Lesson 26: Exotic Forex Charts

Today, we're going to explore some less common, or "exotic", chart types. These charts can offer unique insights that are not immediately apparent in the more traditional bar or line charts.

Point and Figure Charts

This type of chart is primarily concerned with price movements, not time or volume. A point and figure chart consists of columns of Xs and Os. An X column is used to represent a rising price, while an O column represents a falling price. The chart changes direction when the price moves by a certain amount, which you can set according to your preference.

This chart type can be particularly useful for identifying support and resistance levels, as the Xs and Os form clear patterns that highlight these areas.

Key Feature: Filters out market noise by focusing only on significant price movements.
Structure: Alternating columns of X's (upward price moves) and O's (downward price moves).
Box Size: The minimum price move required to add an X or an O. Typically set based on the average true range of the currency.
Reversal Amount: Usually two to four boxes. Indicates a change in market direction.

Uses in Trading

Support and Resistance Identification: Highly reliable due to noise filtering.
Pattern Recognition: Effective for spotting patterns like double tops/bottoms and triangles.
Timeframe Flexibility: Suitable for both long-term investing and short-term trading.

Renko Charts

Renko charts focus solely on price movement, disregarding time and volume. The word "Renko" comes from the Japanese word "renga", meaning "brick". In a Renko chart, a new "brick" is drawn in the chart only when the price moves by a predefined amount. These bricks can help you see trends more clearly by filtering out smaller price movements.

For instance, if you set a brick size to 10 pips, a new brick is drawn only when the price moves 10 pips up or down. This can help you focus on significant trends and filter out the "noise" of minor fluctuations.

Key Feature: Similar to P&F, Renko charts focus on significant price movements, filtering out minor fluctuations.
Brick Size: Set by the trader, indicating the minimum price move to add a new brick.
Brick Formation: A new brick is added when the price surpasses the previous brick by the set amount.

Uses in Trading

Trend Identification: The stair-like pattern helps in visualizing sustained trends.
Indicator Clarity: Indicators built on Renko charts tend to be cleaner and more straightforward.

Heikin-Ashi Charts

Heikin-Ashi, meaning "average bar" in Japanese, is a variation of the candlestick chart. These charts use average price data to create a smoother visual of the market trend. Each Heikin-Ashi candlestick is derived from the average of the open, close, high, and low prices of the previous candlestick. This smoothing technique can make it easier to identify trends and reversals.

For example, a series of bullish (upward) Heikin-Ashi candlesticks can indicate a strong uptrend, potentially signaling a good buying opportunity.

Key Feature: Uses averaging to form composite candlesticks, smoothing out price data.

Calculation

Close: Average of the open, high, low, and close.
Open: Average of the previous candle's open and close.
High/Low: Chosen from the highest/lowest of the current period's high/low, Heikin-Ashi open, or Heikin-Ashi close.

Candlestick Color: Reflects the relationship between the Heikin-Ashi open and close.
Uses in Trading

Trend Analysis: Long sequences of similar-colored candlesticks indicate a strong trend.
Pattern Recognition: Some traditional candlestick patterns like dojis and spinning tops remain valid.

Kagi Charts

Kagi charts ignore time and focus on price. They consist of a series of vertical lines that change direction when the price moves a certain amount, known as the reversal amount. The thickness of the lines also changes to indicate whether the market is controlled by buyers (thick line) or sellers (thin line).

A trader might use a Kagi chart to identify key turning points and resistance or support levels, which can be pivotal for making trading decisions.

Each of these exotic chart types offers a different way to view price movements.

Combining these charts with other indicators and analysis methods can enhance decision-making and improve trading strategies. Each chart type has its strengths and can be chosen based on the specific needs of your trading style and the characteristics of the currency pair you are trading. For instance, if you're looking for a clear view of long-term trends, P&F or Renko charts might be more suitable. On the other hand, for a smoothed-out perspective of current market movements, Heikin-Ashi charts can be quite effective.

Try incorporating these charts into your analysis and see how they can enhance your understanding of market dynamics.