- May 24, 2013
- Posted by: Forex Wiki Team
- Category: Forex Trading System
Understanding the chart
This is an article I wrote some time ago:
The chart is a set of data containing information about price action presented in a certain graphic form, a visual form. The chart is the history of price action written in a specific picture alphabet – Candle alphabet, Bar alphabet or Linear alphabet. Data containing information about price levels is sent by the broker’s server in information packs called ticks, and drawn by a computer programme as an element of the chart. The linear chart contains the least information about price action, because it is presented as a linear set of averaged price levels starting at the Open value and ending at the Close value of a given period of time (Timeframe).
The linear chart shows the trend pretty well, however, it does not show any other information, especially, we can not see the High and Low price levels in the given Timeframe, and it is difficult to recognize the beginning and end of each time period, thus, we cannot see the price action in this period of time. We can only see the average run of the price from the Open price, to the Close price.
The Bar chart and the Candle chart contain the full information about OHLC levels.
The Candle chart provides a much more visualy clear picture of price action in a given Timeframe. As we can clearly see, a Candle consists of three areas: the candle body (from Open to Close), the upper shadow, the lower shadow. From the structure of the candle, we read the Open price level, the High price level, the Low price level and the Close price level. In other words, we can see what the price was doing in the given Timeframe. We do not need to read the actual OHLC values, it is enough that we can see, that:
Ø At such and such hour, the price tested a higher level, but found some Resistance (High) and began falling (upper shadow).
Ø The price fell down to a certain level and found some Support (Low), and there it stopped falling further.
Ø The price turned back upwards somewhat and Closed at a lower level than the previous Candle (lower shadow).
Ø Thus, the trend in this period of time was Bearish.
In the exact same way, we can read each Candle, on every or any Timeframe chart.
Reading each Candle, one by one, we get the whole story, the history of the price. We see the price action. We are able to read the chart. All other indicators, suddenly, become useless, because we can read the chart itself, and we can see it all. Indicators which, in theory, are supposed to show trend, take their data directly from the charts, not from another source. Since we can, now, see it for ourselves on the chart, what do we need any indicators for?
Ø In the following hour, the price dropped some more, created a new Low level, and Closed lower than the preceding Candle, thus confirming the Bearish trend.
Ø In the hour after that, the price still dropped, created a new Low level, and Closed lower than the preceding Candle. However, we notice that the bodies of the last two Candles are much shorter than the body of the Candle we started with, so, obviously the trend is weaker, though still there.
Ø In the still next hour, the body of the Candle is even shorter and we can see the upper and lower shadows. Thus, the price tested a lower level, found Support, tested a higher level, found Resistance, Closed lower than the preceding Candle, so the trend is still Bearish, but the price is, obviously, consolidating.
Let us take a look, again, at the Candle we startet out with.
The High price level is the Resistance level for that hour – isn’t it?
The Low price level is the Support level for that hour – isn’t it?
Thus, what are the shadow areas of Candles, if not Resistance and Support Zones for the given period of time?
Following this trail, Resistance and Support Zones for a given Candle are nothing other than Price Consolidation Zones (equilibrium or balance of Buyers and Sellers) in a smaller period of time. There were still Buyers at the Open price, so the price went up. There were no more Buyers at the High price, and Sellers took over, so the price went down. There were no more Sellers at the Low price, and the price started to go up again. The price went up until the Close level, where, again, the Sellers took over. With the help of a simple MT4 tool, the rectangle, we can draw such Zones, and we see even more clearly what is going on, here!
We cannot see that on the linear chart. We can, on the Bar chart, but not as clearly.
Continuation in next post due to picture limitation per post.
All of my indicator-tools have been designed in order to assist the Forex Trader in the process of learning Price Action and
the Supply/Demand Trading concept on demo accounts.
Any other usage of these indicator-tools is solely at the risk and responsibility of the individual Trader.
As with any tool, the proper usage depends on proper training and experience.
Any tool can be used in the occasional amateur style, the proffesional skilled craftsmen style, or the artists style!
And, as with any other tool, it can be missused, as well.
It is the investor/trader who makes the final decisions and judges or diagnoses the potential,
and it is the investor who is the amateur, the proffesional skilled craftsman, or the artist!
Just like the manufacturers of the simple hammer can not take responsibility for the effects or damages
arrising from using their simple tool, the creator of the tools presented herein can not take any responsibility,
whatsoever, for the effects or damages arrising directly or indirectly from using theForex Trade Supporting tools.
Loss or Profit in Forex Trading is the sole responsibility and sole risk of the investor/trader, and has nothing to do,
whatsoever, with any available tool, indicator or other computer programme.
There are a number of different factors, other than the tools themselves, which lead to success or failure in any trade,
including Forex Trading. It is extremely important to understand, that it is the investor’s ability to make the right decisions
at the right moments which lead to success, and the tools, no matter how fantastic, are only the Supportive Aid,
and not the decisive factor.
It is strongly advisable to thoroughly learn Price Action in Day Trading by Dadas as explained in this thread,
before applying the tools to your charts and trying to use the concept.
Attached, some helping tools.