Why Chart Reading Matters
Price charts are the primary tool for technical traders. They compress thousands of transactions into a visual representation of market behaviour, allowing traders to identify patterns, assess momentum, and make probabilistic decisions about future price movement.
The Candlestick Chart
The candlestick chart is the most widely used chart type among professional forex traders. Each candle represents a specific time period (1 minute, 1 hour, 1 day, etc.) and displays four data points:
- Open: The price at the start of the period
- Close: The price at the end of the period
- High: The highest price reached during the period
- Low: The lowest price reached during the period
Key Candlestick Patterns
Doji: When open and close are nearly equal, creating a cross shape. Signals indecision — neither buyers nor sellers are in control.
Hammer: A small body with a long lower wick, appearing at the bottom of a downtrend. Suggests buyers stepped in and rejected lower prices — potential reversal signal.
Engulfing: A candle whose body completely engulfs the previous candle's body. A bullish engulfing at support suggests buying pressure is overwhelming selling pressure.
Shooting Star: Small body at the bottom, long upper wick. Appears at the top of uptrends — sellers rejected higher prices.
Support and Resistance
Support is a price level where buying pressure has historically prevented further decline. When price falls to support, buyers step in — it acts as a floor.
Resistance is the opposite — a ceiling where selling pressure has historically prevented further advance.
These levels form because market participants remember previous price reactions and anticipate the same reaction recurring. The more times a level has held, the more significant it becomes.
Key tip: When support breaks, it often becomes resistance. When resistance breaks, it often becomes support. This is called a role reversal.
Trend Lines
A trend line connects two or more price highs (in a downtrend) or two or more price lows (in an uptrend). The more times price touches the line without breaking it, the more significant the line becomes.
In an uptrend, price makes higher highs and higher lows. Buying near the trend line (with a stop below it) offers a favourable risk/reward opportunity.
Moving Averages
Moving averages smooth out price data to identify trend direction. The 50-period and 200-period moving averages are the most widely watched.
When the 50-period MA crosses above the 200-period MA (the "golden cross"), it signals potential bullish momentum. The reverse — the "death cross" — signals potential bearish momentum.
Putting It Together
No single pattern or indicator works in isolation. Professional traders combine:
- Chart patterns for context
- Support/resistance for entry and exit levels
- Moving averages for trend direction
- Volume (where available) for confirmation