Ask Price, Average Price, and Bid Price Line Charts

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If you are trading in the short-term only, you may only care about the three main prices – the ask price, the average price, and the bid price. You can view all three individual lines in a single chart by overlaying multiple lines in one chart and using a color scheme to identify the lines.

Sample chart – courtesy OANDA Corporation

Each change or “tick” in a chart is a reporting period and the details for that timeframe are displayed in the chart. You need to ensure that the reporting period you select matches your trading style – for instance, if you are engaged in short-term trading, you need frequent updates to help you identify opportunities that may be a swing of only a few pips. Thus, you need a frequency rate of five to ten seconds – anything greater makes it impossible for you to act in time to capture a price change.

Conversely, if you tend to hold open trades for longer periods, perhaps a frequency cycle of one minute or even longer will be more appropriate. Ultimately, you need a reporting frequency that provides you with the information you need.

1 Trend Lines

Trend Lines

Any decent charting application will allow for the drawing of trend lines. A trend line is simply a line that you can place along two or more price points in an attempt to identify support and resistance price levels.

Support	A support trend line is a line connecting the lowest price points for a time interval and shows the level at which the price drops, but ultimately bottoms out and then rebounds as the market supports the price level.
Resistance	The opposite of support; a resistance trend line connects the highest prices for a time interval. This is the point at which the market resists paying more and the price falls back below the resistance line.

By placing support and trend lines together on the same chart, you can quickly see the level at which the price has changed directions as well as the range (the high and low price differential) supported during the evaluation period. For example:

Sample chart – courtesy OANDA Corporation

While traders often develop their own methods of working with charts and trend lines, most will use trend lines to establish support and resistance levels. As a price hits what the trader feels to be an established support bottom, this signals a buy and hold opportunity that will remain in effect until the price nears resistance – if the price is already at the resistance level and is trending downwards, this signifies a short sell opportunity as you hope to buy the currency pair as the rate bottoms out near the support level. Trend lines are a widely-used to identify trends but be careful not to place too much faith in their prognostic abilities. They are a simple tool and their usefulness is very much dependant on the abilities of the trader placing the lines on the chart.

Bar Charts

Probably the most commonly-used technical chart – certainly by Western traders – are simple bar charts. Bar charts show the open and close prices for the reporting period, as well as the high and low prices for the period.

Sample Bar Chart – courtesy OANDA Corporation

How to Read

Each bar represents a single reporting period and includes the following information:

Period high is the top of the bar
Period low is the bottom of the bar
Period opening price is the left hash mark on the bar
Period closing price is the right hash mark on the bar

By combining all this information into one chart, it is possible to quickly evaluate the market direction for the currency pair. In the example above, you can see that the price has fluctuated somewhat but overall, is down over the past twenty-four hours.

Recognizing Bar Chart And Line Chart Patterns

Again, I must preface this by saying that what you are about to read here is but a very brief overview of the more common patterns and how they are interpreted. Chart analysis is a huge topic with many, many books and websites dedicated to the discipline and if I can offer a simple introduction that provides you with some background information that inspires you to study more on this fascinating topic, I will consider my work successful.

Reversal Pattern

As the name implies, a reversal pattern indicates that a trend is about to end and the rate is going to head in the opposite direction. Naturally, as rates change in an active market, there can be many reversals as rates bounce up and down (i.e. whipsaw) and this is where a trend line can help you see if a reversal is just an incidental rate change or if the trend really is reversing.

Continuation Pattern

A continuation pattern provides confirmation that a rate trend has formed and despite regular up and down movements, overall, the direction can be defined as having a definite direction. Again, trend lines can be very helpful in identifying continuation patterns.

Double Tops and Double Bottoms

Double tops and double bottoms are considered by many to be some of the most reliable patterns to indicate a rate reversal. Basically, whether a rate is trending upwards or trending downwards, a point will be reached that represents the high or low depending on the direction the rate is heading.

Double Top

When a rate reaches the highest point the market is willing to go, it typically falls back a little but if support remains strong, a follow-up rally creates a second or shadow at the rate – hence the double top. If the rally is to be extended, the second top should be higher than the previous, but if it falls short of the first top, this is often seen as a signal that a rate reversal is imminent, and traders holding long positions tend to sell in order to take profits before the rate falters.

Double Bottom

Basically the same as a double top but based on the low rate. Once a new low is reached, a flurry of buying often results as traders attempt to profit on an upswing resulting in a moderate spike. However, if this point truly is at the bottom of the support range, the rate will fall back to near the first bottom. Like any pattern, double tops and double bottoms may not form precisely equal tops and bottoms and the second top or bottom may not match the first level and this is often seen as confirming that the market direction is about to reverse. You can see both a double top and a double bottom in the following illustration – in the case of the double top, the reversal is quite dramatic:

Sample Chart – Courtesy OANDA Corporation

Head and Shoulders

The head and shoulders pattern is a powerful indicator of a rate reversal. It is signified by a peak, followed by a higher peak, and finally, a third peak – taken together these three elements form the classic head and shoulders pattern as typified by the image below:

Chart courtesy of OANDA Corporation

Also known as a triple top, this pattern occurs after rates have trended upwards and hit a high that the currency pair struggles to maintain, thus resulting in three “tops”. At the first shoulder, there is a slight correction, followed by a dip, and then a rally that hits a new high. This is followed by a second drop but the subsequent rally falls short of matching the previous high (i.e. the “head”) thereby forming the right shoulder. This is often seen as a sign that the market is not willing to support the rate and is about to drop.

When you see this pattern, you can draw a trend line across the two shoulders at the lowest point of the troughs formed by the shoulders. This trend line is known as the neckline and it often marks a new line of resistance. In some cases, the neckline will have a pronounced slope – a downward sloping neckline is considered the more reliable signal and indicates a definite weakness for the current rate.

Inverted Head and Shoulders

The classic head and shoulders pattern illustrated above indicates a rising price that is about to turn downwards but an inverted head and shoulders is just as effective for identifying an upward rate reversal.

Flags

A flag pattern is seen as an indicator that a trend reversal is about to take place. An ascending flag pattern consists of a sharp jump in the rate – this forms the flag pole – with a short period of fluctuating rates to form the flag. As the resistance level is reached, the rate retreats to a level considerably under that maintained by the flag thereby marking the end of the pattern.

Chart courtesy of OANDA Corporation

Flag Reversal Pattern

When the flag trends upwards it is referred to as a bear flag because the trend that follows is downwards or bearish. On the other hand, a flag that slopes downwards is known as a bull flag as the trend that emerges is typically a bullish trend.