Forex chart analysis is a main tool of technical analysis. Charts generally depict all the data obtained on the currency market and it does not matter, what chart you are looking at, it conveys a very important and detailed information. Thus, your success on the Forex market directly depends on your chart analysis skills. The main types of charts include line charts, bar charts, and Japanese Candlesticks. Traders usually work with those charts that are more convenient and understandable for them and that meet their personal preferences and requirements. Forex chart analysis should be easy to understand and should give the opportunity for profitable trading on the currency market at any time frame. Your time frame could be expressed in minutes, hours, days, or weeks.
The three main chart types are:
Bar charts and Japanese Candlesticks provide more detailed information about the market: opening and closing price, maximum and minimum price for a given time period.
Support and resistance levels are the price levels where the price tends to find support or resistance as it is moving down or up, respectively, i.e. the price cannot move at the same direction when it has reached these levels. The price meets support and resistance levels at any market with a defined trading range. When the price reaches one of the levels, market participants start actively buying or selling, i.e. the market starts moving.
"Bulls" and "bears" who disagree with this or that level balance the demand buying or selling. Thus, support or resistance levels appear. However, if there is a break of the trading range upwards or downwards, the previous support level becomes the resistance level (Figure.4), and, vice versa, the resistance level becomes the support level (Figure.5).
Figure 4 shows that the price breaks the support line, the support switches roles with the resistance, and the support line becomes the resistance line. It leads to the downtrend.
Figure 5 illustrates the trading range. We can see how after several attempts the price breaks the resistance level. Once the resistance level is broken, it becomes the support level.
Not only trend lines, but also the maximum and minimum prices form the support and resistance levels (Figure 6 and Figure 7). It should be noted that maximum or minimum does not guarantee that the price will rebound from this level. If the price gets closer to its maximum or minimum, it will be able to find a new support or resistance level near its maximum or minimum that show such a possibility to the Forex participants. At this level, there was the balance between "bulls" and "bears". The market remembers about it and, therefore, when the price gets closer to the support level, all the Forex participants start actively buying, and, vice versa, when the price gets closer to the resistance level, all the Forex participants start actively selling. When the price breaks its maximum or minimum, it is a signal for further price increasing or decreasing.
The sequence of at least two or three closing prices above or below the support and resistance levels indicates the breakdown of these levels. The ordinary breakdown signifies nothing, only several closing prices are considered to be a conclusive evidence of the breakdown of support and resistance levels (Figure 8). Such a confirmation of the level breakdown is called duration confirmation. Other criteria indicating the level breakdown are how far the price moves beyond identified support and resistance levels, breakdown depth.
The density (concentration) level of candlesticks (Figure 9), bars (Figure 10), minimums (Figure 11) or maximums (Figure 12) can form the support or resistance level.
We have looked through support and resistance levels. Now it is reasonable to learn more about trend.
Trend is an ascending or descending tendency conveying price fluctuations for a long period. Trend is defined by a certain sequence of increasing maximums and minimums with the ascending tendency (Figure 13) or decreasing maximums and minimums with the descending tendency (Figure 14). While the next maximum and minimum are higher than the previous maximum and minimum, it is considered that the ascending trend is not broken. It characterizes the ascending tendency. It is considered that the descending tendency is broken in case if the next maximum and minimum are higher than the previous maximum and minimum.
Unlike trend, trading range is a horizontal tendency, i.e. all the maximums (minimums) are virtually at the same level (Figure 15). Trading range shows price fluctuations for a long period. The broken trading range is a range where its lower or upper boundary is broken. When for a long time the price fluctuates within a narrow horizontal range, it is called flat.