Top Trading Strategies: Understand Chart Types & Indicators

Market psychology is one element of trading that shouldn’t be missing at any point, mainly because it gives an insight into what people are thinking and the supply and demand of assets in the market. Technical indicators and charts are what traders use to understand this psychology and get closure into the past and present happenings in the market. Having the right set of these tools in your arsenal could be a game changer, as it positions you for better profitability. This article explains how chart types and indicators work and how traders can use them for optimized trading strategies.

Price charts are one of the first tools every trader is introduced to in technical analysis. They are visual representations of price movements and performances over certain periods. They analyze and display all trading activities carried out within a single period. Changes and fluctuations in the foreign exchange (forex or FX) market are usually constant, so traders have employed tools like charts to trace these variations. It gets easier when investors explore MT4 trading to easily access these tools. Typically, these charts display the period on the x-axis and, on the other hand, show traders’ exchange rates on the y-axis. The three most popular price chart types are line, bar, and candlestick.

Line

Line charts are the simplest to read. They draw a simple line from one closing price to the next. When you join these lines, seeing and analyzing assets’ varying closing prices is easy. However, the drawback of using this is that traders do not get any other information on the currency’s directions. Line charts might be the appropriate tool for traders more interested in the closing level of the asset.

 

Bar

This one takes a step further in terms of offerings and complexity. Bar charts don’t only show the highs, but they display the lows as well. That is, traders get to analyze both the opening and closing positions of the currency pair. The vertical line on the bar displays the highs and lows of a currency, while the horizontal bars tick to the left and right, showing the opening and closing, respectively. If the closing price exceeds the opening price, it translates to bullish momentum. Conversely, the opposite of this shows red, indicating a bearish sentiment.

 

Candlesticks

The candlestick is like the bar chart and displays the same information. The significant difference here is how it is represented. Charts on candlesticks are shown as a graph, making it even easier to read. They also display highs and lows on an asset with a vertical line. The large blocks in the middle indicate the opening and closing. If the price closes higher than it opened, the body will be green, indicating a bullish trend. On the other hand, the body shows red if the price closes lower than it opened.

Green candlesticks represent a bullish momentum, and a red one represents a bearish sentiment. For instance, an investor trading Apple stocks notices that a candlestick shows an opening price of $126. On checking the closing price with the scale on the right, if he notices this same stock has a higher rate of $130. Then, such a candlestick pattern represents an appreciation in price and a bullish position. If it had shown a higher opening balance and a lower closing price, the body would be red, indicating a bearish pattern. Traders can check these patterns and price movements based on daily, weekly, and hourly changes. All you have to do is adjust the time frame in the chart’s upper left corner.

Technical indicators are another category of tools that traders use to gain insight into the supply and demand of an asset in the market. These indicators are not strategies; however, combining the right ones would give you a solid strategy for carrying out your trades. Here are some of the best indicators to add to your toolkit.

Relative Strength Index (RSI)

RSI helps traders gauge momentum and trend strength in a currency. One of the most basic uses of this is as an overbought and oversold indicator. When the RSI goes above 70, traders interpret that this asset could be considered overbought and pull out of the trade. If the RSI goes below 30, then this signifies that that asset is oversold and could possibly rally. To calculate the RSI, traders have to come to the end of the asset’s time frame. After this, sum up the average gains within the selected time frame and divide this value by the addition of the average losses. Another everyday use of RSI is support and resistance level.

 

Stochastic Oscillator

This one is used to weigh the current price of an asset in relation to its price range over a growing period. Ranging between 0 and 100, the idea is that the stochastic stays close to zero at the point of new lows and approaches 100 at the stage of new highs. When it reaches around 80 and above, that tells you that this asset is being overbought. Such positioning could be an excellent time to go short because it shows that the sellers are about to take over the market.

When the stochastic reaches below 20, it shows the oversold points in the market and could be an excellent time to go long on the asset. However, it is noteworthy that no technical indicators always work perfectly, and these signals might not be 100% accurate in most circumstances. It takes additional skills and risk-taking when the signals are not direct to make some decisions and be profitable in the trade.

 

Moving Average Convergence Divergence (MACD)

MACD helps traders get a holistic view of an asset’s trend direction and momentum, as it measures the relationship between 2 moving averages. The MACD line is deduced by calculating the differences between the long-term 26-period EMA (Exponential Moving Average) and the short-term 12-period EMA. These moving averages are significant in recent price changes, and the MACD shows the differences in these positions. MACD has a positive value when the short-term EMA is above the long-term EMA and a negative value when it is the opposite of this.

It also gives traders signals on whether to buy or sell based on the momentum of the investment. The indicator also comes with a signal line. The signal line is a 9-period EMA on the MACD charts. That is, a 9-day EMA for daily and a 9-hour EMA for hourly charts. This line is a trigger line for buy and sell signals. If the MACD goes below the signal line, it indicates a price decline, which means to sell, but if it goes above, it shows that the asset is gaining, which means to buy. For example, let’s say the Apple Stock we used earlier happens to be taking a downward momentum on today’s trade, but the MACD line suddenly crosses above the signal lines, indicating a positive change in direction and momentum. This could be a sign to buy the stock as it is reversing its downward positioning to an upward one.

MACD indicators can be applied to any timeframe, from minute to monthly charts. This makes it ideal for several types of traders: swing, intraday, and positional.

 

Bollinger Bands

Bollinger bands were created to help traders see a market’s potential highs and lows in relation to its moving averages. This way, they can measure the potential volatility of the asset and put a tab on when the trends may continue or relapse. Bollinger bands are envelopes plotted two standard deviations from a simple moving average. The bands are placed above the moving average and below to adjust consequently to the volatility swing of the asset. During highly volatile periods, traders will see these bands widen and contract during non-volatile times.

The band contracts and expands based on these assets’ volatility and price changes within 20 days. The move towards each band could signal a trader to buy or sell an investment. For example, if an investor trading the euro market notices that the price started approaching the upper hand, they could take that as an indicator that the market is overbought and a price decline could be looming ahead. On the flip side, if the price leans toward the lower band, it could be a sign that the market is oversold.

Forex charting and indicators work hand in hand and can help you explore that extra advantage needed to stand out. Most charts in forex trading platforms have customizable settings that allow you to use these indicators. It can help you explore trading volume, prices, and open interest in security or assets. Active and expert traders have developed easy ways to use these tools conjunctively to optimize their strategies. You can also do the same if you want to expand your profit potential as a forex trader.