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Task №3. Types of trends, charts, and rules of plotting charts. Long positions. Short positions.

Every trader is curious about one question: How to make money trading on Forex or any other market?

As a rule, prices do not stand still. In our everyday life we often watch a price for a certain product increasing, decreasing or remaining at the same level with minor fluctuations now and then. These movements can be defined as trends, which in their turn are divided into several types. When the price is increasing, it is an upward trend, when it is decreasing the trend is downward. If the price is steady we are talking about sideways movement. The above-mentioned price behavior is exactly what gives you an opportunity to make gains.

What should you do to make a profit from a price increase? First of all, you should buy a financial instrument, or an asset, which is rising in value. Later, when its price increases, you should sell it. The difference is your profit. If an asset has already started to fall in value, you should get rid of it as soon as possible and sell the asset at a higher price. Afterwards, you may buy it again when the price is lower.

How to sell something you do not have? This is a more difficult question which takes a special approach. We will definitely revert to it in the following tasks. Now let us consider the actions which have already been mentioned. The buying of an asset succeeded by its further sale is called long position, while the initial sale of an asset with the following purchase is called short position.

We hope that you had read carefully the user guide when you installed the MetaTrader platform. Now we are going to run this software to study the material more thoroughly and pick up some practical skills.

Open the program and choose a chart window. It is not of major importance which one you choose.

Figure 1 shows a gradually ascending line. The movement is not unidirectional because of continuous ups and downs, although in general it is directed upwards. In the example under consideration the chart illustrates the price movement of the USD/JPY currency pair. Before June 15, a US dollar traded at 117.85 yen while on August 3, it was worth 120.45 yen. It means that an upward trend is prevailing. In financial circles it is commonly referred to as bullish. Thus, you should buy the US dollars for the yen, or go long the US dollars, in order to make profit. Let us make some calculations. If you buy one US dollar for 117.85 yen and then sell it at 120.45, the difference will be 2.6 yen, or 0.02 dollars. The figures may not be impressive, but suppose that the trade volume amounted to $100,000, the overall picture is way better. The profit of $2,000 in 18 days is a positive achievement and equals to 40.5% of an annual interest. No bank in the world provides such a high return to investors.

We can see a completely different scenario on Figure 2. The line reflecting the price movement of the US dollar against the Japanese yen is going down. This movement is not unidirectional as well because there is a series of ups and downs. However, the overall trend is downward, or bearish. You should sell the US dollars for yen, or go short the US dollar, in order to gain profit.

Figure 3. The line on the chart changes its direction successively in a narrow range between 118.10 and 116.70. This kind of movement is called sideways, or flat. In this case you can vary your strategy, shifting from long to short positions.

Moving over time, the price registers different points in a certain time frame. The time frame can range from one minute to one month. The key points are opening price, high, low, and closing price.

Opening price is the first price of an asset in the current period (hour, day, week, month).

A High is the highest price of an asset in a particular time frame.

A Low is the lowest price of an asset in a certain time frame.

Closing price is a final price of an asset in the current period. This figure is most frequently used in analysis and is considered to be of the greatest importance.

There are many different ways to plot price movements on a chart. We offer you three most widespread methods.

Line chart

A line chart represents a sequential connection of closing prices over a certain trading period. Therefore, the line illustrates the price movement of a currency pair in a set time frame. For example, it can be one-minute chart (M1), five-minute chart (M5), fifteen-minute chart (M15), and so on. This is the roughest type of depicting a price movement because it is formed only by taking into account the closing prices while other prices are not considered. Line charts are commonly used to identify general trends for a given time frame. It is not very useful for trading.

Bar chart

A bar chart, which is also called an OHLC chart, is way more complex than the previous one. It includes all points of a price dynamic, in particular an opening price, high, low, and closing price. The bottom of the vertical line represents the lowest price over a set period of time while the top indicates the highest price. Opening and closing prices are shown as the horizontal lines on the left and on the right side of the bar, respectively.
Many western technical analysts pay special attention to this type of charts and use it to estimate securities and other financial instruments. A bar chart of a price movement is very useful for developing a consistent concept of analysis, like price action, which is based on price formations most easily distinguished on this type of charts.

Japanese Candlestick Chart

A candlestick chart displays the same price characteristics as a bar chart, i.e. an opening and closing price, high and low. However, unlike the previous type of charts, it shows the relationship between opening and closing price in a more illustrative way. A thin shadow of a Japanese candlestick represents the highest and the lowest prices that correspond to a vertical line on a bar chart. The main difference between them lies in a wide unit in the center. This part of the chart is called the real body of the candlestick and it demonstrates the correlation between opening and closing prices. When the body of the candlestick is dark, or just filled, it means that the closing price is lower than the opening price, so the trading session closed down. When the real body is light, then the closing price is higher than the opening price, meaning that the trading session closed up. Candlestick charts do not require any complex calculations, they are most easy-lo-use for analysis because of the different colors. Besides, they give ample room for analysis and allow traders to identify market sentiment as well as recognize patterns to open and close deals. The Japanese candlestick chart provides an opportunity to make profitable trades due to the data it shows. That is why this type of charts gained the most popularity among traders.

Helpful information for users of MetaTrader trading platform from InstaForex.

A particular feature of our platform is that in a situation when a closing price is higher than an opening price, the candlestick is hollow. At the same time, when the closing price is lower, the candlestick is filled white.
We take these things into account while describing candlesticks in this training course. So, we indicate the content of a candlestick (hollow or filled) as well as the color.
The default background is black.

Questions for revision
  1. Long and short positions, meaning. What are the main features and advantages of these strategies?
  2. What types of price trends are there?
  3. What is the difference between the Japanese candlestick and bar charts?

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