Charting Application Tutorial
Forexnews Charts & News software is a comprehensive charting software that incorporates both technical and fundamental analysis into a single application. Technical charts display past price movements, indicating to traders where the market may move in the future. This month, we'll outline basic premises of technical analysis while highlighting some of the tools that have been created exclusively for our clients. Of paramount importance is the fundamental knowledge of the various pillars of technical analysis and their application to your trading strategies.
What to Look for in a Chart:
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trendline is a straight line that plots the general direction of a currency in order to help predict future price levels. Connecting the peaks or the troughs within a particular time period makes up the trendline. If the price rises above a downward sloping trendline or drops below a rising up-trend line, the trend is said to be broken. Time intervals could be adjusted according to your preferred trading outlook. Once you have captured the overall trend, you could select the time horizon in which you wish to trade. Thus, you could effectively buy on the dips during rising trends, and sell during the rallies through downward trends.
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support is a price level which is deemed attractive by buyers of that currency, therefore preventing sellers from lowering the price below it. In the example below (Chart#1), the buyers of EUR/USD would like to buy euros at 0.8800; and, until August, the sellers were not able to drive the currency below that price. A support level is usually identified once the market tests that level more than once before breaking below it (broken support) or moving up and away from it (maintained support). A recurring failure by the market price to move below the support level usually results in a pattern that can be traced by a straight line.
Support levels are sometimes used to determine good buying opportunities since the currency may be
supported by that level and the currency's price may appreciate again after testing it.
Chart #1
Here are some other examples of support levels:
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resistance level shows a trendline whereby the sellers of that currency find those prices along the line more attractive to sell and therefore prevent the buyers from raising the price further. In Chart #2, we can see a resistance trendline for the USD/JPY. The 112.70 resistance level is tested a few times but the line keeps retracing until it is finally broken towards the 19th of December.
Chart #2
Here are some other examples of resistance levels:
Sometimes if a support level breaks, its role as a support will transform into that of a resistance. If there is a falling market and a support level is broken, it could then serve as a resistance for the downward trend. (See Chart #3)
Chart #3
On the other hand, in a rising market, once the trendline for a resistance level is broken, it could turn into a support. (See Chart #4)
Chart #4
Understanding support and resistance levels is highly important for traders placing Stop and Limit orders. For example, if a trader has an open buy position, he can use the resistance level to serve as a reference point for placing the Sell Limit order and use the support level to serve as a benchmark for placing a Sell Stop order.
Again, it is highly recommended that all traders hone their technical analysis skills while paper-trading before committing to live-trading strategy using technical analysis.
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channel is formed when the currency fluctuates between two parallel trend lines. The first step in constructing a channel is to draw the primary trendline, below the troughs for an up-trend or above the peaks for a downward trend. Connecting at least two successive highs draws a downward straight line. We can use the chart below to demonstrate a channel:
EUR/USD remains in the channel formed by the parallel downward trendlines. A channel can be used to identify opportunities for profit taking during a trend. Penetration of the bottom trendline signals a depreciating currency and a potential trend reversal. Penetration of the upper channel trendline may signal an appreciation of the currency.
Types of Charts: Line, Bar, and Candlestick.
All of these charts are plotted with time on the x-axis and the currency pair on the y-axis. Each time period on our real time charts can range from a tick by tick to a weekly interval (the tick refers to each individual pip movement). This gives traders the flexibility to view currencies with closer examination while also allowing them to spot the trends most suitable for their time-sensitive trading strategy.
Line Chart: A line chart's strength comes from its simple design; it provides an uncluttered, easy to understand view of a currency's price. Line charts display the currency's closing price.
Bar Chart: A bar chart displays a currency's open, high, low, and closing prices. The top of each vertical bar represents the highest price that the currency traded during that time interval and the bottom of the bar represents the lowest price that it traded. The closing price is displayed as a horizontal "tick" to the right side of the bar, representing the last price the currency traded. A tick on the left side of the bar signifies the opening price.
Candlestick Chart: This kind of chart displays each time period in a "candlestick" format. As in the bar chart, the candlestick shows the open, high, low and close of a specific time period. A candlestick can either be solid or transparent. Its appearance depends on the relationship between the opening and the closing price. If the close is higher than the open, the candlestick is transparent or empty. If the close is lower than the open, the candle is solid or filled. When two thin lines extend vertically above and/or below the body of the candle, this means that they represent the highs and lows respectively, but not the closing price. These lines represent the high and the low for the period and referred to as shadows. The high for the period is the upper shadow and the low is known as the lower shadow.
Fibonacci Retracement
Some experts believe that the mathematics involved in many of today's indicators were developed as far back as 1170 AD when a mathematician by the name of Leonardo Fibonacci discovered the relationship of what are now referred to as Fibonacci numbers while studying the Great Pyramid of Gizza in Egypt. The Fibonacci ratio exists between any two successive numbers in the Fibonacci sequence. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
Fibonacci retracement is displayed by drawing lines between two extreme points, a high and (opposing) low peak. A series of horizontal lines will be drawn intersecting the trend line at the Fibonacci levels of 0.0%, 38.2%with 61.8% or 33.3% with 66.6%, 50%, and 100%. After a significant price move (up or down), prices will often retrace a significant portion (if not all) of the original move. As prices retrace, support and resistance levels often occur at or near the Fibonacci Retracement levels.
Moving Average
The Moving Average is an indicator that shows the average value of a currency's price progressing over a certain time period. There exist three different moving average modules to choose from: simple, weighted, and exponential. Moving averages can be calculated on any data series including a currency's open, high, low, close, or other, but MG's Charting Application uses close prices. The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Simple moving averages apply equal weight to the prices. Exponential and weighted averages apply more weight to recent prices.
Here is a list of recommended reading for technical analysis:
· Technical Analysis Applications in the Global Currency Markets by Cornelius Luca
· Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity and Currency Markets (Wiley Finance Edition)
by John J. Murphy
· Technical Analysis from A to Z, 2nd edition by Stephen B. Achelis
· New Thinking in Technical Analysis: Trading Models from the Masters by Rick Bensignor.
Unique Features of the System
News and Analysis delivers real time information. It is highly recommended that all traders consider both technical and fundamental analysis prior to committing to a trade.
Rate Box displays real-time rates for the Major Currency Pairs.
This button launches MMS Technical Trader and Strategizer if you are a subscriber to the plug-in.
Allows you to cycle through the different currency pairs and select the currency to be displayed on the graph.
Allows you to select the time interval for the currently selected currency pair chart.
Allows you to select or deselect a grid.
Help Function provides in-depth definitions of all the indicators available on Charts & News software. The Help section also provides helpful examples to better understanding the indicators.
Allows you to plot trend-lines on the Charts Application.
Parallel Lines allow you to click and drag an existing trendline in order to create a perfectly parallel line. This tool is very useful in charting channels.
Allows you to customize your screens by moving the time interval either closer or farther than your default screen.
Allows you to return to the default chart screen you've specified.
Allows you to delete the latest trendlines or retracement lines.
Did you know?
· If you were to draft trendlines on time-specific chart and then change the time intervals to a different time frame, the trendlines may still appear on the new chart. For example, if you were to draw trendlines on a 30-minute chart and then switch to a 15-minute time interval, your lines would not disappear as long as the lines from the 30-minute chart correspond to the same dates displayed on the 15-minute chart.
· There are multiple ways to display more than one chart on your screen at a time. Simply click on the
button and you'll automatically open a new worksheet. Then, adjust the size of your charts and you can display multiple charts simultaneously. Or, you can click on the Window option of your toolbar and select between Cascade, Tile Horizontal, or Tile Vertical.
· When your pointer is on top of the chart, you can right-click on your mouse to have a brief menu of charting options. By right clicking the mouse, the diagram below will appear and you can choose the type of chart, grid, or color to be displayed.
Remember, charts are expressions of price behavior patterns. When integrating charts into your analysis, keep in mind the old adage, "practice makes perfect". We highly recommend that you practice using these features on Forexnews Charts & News software and deliver yourself a new education in one of the most important aspects of foreign exchange trading: technical analysis.
These articles are designed to help traders understand the unique benefits of trading with DealStation. Articles contain hypothetical examples that have been created for illustration purposes only.
The opinion of the writer does not necessarily represent the view of MG and must be considered as an opinion and not fact.
