One of the pivotal instruments of technical analysis in Forex trading is the bar chart and when utilized correctly, this ambiguous tool can help define trend lines, turning points, and support and resistance levels. Even though this type of chart isn’t as comprehensive as a candlestick chart, and it can’t accurately forecast price movements, it does provide meaningful insights into a better understanding of general market movements. EuropeFX explains the mere basics of bar charts and what they signify on screen.
- Defining a Bar
A bar chart puts together vertical bars arranged in such a way to depict currency trading ranges for different timeframes – hourly, daily, weekly and monthly. The supply and demand for a particular currency are affected by economic pressures depicted as rising or falling bars. The top of the bar signifies the highest price reached during that period for the said currency, and the lowest point depicts the end of the range. If you look closely, there is also a small tick on the left of each bar which indicates the opening price, whereas a tick on the right represents the closing price of a currency. Some models even include colors that show if the currency rose or fell in the chosen time period. In the most common cases, black bars mean a rising price, while red bars indicate a declining price.
The idea behind analyzing charts is based on predictable and recurring patterns made by currencies. Trends can be identified visually and in order to spot an ascending trend on the screen correctly, you need to see three aligned peaks on the rise. If you happen to notice falling prices, that can be identified as a downward trend – marking a line that connects three or more falling lows.
Once you’ve learned how to spot a trend on the bar chart, the next crucial step is to detect the end of a trend, given that this signals if you have a buying or selling opportunity. Two existing patterns signify reversals, with inversing tops and bottoms. When an ascending trend peaks, a reversal trend is called a double peak and on the chart, this pattern is shaped like the letter M. What happens is that the price rises, then falls back, and then rises once again to the previous high before it falls back again, starting a downtrend. One other reversal pattern is called the head and shoulders and this pattern signifies a currency price rising, retrieving, rising to a higher level, retrieving, and then finally rising to the level of the initial high before starting a downtrend. A reversing pattern at the end of a trend is just the opposite – the aforementioned M is now a W, and the head and shoulders pattern is now inverted.
- Support and Resistance
Resistance is defined as a price level at which a certain currency has trouble breaking through when an uptrend occurs, whereas support is a price that a declining stock doesn’t cross. A bar chart clearly shows support and resistance levels, places where a currency can’t seem to break through the ceiling (resistance) or bounce of the floor (support). These price levels can represent buy or sell signals, depending on your position in a currency trade. Before using real money, EuropeFX advises practicing with paper trades or a demo account, until you gain enough confidence in reading and understanding bar charts.