Using a Chart to Enhance Your Trading Techniques

If you like to trade markets, such as forex, indices or commodities, you should spend some time looking at a price chart, which will give you an idea of the history of price action, and help you determine the next direction for a currency pair or security. Forex charts show past exchange rate levels, and provide the backdrop for technical analysis.

Technical Analysis

Technical analysis is the study of past price movements and using patterns, trend lines, or studies to determine the future direction of a currency pair or security. Many technical analysts believe that all the current available information is priced into an exchange rate. Without new information, the only way to determine the future direction is to look at the past.

The best way to evaluate price action is to look at a chart. There are dozens of free charting packages available. Most will show you a chart of a security and allow you to look at it on a daily, weekly or monthly basis. Some also offer intra-day data, which provide a short-term view of where the markets have been.

A forex chart can be looked at in many formats. Most show you the open, high, low and close of a security. Some only have a line, which is usually the close. Some might even reflect a candle stick which provides information in color, such as the open relative to the close, which further provides data on the future direction of the price of a security.

By connecting highs to other highs or lows to other lows you can form trend lines, that help you determine support or resistance levels, where prices could stabilize. Trend lines can also help you determine if a price is breaking out or breaking down. You can use trend lines to enter trades or utilize them for your risk management.

On certain charts, you might be able to generate studies such as moving averages. This smooths the price action, and can also be used to help you determine support and resistance levels. You can also evaluate a trend, but looking for periods when short term moving average cross above or below longer term moving averages. This is known as a crossover moving average trading strategy.

Other types of studies will help you with momentum, or even levels that are unsustainable. For example, the (moving average convergence divergence) index is a study that measures the difference in moving averages. You can use this index to see accelerating positive or negative momentum, and use a crossover buying or selling strategy when you see momentum accelerating.

The relative strength index (RSI) shows you when prices are starting to become overbought or oversold. The index is based on where prices have been relative to the last 14-days and generated and index from 0-100 where 30 is considered oversold and 70 overbought.

By using a chart, you can combine your knowledge of a security with historical price action and increase the chance that you will have a successful trade. Forex charts can be found online either at a reputable broke sites or a trading platform site.