Now that you have some experience and understanding in currency trading, we will starting discussing a few basic tools that forex traders frequently use. Due to the fast paced nature and leverage available in forex trading, many forex traders do not hold positions for very long. For example, forex day traders may initiate a large number of trades in a single day, and may not hold them any longer than a few minutes each. When dealing with such small time horizons, viewing a chart and using technical analysis are efficient tools, because a chart and associated patterns can indicate a wealth of information in a small amount of time. In this section, we will discuss the "candlestick chart" and the importance of identifying trends. In the next lesson, we'll get into a common chart pattern called the "head and shoulders." (Day trading could be your cup of tea; you might want to read How To Set A Forex Trading Schedule.)
Chart Basics (Trends)
While everyone is used to seeing the conventional line charts found in everyday life, the candlestick chart is a chart variant that has been used for around 300 years and discloses more information than your conventional line chart. The candlestick is a thin vertical line showing the period's trading range. A wide bar on the vertical line illustrates the difference between the open and close.
The daily candlestick line contains the currency's value at open, high, low and close of a specific day. The candlestick has a wide part, which is called the "real body". This real body represents the range between the open and close of that day's trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: the close was higher than the open.
Just above and below the real body are the "shadows." Chartists have always thought of these as the wicks of the candle, and it is the shadows that show the high and low prices of that day's trading. When the upper shadow (the top wick) on a down day is short, the open that day was closer to the high of the day. And a short upper shadow on an up day dictates that the close was near the high. The relationship between the day's open, high, low and close determine the look of the daily candlestick.
After viewing it, it is easy to see the wealth of information displayed on each candlestick. At just a glance, you can see where a currency's opening and closing rates, its high and low, and also whether it closed higher than it opened. When you see a series of candlesticks, you are able to see another important concept of charting: the trend. (For a more in depth analysis, check out The Art of Candlestick Charting.)