Introduction to Forex – Chart Pattern Reading (Part 1)

Good morning, traders and cyprusthrivers! Today kicks off with a little bit of education here at cyprusthrive. For those of you who are rather new to trading, we will briefly walk you through chart pattern reading.

What’s the main purpose of charts in forex trading?

The answer comes easy – charts allow traders to track real-time exchange rates and price movements of an asset. Reflecting the exact actions (buy or sell) performed on the market, charts keep traders tuned in to the market vibe.

What are the most common chart forms in forex?

Price charts come in variety of forms that include bar charts, Min/Max, Bollinger Band®, candlestick to only name a few. Whatever the form, they serve the very same purpose and are characterised by granularity.

Granularity represents the time frame corresponding to each reporting period represented in the chart. Fig. 1 below shows a 1 minute granularity, meaning that at each data point or tick the price chart will display the pricing information relating to the previous period (each minute in this case).

price chart
Fig. 1 – 1 minute Granularity

When selecting granularity you need to set the time frame that best suits your trading style as this will determine whether you’ll be in a winning (in the money) or losing position (out the money) at the end. In general, the shorter the period of time you tend to hold your positions open for, the shorter you should set the granularity on your chart.

What are trend lines?

You may have often heard traders speak about trend lines in forex. Well, trend lines are lines that can be placed over two or more price points on the chart. Generally, they are used to highlight support and resistance levels for the previous reporting period and overall market direction.

Moving forward, a support trend line is one which connects the lowest price points for an asset and indicates the recent levels to which the rate dropped before bottoming out (reaching the lowest levels) and rebounding (recovering after a downfall). In trading terms, this means that the market supports the price.

 

By comparison, a resistance trend line is one which links the highest prices of an asset before falling back to lower levels. This phenomenon is known as resistance or the point where the market resists moving the price higher.

Finally, directional trend lines are used to determine the overall market direction for an asset. Fig. 2 below shows that the general market trend over the last three hours heads upward despite the fluctuations it faced along the way.

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