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Lesson 7: Chart and Time Frame

Chart and Time Frame

Chart and Time FrameLet's continue our path, and after seeing some aspects of Forex, now we see how to represent the price of a currency pair. The two most used methods for representing the price of a market in general, are the price bar and the candlestick.

 

Price Bar

The price bar represents the range in which a currency pair has moved in a specific time-frame (you will see the time-frame in the following). You can see a price bar below

Bar

The small horizontal line on the left represents the opening price and the small horizontal line on the right represents the closing price. The high price is the highest point of the bar, and the low price is the lowest point. If the closing is above the opening, the price has risen; otherwise, the price has fallen in a given time-frame.

Particular combinations of two or more price bars, form patterns that are then used by traders to open long or short positions on a currency pair.

 

The Candlestick

The candlestick originates in the 18th century as a method to predict the price of rice. Its inventor, Menehisa Homma, earned a fortune with this type of graphic representation. As you can see in Figure 3 it is a system that gives us the same information as a price bar but at a much more immediate visual level.

Canflestick

Candlestick analysis can be used with other forms of technical analysis, in fact, often it can be useful for trying to interpret price developments better. In the candlestick, to represent the swing of the price in a time-frame, which can range from one minute up to a month, uses a figure called Candle-Line. It is formed by a central body called Real-Body, which indicates the rise or decrease in price between the opening and closing, and the Shadows, lines that represent the high and low prices of the chosen time-frame and called respectively Upper Shadow and Lower Shadow. As for the bar chart, the information that we get are the open, high, low, and close prices.

The body of the candle can be black or white: you have a black body when the close is below to open and then characterises a day with a negative trend, while a white body shows us a rising day with a closing price above the opening. Technically, the body is not coloured in white, but is simply blank, to facilitate the work of the computer.

This was one of the adaptations that have been used when exporting the theory to the West, in fact, the Japanese use red instead of white for the bullish days. Today they are used in addition to the colours black and white even green (bullish days) and red (bearish days).

As mentioned, this representation of the price is more immediate. The colour of the body makes us immediately understand whether the currency pair from opening to closing rose (white or green) or fallen (black or red). If the bullish traders have had the upper hand on the bearish ones or if the opposite occurred.

 

Charts

The chart in the Forex is the representation of prices of a currency pair in a specific time-frame: it can show, for example, the price trend of Usd-Cad over the course of a week, a month or a year. In principle, prices are shown on the ordinate axis, while the abscissa axis represents the time-frame.

EUR-USD Bar Chart

The relationship between supply and demand influences the change in price in a currency pair, as for any other market: the purpose of the chart is to help to forecast the future movements taking into account the past ones. The chart may concern short-term (on daily data) or long-term movements (on weekly or monthly data). The most common charts in the Forex are the bar chart (above) and the candlesticks chart (below).

EUR-USD Candlestick Chart

Another type of chart used by traders is the linear chart. It is the simplest type of chart; it is formed by connecting the points, which represent the closing prices of a currency pair, over a period of time, and represented by a homogeneous line. We use the closing prices as they are the most significant. Below, you can always see Eur-Usd but represented in a linear chart.

EUR-USD Line Chart

 

What does it mean “time frame”?

The term "time frame" means a period of time during which something has taken or will take place. When it is used in the Forex, it indicates the temporal setting that is intended to be assigned to a chart. Choosing the right time-frame is essential for technical analysis, both for beginners and professionals traders.

Different time-frames offer, of course, different interpretations; it is not possible to establish a priori if a time-frame is better than another because everything depends on the trading needs that you are managing.

For example, with a relatively reduced time-frame, we have the opportunity to verify what is happening on the market in the immediacy, but it is difficult to obtain a vision of the global situation, which derives from the use of a wider time-frame. To read the market conditions more comprehensively, then, we can refer to multiple time-frames, whose analysis is based on charts with different settings.

In principle, it can be said that a long-term trader will opt for a daily, weekly or even monthly chart, and then with a long-term time-frame, while a short-term trader will prefer an hourly or 4-hour chart.

Charts with even smaller time-frames, based on time intervals from one to fifteen minutes, will instead be preferred by intraday traders or "scalpers", as they have the advantage of more easily signalling the most suitable moments for entry.

In the next article, we will see some aspects of technical analysis.

 

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