If you are new to forex trading, you have probably noticed all of the charts that dominated forex trading platforms and forex news sites. While these might seem complicated at first, they are designed so that anyone can make sense of them.
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You cannot have a successful and considered forex trading strategy without a proper understanding of how to read a forex chart, and what exactly a forex chart is telling you. Fortunately, we have got you covered.
This quick and simple guide will show you exactly how you can make sense of your forex charts to make smarter, more informed trades. We'll use real examples of various types of forex charts to break down how you can get the most value out of this essential trading resource. Read on to find out more.
Put simply, a forex chart is a chart or a graph that shows how the exchange rate of a currency pair, such as USD/EUR, has fluctuated and changed over time. It will usually show the historical exchange rate of a forex pair within a given time rate.
This time rate could be as short as the past ten minutes, or as long as the past ten years. It will also show the highs and lows of the price within fixed time slots, often given in pips (more on that later). Many forex charts are also live charts, meaning that you can use them to see the real-time price of a forex pair and watch how that price will fluctuate over time.
As a successful forex trader, being able to analyze those inter-day price fluctuations will help you predict future changes and time your buy and sell orders accordingly. A forex chart is your most important resource when it comes to understanding the relationship between two currencies and how you can make a profit from trading currency pairs on the global marketplace.
A typical forex chart tells you so much more than just the current and previous price of a currency pair, although this will form the basis of the chart. The chart will always have the time period on the x-axis, and the price differential on the y-axis. Usually, you will be able to zoom in to the chart to view a briefer period of time or zoom out to view a longer historical price relationship between a currency pair.
The y-axis will list different "pips", or price points, from top to bottom. For example, a GBP/EUR ten-year forex chart would likely have a pip range from 1.45 to 1.00, as this is the general price range demonstrated for this pair over the past decade. Meanwhile, a 24-hour GBP/EUR forex chart would have a pip range that is more detailed and has lower pips, such as 1.18000 to 1.13000. Pips are simply the unit of measurement for the price movement of a currency pair.
The bars or lines on the chart might also be coloured red or green, to indicate whether the currency pair price is higher or lower than when trading opened, or when you personally opened your position. By using a detailed live chart you can detect the early stages of price movements and buy or sell accordingly.
By zooming out and taking the longer view, you can identify patterns in currency pair prices that can help inform your trading strategy. For example, you might see a 10-year chart for USD/JPY in which it is clear that the value of the Yen to the Dollar falls every time the BOJ cuts interest rates. Being able to identify patterns and correlations such as this is absolutely crucial for profitable forex trading.
No matter what forex trading platform or broker that you use, you will be exposed to various different types of forex trading charts. None of these are inherently better than the other, and all are used every single day by top traders in Wall Street and the City of London.
However, you might find that one particular type of forex chart is easier to read than another. Let's go through the main types of forex charts so that we can better understand the benefits of each.
A line chart is by far the simplest of all forex charts out there. As you probably guessed, it is a basic line graph, one that only plots the closing price of a currency pair from one day to the next.
In forex trading, a line chart is better for those who are trying to get an idea of the bigger picture. They will not tell you anything about how a forex pair changes throughout the trading day, therefore they are ideal for those trying to get a comprehensive view of the historical relationship between two currencies.
A line chart does not have the same level of detail as some other types of charts and is, therefore, easier to read. The x-axis will show each day, week, or month that the line represents, while the y-axis will represent the closing prices. Each connecting point in the line represents the price at which a particular currency pair closed on that day.
Simply, easy to understand, and highly accessible
Ideal for quickly assessing historical price changes between currencies
Very little data is actually included in a line chart
Not possible to see inter-day price changes on a line chart
Bar charts are more advanced versions of line charts that allow you to see the highs and lows of a currency pair within the trading day, as well as whether it is a buyer's or a seller's market.
Each point on the chart tells you both the opening price of a currency pair and the closing price of that same pair within a certain period, usually within a day. A bar chart can, therefore, give a more detailed picture of the price relationship between a currency pair.
A bar chart is incredibly useful as it allows you to easily see gaps and single out individual time periods, as the bars ensure that nothing overlaps. They can allow you to identify when a currency price has closed above a crucial point, thus signifying a potential breakout.
By looking at the inter-day price changes set against a wider trend, you can better understand the daily factors that influence a currency pair while keeping an eye out for longer-term trends.
A bar chart consists of a horizontal line of bars, with the bars each lying vertically across the chart. Each bar will usually represent a time period, such as a trading day. The height or the top of the bar will represent the highest price reached by the currency pair during the trading day.
The lowest point of the bar will, conversely, show the lowest price reached by that pair during the same day. In addition, the line dash on the left side of each bar represents the price of the pair at the opening of the day, while the dash on the right side of each bar represents the closing price of the day.
Great for assessing detailed price movements throughout the day
Can allow you to identify emerging trends
Not as helpful when trying to see live price changes
Some bar charts only use a range of one day
A candlestick chart is the most advanced type of forex trading chart and contains the widest range of data. It is the type of chart that you are most likely to see on the trading terminals of seasoned institutional traders and investors. Although they can initially seem difficult to read, it is easy to make sense of them once you understand the fundamentals. Here is how you can read and use a candlestick chart.
Candlestick charts show you exactly which direction the market is moving in, with red bars representing a lower closing price than the opening price and green bars showing a positive price trajectory. As a forex trader, you can use these helpful indicators to identify specifically whether a currency pair is heading towards a positive or negative trajectory. Furthermore, the price ranges identified by candlestick charts can help you determine whether a currency is due for a breakout moment.
Candlestick charts are very similar to bar charts, in that they give you the high and low price for each trading day as well as the opening and closing price of a currency pair. However, that's not all. In candlestick charts, the open and close price is usually represented by a box or thick bar - the "body" of the candle.
The high and low price points are then represented by a thin line extending from the top and bottom of each bar - the "wick" of the candle. Furthermore, a candlestick chart bar will usually be priced green if the closing price of a currency pair is above the opening price, or red if the closing price is below the opening price.
Immense detail that shows you the fundamentals of a forex pair
Colour-coded bars show you who is in control of the market
Can be difficult to read and understand for beginner traders
The red and green system is not always indicative of a genuine trend.
No matter which forex chart you prefer to use, it is important to choose a forex trading platform that offers all of the resources you need to make clear, informed decisions. Make sure to explore out in-depth forex broker reviews to find the right technology for you