Popular Forex Chart Types

Technical analysts commonly use a number of different types of price charts in order to review the price action of exchange rates for a certain currency pair.
They generally employ these charts to identify trends and other classic chart patterns. These reliable price patterns often allow technical analysts to forecast future exchange rate movements with impressive accuracy.
Although such charts were formerly drawn by hand on graph paper, today's forex traders often plot them using computers running special technical analysis software that incorporates historical exchange rate data for the currency pairs of interest.
Historical Data Commonly Kept for Charts
The historical data kept for displaying on forex charts drawn for a particular currency pair will generally include the following items for each time period made available for analysis:

• O = Opening price
  

• H = High price
  
• L = Low price
  
• C = Closing Price (or the Last Price for the most recent set)
  
• V = Volume or the number of trades occurring
  

Nevertheless, not all chart types require all of this data in their construction.
Also, many technical analysis systems compile information on the open interest in the relevant currency futures contract.
Popular Chart Types
Among the more common chart types used by technical analysts are the line charts, bar charts and candlestick charts. They all plot the rate on the vertical axis of the chart, with time plotted on the horizontal axis.
Nevertheless, time is not generally a factor in both tick charts and the point and figure charts used by many professional forex traders.
These chart types are described further as follows:

• Line Chart:
  

As the name implies, this simple chart type just draws straight lines from a particular price - usually the closing price- to the same price of the following time period. Such charts are often used to help identify trends.

• Bar Chart:
  

Bar charts consist of a set of bars or vertical lines drawn from the high price for a given time period to the low price for that same period. Each bar also has a small horizontal line or tick to the left at the level of the opening price for that time period, as well as a tick to the right at the level of the closing price.

• Candlestick Chart:
  

This type of chart consist of a series of candles that have a solid body that is drawn from the opening price to the closing price and then filled in with a different color - usually either black and white or red and green - depending on whether it was a down or up period. The candle also has upper and lower wicks that consist of vertical lines which respectively extend up from the body to the high and down from the body to the low

• Point and Figure Chart:
  

Point and figure charts focus exclusively on price and they notably lack a fixed time component. They have a box size that results in the next box on the chart being filled in when the price moves a certain amount in the same direction. Traders generally place an X in the box in the case of an upward move or an O in the case of a downward move. They also only switch from X's to O's when the price reverses more than a certain amount, usually three boxes worth.

• Tick Chart:
  

These charts usually plot a new tick or change in the price after a set number of trades, and they are often used by short term traders in conjunction with volume charts or by longer term traders to time their entry into the market. This type of chart generally does not have a fixed time component, although it does naturally progress over time.

Using the COT Reports to Predict Forex Price Movements

Before examining the COT reports and a few ways of using them, let us note two important details:

• One of the major problems with the forex market is the lack of a volume indicator. Since there is no forex exchange such as the Nikkei or the NYSE, volume statistics on the entire market are not available. The COT report, tracking the currency and commodity futures allocations of the major speculators and commercial hedgers, is an excellent substitute for the volume indicator, and it should therefore be an inseparable item of any technical trading scheme.
• The other point which we would like to emphasize is the lagged nature of the report. As it updates us on positions of the past week, it is a lot more valuable as a long-term indicator, with periods of weeks, rather than days being the field of its measurements.

The COT (commitment of traders) is a report issued by CFTC to update the public on the futures positioning of traders in commodities markets. In the US most futures trading takes place in Chicago and New York, and the institutions covered by the report are heavily concentrated in these locations.
Let’s examine the body of a COT report.
EURO FX - CHICAGO MERCANTILE EXCHANGE Code-099741 FUTURES ONLY POSITIONS AS OF 03/17/09 | --------------------------------------------------------------| NONREPORTABLE NON-COMMERCIAL | COMMERCIAL | TOTAL | POSITIONS --------------------------|-----------------|-----------------|----------------- LONG | SHORT |SPREADS | LONG | SHORT | LONG | SHORT | LONG | SHORT -------------------------------------------------------------------------------- (CONTRACTS OF EUR 125,000) OPEN INTEREST: 111,077 COMMITMENTS 33,657 42,696 548 37,055 34,864 71,260 78,108 39,817 32,969 CHANGES FROM 03/10/09 (CHANGE IN OPEN INTEREST: -69,201) -273 -1,466 -1,371 -67,685 -64,551 -69,329 -67,388 128 -1,813 PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS 30.3 38.4 0.5 33.4 31.4 64.2 70.3 35.8 29.7 NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 99) 38 30 7 19 17 60 51
Open interest describes the amount of open futures contracts that are being held. In other words, it is the total volume of open contracts in the market, but not the transactions.
Reportable positions are the positions held by institutions that meet the reporting requirement of the CFTC. These are the major players in the CBOT, and their choices are usually backed by hordes of analysts and their studies.
Non-reportable positions cover everyone who do not suit the above criteria, and they are also termed small speculators. Of reportable positions, non-commercial includes all actors who do not possess any interest in making use of the underlying currency or commodity, such as hedge funds, brokerage firms, investment banks and other related firms. Commercial open interest is created by firms that have the desire to receive or deliver the underlying. Thus the roles played by the two categories of traders is quite different.
Spreading covers those trades who hold an equal number of long-short positions on the future contracts.
The report provides data on the percentage of long or short contracts to the total, on the number of traders in all three categories with positions on a currency, and finally the changes in open interest in comparison with the previous reporting period.
Over the years the COT report has become quite a popular tool for all kinds of traders. Here are a number of ways of exploiting the data provided by the COT report.

1. Creating a currency portfolio based on the COT report positioning.

We can use the COT report data to create a diversified currency portfolio. By examining the COT report, we can have a good idea of the attitude of major traders toward the USD, but to make real use of the the data we must create a portfolio of currency pairs, such as AUD/USD, EUR/USD, USD/JPY. Since the market can be, overall, long the USD, but can be short the USD against one or more currencies, we do not want to be caught holding a pair in which the USD will lose value, while the COT is still long. Let us now suppose that the non-commercial sector is overall long the USD in our example.
What should be the criteria in deciding the currency pairs that will be included in our portfolio in such a situation? In general, it’s a good idea to make our portfolio interest-neutral, so as to express in our currency allocations our USD-positive idea, while declining to say much about the currencies we will short.
For instance, we will short AUD/USD and EUR/USD (and the carry is negative) and long USD/JPY and then we will manage our currency pair ratios in such a way that the total interest received will not exceed the Fed rate. Why do we do this? Because all we want to do is to gain from the appreciation of the USD while limiting the volatility caused by the carry trade. By making our position interest-neutral, we will, we expect, be able to ride through such disruptions. This will reduce the volatility of our portfolio, and will also reduce the potential return from our investment, but it does create a longer-lasting, more resilient position.
Another, but much riskier way to create our COT-report based portfolio would be to simply long what the commercial sector is long, and to short the commodity or currency in which the non-commercial traders are long. Thus, for instance, if the commercial sector is long the EUR, and the speculative sector is long the AUD, the trader would simply arrange his portfolio to reflect the market’s choice by assigning a large part to EUR/AUD. And one can go on with this method, to create an interest-neutral portfolio in the previously described way, thereby limiting the volatility of the position, and ensuring a more successful long-term strategy.

2. Exploiting reversals in positioning to create a portfolio

It’s also possible to arrange the above mentioned portfolios to profit from trend reversals as signaled by COT reports, but we caution against this method, unless the trader carefully hedges his position by trading uncorrelated(or negatively correlated) pairs. Correlations statistics of currency pairs are available from most major forex brokers.
It is nonetheless true that major changes in the strength of a trend, or its reversal on a permanent basis, are indeed noted by changes in open interest, and institutional positioning. Our only suggestion is that the trader be aware of the potential of false signals, and, as per the usual principle, avoid trying too hard to catch bottoms and tops.

3. Using the COT report as a long term volume indicator

An exceptionally useful and prudent use of the COT report is regarding it as a volume complement to the price studies generated by conventional technical analysis. The trader can simply refuse to act when a technical signal fails to be confirmed by a similar movement (signaled in increasing open interest) in the COT report. For an uptrend, he would expect a corresponding rise in open interest, and for a down trend, a corresponding fall. It is also possible to devise indicators for this purpose, and MACD, Williams Oscillator, or Stochastics can all be drawn on the COT report data.
This approach is akin to using volume and price data simultaneously while exploring stock market charts, and those with experience in that field will easily grasp the importance of the COT report. Nonetheless, those with little knowledge of other markets can still greatly benefit from its utilization, especially when trading on a purely technical basis.

4. Using flips in positioning to predict market reversals

In the sample COT chart above, non-commercial net positioning for Euro is short, since 38 percent of traders are holding short positions, while thirty percent hold longs. One way of exploiting this segment of the COT report is by taking note when net positioning switches from long to short and vice versa, and predicting forex market reversals on that basis. In the above example, when net positioning of the non-commercial sector switches to long, we would use the development as a signal for buying euros, coupled with some input from other sources of technical analysis.
While this method can produce results that are much more reliable than those generated by pure technical analysis, the trader should still be aware of whipsaws and unpredictable spikes and collapses that can sometimes arise. Percentage values are easier to recognize, and are easier for recognizing position flips.

5. Using extreme positioning to gauge market exhaustion

Comparing long or short positioning with historical extremes can also be beneficial in identifying market extremums. Experience shows that there are absolute values which indicate a bought-out, or sold-out currency, and as the COT positioning hits these values, there’s a significant chance of a rapid reversal.
Extremums can also be termed bubbles, as they characterize a market that is already in an unsustainable phase of rise or fall. The problem with this method lies in the fact that it’s always hard to pick up tops and bottoms: there’s no reason to expect that positioning cannot exceed a previously registered high, before collapsing. Still, if one has the determination and the resilience, extremums reported by the COT report have much greater value than that reported by price based technical analysis.
It is possible to confirm the absolute extremes on the COT report with extremes on moving averages or oscillators on the price chart.

Summary

The COT report is a very useful tool which can be substituted for the volume indicators of stocks analysis. Absolute long and short positioning and historical comparisons can be useful for identifying market extremes. Percentage changes in open interest can be valuable in noting position flips and predicting market reversals in the medium term. If there ever were an ultimate technical indicator, its seekers have their greatest luck in COT data. But the old advice on not putting all eggs in the same basket is still valid: it’s better to confirm signals from the COT report with data from other aspects of TA, and of course fundamental analysis, before reaching decisions.

Trading Managed Currencies - Exploiting Central Bank Policies to Make a Profit

Managed currencies are those such as the Singapore and Hong Kong dollars, the Chinese yuan, the Russian ruble, where the Central bank doesn’t control the day-to-day fluctuations of the currency, but attempts to manage the direction of the trend by periodical interventions. The interventions are usually formulated through a floating or fixed currency band where the price is allowed to move within a range around a central point which are both set by the Central bank. Usually, only those central banks or monetary institutions with a significant reserve accumulation can aim to manage their currencies effectively, as countering the actions of the market can be costly.
The midpoint and the percentile range within which the price moves are sometimes held as a secret by central banks, and sometimes they are public. It is also possible that the central bank possesses no solid numerical long-term plan for the price range, but moves as the fundamental data flow and the political authority dictate. The policy choice is a secret in the case Singapore, is open in the case of the Hong Kong dollar and is partially public according to data in the cases of both the ruble and the yuan.
Before further explanation, let us say that the predictive power of government policies tends to diminish during periods of volatility and economic turmoil. Central banks are not run by wizards with crystal balls, and usually they do not possess confidence or willpower greater than that possessed by the experienced trader. As a result, policy errors, zigzagging, and conflicting signals generate a lot of noise through which the trader must wade his way to success.
The word “managed” in the phrase managed currency encapsulates the core of our strategy in trading currencies in this section of the market. The authorities make a commitment not to allow their currencies to move beyond the limits of a band, and they are ready to intervene when such a movement occurs as a result of chaotic market action. And, to the further benefit of the trader, newspapers, forex websites, and forex market news providers all declare the presence of central bank authorities when they do intervene. In many cases, the central banks also encourage the publication of their presence as they seek to intimidate and discourage those who want to counteract their policies. All that the trader would have to do to profit from such interventions is noting the direction of the intervention, and acting in accordance with it. Thus when we know that the technical indicators are showing extreme values (for instance RSI is at 20 or 80), there’s news flow speaking of intervention, and the central bank has already made its intention to prevent extreme price fluctuations clear, the trader can, with great confidence, make a counter-trend move with a reasonable stop-loss order, and expect to return a meaningful profit. This is a proven and well known method, with very high odds of success.
The behavior of the Monetary Authority of Singapore between October 2007 and April 2008 provides countless profitable examples for this method. In many cases where the RSI registered extreme values, the MAS would intervene, and as traders used the opportunity to pile in, large amounts of profits were made. Counter-trend interventions by MAS were usually easily detectable because of the very large movements in spot within seconds, and they were also noted by Bloomberg and financial news providers.
Conversely, between November 2007 and April-May 2008, the People’s Bank of China allowed the yuan to appreciate in a very regular, and predictable fashion, providing currency traders with a unique opportunity to register risk free profits. Because the central bank manages volatility in a punctual and strict fashion, the risk of any significant reversal was almost non-existent, and policy direction was communicated clearly and decisively by the chief of the institution.
Where do the pitfalls of this method lie? Obviously, the first and foremost obstacle to the success of a central bank is insufficient reserves, or lack of political will. Usually, a central bank will do all that is in its power to ensure credibility but if the market does not find its declarations credible, it has the power to invalidate the schemes of the institution. Similarly, markets are quick to punish those nations where financial policies are and improvised and revised in response to temporary developments. In spite of all this, given the very high level of uncertainty that the forex trader must be used to live with, following interventionist central banks can be a relaxing experience.
Currency interventions are especially difficult when they occur on an isolated basis against prevailing market conditions with insufficient reserves. Given how liquid and vast the forex market is, only exceptionally reserve-rich nations, like China or Singapore, or those with little need of external financing, like Saudi Arabia, can be confident that they have the clout to make their interventions work. On the other hand, markets treat those few Central Banks with respect, and they are unlikely to suffer from short term shocks, and their interventions and currency policies have credibility that is not found in other, less financially sound nations.
To repeat, managed currencies can be a source of great profit if they are traded with patience and consistency. The risks involved are usually much lower than those faced when trading floating currencies, with the one caveat that currency crises can quickly wipe out the gains of a long-time if the trader is not sensible with his stop-losses. The principles of sound money management, and low leverage are still valid when trading this type of market. One should avoid bubbles, and it’s not a good idea to chase excessive price movements, especially because the managed currencies tend to absorb a lot of tension by resisting market pressure, and if they break, the reactions can be very violent and fearsome.
We strongly advise the trader to concentrate on one or two managed currencies, if that is the method he would like to employ, to absorb the policy choices and principles of the Central Bank in question, and act in accordance with global developments. The transparency and independence of the Central Bank are both exceptionally important, because we would not want our guiding institution to zigzag or bow to political power, in essence invalidating its statements and policy declarations. Singapore and HK are good choices to begin trading this method.
Here is a list of some currencies with their Central Banks and their policy preferences.
USD/SGD: Controlled by the Monetary Authority of Singapore, this pair is one of the more predictable and easier for those who prefer this forex strategy. Because of the status of Singapore as an importer of necessities like food, the monetary authority of Singapore aims to control inflation through the currency rate, and its policies are regularly and clearly communicated at its website.
USD/CNY: Controlled by the People’s Bank of China, the yuan’s value depends on two important factors: the trade surplus of China versus the Euroland and the United States, and the unemployment situation of China’s rural regions. The central bank does not zigzag, however it’s policies are greatly influenced by the supreme leadership of the nation and their relations with the US government. PBoC allows the yuan to appreciate at times of economic boom and inflation, and generally holds it stable during recessions and economic turmoil.
USD/HKD: The HKD is pegged to the US currency at 7.8, but is allowed in a band of 7.75 to 7.85. Hong Kong’s economic policies are influenced greatly by developments in mainland China, but the nation has a currency board policy, and is mostly independent in its policy choices. The nature of the peg suggests an almost risk free trade in buying the HKD at 7.75 and selling it as it appreciates.
USD/RUB: The ruble is managed by the Central Bank of the Russian Federation. Its policy choices are determined by Russia’s external balance, and the price of oil and other commodities.