions below are incorrect but I believe they can easily be misinterpreted if not understood correctly by the trader using technical analysis in their trading.

Price Discounts Everything

The first assumption technical analysis makes about financial markets is idea that the market price discounts all information about price direction.

Price discounts everything basically means any information which is known about the market is reflected in the current market price, anything which could affect the future direction of the market such as fundamental news has already been incorporated into the market price, therefore drawing conclusions about the future direction of the market using anything other than the market price is pointless.

When traders first hear the price discounts everything assumption they make the unfortunate mistake of believing all they need to focus on when analyzing their charts is the market price as it contains all the information they need to predict the market.

You’ll see later why this is incorrect and is the number one reason why traders use technical analysis in the wrong way.

History Repeats Itself

The second assumption is the belief that things which have happened in the past will happen again in the future,

Common technical analysis theory says there are patterns which repeat themselves over and over again in financial markets due to the traders in the market reacting to certain events in the same way. For the most part I believe this assumption is correct, the problem is the majority of the patterns traders use when trading are so well-known and obvious they are actually used against the traders themselves.

Take the head and shoulders patterns, one of the best known price patterns in the market is known and monitored by almost all traders using technical analysis.

If you didn’t already know a head and shoulders pattern gets its name from the way the swing structure of the pattern resembles the head and shoulders of a human.

When a clear head and shoulders pattern forms many traders will try to trade the pattern using the common entry criteria given out in technical analysis books which is:”Wait for a break below the neckline”. When the market breaks the neckline traders enter trades under the impression the market is going to move in the direction of the break, bank traders can also see the head and shoulders pattern and know how the retail traders trade it, so when it the neckline breaks and the traders go short, depending on how obvious the head and shoulder pattern is, the banks will use the sell orders to place their own trades and the market will move up, making all the traders who sold on the break of the neckline lose money.

It’s important to note price patterns will only be used against retail traders when their appearance is obvious, a clearly defined head and shoulder pattern is one in which the highs of the left and right shoulders are relatively equal and the high of the head noticeably sticks out from the two shoulders.

When the price patterns are not so obvious they can go either way, some may work out successfully while others might result in you losing money, there really isn’t any way to tell truth be told

The final of the three assumptions technical analysis is based on, is the idea financial markets move in trends.

When the market has been moving in one direction for a long time its said the market has a higher probability of continuing to move in the same direction rather than reversing and moving in the opposite direction.

There is nothing wrong with the concept of financial markets moving in trends, it’s an assumption which is based upon fact, the problem is knowing the point where the market has entered a trend is different for all traders. Where you determine a trend has begun will be different to where I determine where a trend has begun, which means there is no definitive way for use to know if we are getting into the market at the beginning of a trend or at the end of a trend.

Where Traders Go Wrong With Technical Analysis

The big problem with technical analysis isn’t technical analysis itself, it’s what the traders using technical analysis expect to be able to do with technical analysis.

Traders using technical analysis believe they can predict the market using nothing but price, as like we have just seen one of the main assumptions technical analysis is based on is the idea that price discounts everything, therefore the only thing in the market which needs to be studied is the current and past price.

How can it be possible to predict the market using price when the only time a price change can occur is when people are placing or closing trades ?

It doesn’t make any sense !

This is where people using technical analysis go wrong, the market price doesn’t matter, whether we’re talking about the current price or the past price. What matters is knowing what action the traders participating in the market will take which will cause a price change to occur.

Take a look at the consolidation above.

Why did the market move out of this consolidation ?

Because one set of traders came into the market and placed buy trades which were bigger than the sell trades coming into the market from another set of traders. It doesn’t take a genius to figure that out ! But the real question is why did the traders place buy trades in the first place ?

Was it because they believed the market should move up ?

Did the market hit a support level which caused a reversal in the past ?

Or was it to make money ?

Obviously it was to make money, but how do you actually make money in the market ?

By making other traders lose !

So if the only way to make money is by making other traders lose money, knowing where traders are placing trades is the number 1 thing we need to be focusing on.

The only attention we need to be placing on the price is what does it mean for other traders ?

“What will retail traders do if they see the market make a large move up” ?

“If the market drops from its current location is it likely for retail traders to close their trades” ?

These are the types of questions you need to be asking yourself when looking at your charts, not ” I think the market will reverse at this resistance level” because by saying that you’re not thinking about the other traders in the market.

The only way for the market to turn upon reaching the resistance level is if other traders come into the market and sell, so you need to be thinking about the reasons as to why traders will sell when the market hits the resistance.

Technical analysis concepts like support and resistance – Fibonacci – even indicators are fine to use in your analysis so long as you relate them as to what they mean for other traders, if you think the market should turn when it reaches a technical level due to the fact that you have seen the market turn there in the past means you’re not trading from the right perspective.

When people trade support and resistance they’ll rationalize why the market turns at the levels with something like “if everybody buys the market will move up” the problem is the people who move the market i.e the banks will always trade against the retail traders, so if there is a really obvious support level in the market which any retail trader can easily see on their charts the banks will purposely sell when the level is reached because they know a large number of retail traders will buy, therefore by selling they can push the market below the support and make all the traders who went long lose money-making themselves a nice profit.

Summary

Price doesn’t move financial markets people do. It’s anticipating what the traders who use price to make their trading decisions are going to do which will make you a consistently profitable trader. Charts can only show you where the market has been, it cannot show where it may go in the future, you have to understand how other traders trades in order to figure out what action a trader may take if the market moves up or down as its his actions which will determine to what extent the price will change in the market.

Getting Started With Chart.js: Line and Bar Charts

In the first introductory Chart.js tutorial of the series, you learned how to install and use Chart.js in a project. You also learned about some global configuration options that can be used to change the fonts and tooltips of different charts. In this tutorial, you will learn how to create line and bar charts in Chart.js.

Creating Line Charts

Line charts are useful when you want to show the changes in value of a given variable with respect to the changes in some other variable. The other variable is usually time. For example, line charts can be used to show the speed of a vehicle during specific time intervals.

Chart.js allows you to create line charts by setting the type key to line . Here is an example:

We will now be providing the data as well as the configuration options that we need to plot the line chart.

Since we have not provided any color for the line chart, the default color rgba(0,0,0,0.1) will be used. We have not made any changes to the tooltip or the legend. You can read more about changing the crate size, the tooltip or the legend in the first part of the series.

In this part, we will be focusing on different options specifically available for modifying line charts. All the options and data that we provided above will create the following chart.

The color of the area under the curve is determined by the backgroundColor key. All the line charts drawn using this method will be filled with the given color. You can set the value of the fill key to false if you only want to draw a line and not fill it with any color.

One more thing that you might have noticed is that we are using discrete data points to plot the chart. The library automatically interpolates the values of all other points by using built-in algorithms.

By default, the points are plotted using a custom weighted cubic interpolation. However, you can also set the value of the cubicInterpolationMode key to monotone to plot points more accurately when the chart you are plotting is defined by the equation y = f(x) . The tension of the plotted Bezier curve is determined by the lineTension key. You can set its value to zero to draw straight lines. Please note that this key is ignored when the value of cubicInterpolationMode has already been specified.

You can also set the value of the border color and its width using the borderColor and borderWidth keys. If you want to plot the chart using a dashed line instead of a solid line, you can use the borderDash key. It accepts an array as its value whose elements determine the length and spacing of the dashes respectively.

The appearance of the plotted points can be controlled using the pointBorderColor , pointBackgroundColor , pointBorderWidth , pointRadius , and pointHoverRadius properties. There is also a pointHitRadius key, which determines the distance at which the plotted points will start interacting with the mouse.

The above speedData object plots the same data points as the previous chart but with custom values set for all of the properties.

You can also plot multiple lines on a single chart and provide different options to draw each of them like this:

Creating Bar Charts

Bar charts are useful when you want to compare a single metric for different entities—for example, the number of cars sold by different companies or the number of people in certain age groups in a town. You can create bar charts in Chart.js by setting the type key to bar . By default, this will create charts with vertical bars. If you want to create charts with horizontal bars, you will have to set the type to horizontalBar .

Let’s create a bar chart which plots the density of all the planets in our solar system. The density data has been taken from the Planetary Fact Sheet provided by NASA.

The parameters provided above will create the following chart:

Just like the line chart, the bars are filled with a light gray color this time as well. You can change the color of the bars using the backgroundColor key. Similarly, the color and width of the borders of different bars can be specified using the borderColor and borderWidth keys.

If you want the library to skip drawing the border for a particular edge, you can specify that edge as a value of the borderSkipped key. You can set its value to top , left , bottom , or right . You can also change the border and background color of different bars when they are hovered using the hoverBorderColor and hoverBackgroundColor key.

The bars in the bar chart above were sized automatically. However, you can control the width of individual bars using the barThickness and barPercentage properties. The barThickness key is used to set the thickness of bars in pixels, and barPercentage is used to set the thickness as a percentage of the available category width.

You can also show or hide a particular axis using its display key. Setting the value of display to false will hide that particular axis. You can read more about all these options on the documentation page.

Let’s make the density chart more interesting by overriding the default values for bar charts using the following code.

The densityData object is used to set the border and background color of the bars. There are two things worth noticing in the above code. First, the values of the barPercentage and borderSkipped properties have been set inside the chartOptions object instead of the dataDensity object.

Second, the chart type has been set to horizontalBar this time. This also means that you will have to change the value of barThickness and barPercentage for the y-axis instead of the x-axis for them to have any effect on the bars.

The parameters provided above will create the following bar chart.

You can also plot multiple datasets on the same chart by assigning an id of the corresponding axis to a particular dataset. The xAxisID key is used to assign the id of any x-axis to your dataset. Similarly, the yAxisID key is used to assign the id of any y-axis to your dataset. Both the axes also have an id key that you can use to assign unique ids to them.

If the last paragraph was a bit confusing, the following example will help clear things up.

Here, we have created two y-axes with unique ids, and they have been assigned to individual datasets using the yAxisID key. The barPercentage and categoryPercentage keys have been used here to group the bars for individual planets together. Setting categoryPercentage to a lower value increases the space between the bars of different planets. Similarly, setting barPercentage to a higher value reduces the space between bars of the same planet.

Final Thoughts

In this tutorial, we have covered all the aspects of line charts and bar charts in Chart.js. You should now be able to create basic charts, modify their appearance, and plot multiple datasets on the same chart without any issues. In the next part of the series, you will learn about the radar and polar area charts in Chart.js.

I hope you liked this tutorial. If you have any questions, please let me know in the comments.

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