A Brief Explanation of Forex Charts for Beginners

A Brief Explanation of Forex Charts for Beginners

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What is a Forex Chart?

Simply defined, a forex chart graphically depicts the historical behavior and relative price movement between two currencies, or a currency pair, across several different time frames.

These charts are typically used by day traders and technical analysts to identify trends and various patterns which will signal reversals, continuations, trends, entry points, and exits, helping them make more informed trading decisions.

Forex charts allow traders to view the past, which may help them in predicting the future price movement of currency pairs based on previous trends. 

A price chart depicts the changes in supply and demand, aggregating each buy and sell action of a currency pair. Forex charts also incorporate known news, the current expectations of traders, and future news.

In terms of their importance, forex charts are essential tools for forex traders who want to incorporate technical analysis so that they can determine when and where to invest their funds.

Technical analysis involves the review of previous market prices and technical indicators to predict the potential future movements of a currency pair. Forex charts use line, bar, and candlestick chart types, and the typical timeframes that most charting software provides range from tick data to yearly data.

In terms of how easy it is to learn how to read forex charts, it is a fairly simple process once traders understand the basic components presented and represented on each chart, and for this, traders must first have a basic understanding of trading, terms and definitions, and other components that they will encounter on charts.

On the chart, despite the type, the Y-Axis (Vertical) represents the price scale while the X-Axis (Horizontal) represents the time scale. Prices are typically plotted from left to right on the X-Axis, and the most recent price is plotted at the furthest point to the right.

The type of charts and how each can be read are further explored in the sections below.

What are the Types of Charts in Forex Trading?

There are three main types of charts that are used in forex trading, namely:

  1. Line Charts
  2. Candlestick Charts
  3. Bar charts

1. Line

A-Line chart in forex draws a line from one closing price to the next one. When it is strung together in a line, traders can see the typical price movement of a currency pair over a certain period. Line charts are simple to follow. However, line charts do not provide traders with detail regarding price behavior within the period.

All that traders can deduce from the line chart is that the price closed at a certain amount at the end of the period. However, despite this, line charts help traders identify trends more easily and allow them to visually compare the closing prices from one period to the next.

Line charts are often also used to provide traders with a “bigger picture” of price movements.

2. Candlestick

Candlestick charts are a variation of the bar chart that shows traders the same price information as a bar chart but in a more graphic way. Many traders prefer using this chart because it is much easier to read than normal bar charts.

With candlestick charts, traders can easily conduct chart analysis as the difference between the high and low prices of a currency pair are indicated through the length of the bar on a candlestick, with the middle of the candlestick being used to indicate whether the currency pair closed higher or lower than the price on which it opened.

Key Points of Candlestick

Candlesticks clearly show the following few data points for a selected period of either one minute, four hours, one day, one month, and so on:

  • Open price
  • Close price
  • High price
  • Low price

Candlesticks are known to be bullish when the closing price on a currency is higher than the opening price. Traders can use any colour they wish to represent a bullish candlestick, but white or green is the typical colour used to indicate the bullish direction.

When this occurs, the upper wick lies between the high and close period price, while the lower wick can be found between the low and open price.

Candlesticks are considered bearish if the close price is lower than the open price. Traders can represent a bearish candlestick with any colour they wish, but the typical colours used are either black or red. In bearish markets, the upper wick lies between the high and open prices of the period, while the lower wick is positioned between the low and close prices of the session.

Candlestick charts have three distinctive features, namely:

  • The body – which represents the open-to-close range
  • The wick – also known as the shadow, which indicates the intra-day high and low

3. Bar

Bar charts are a little more complex than the other two types of forex charts, and they represent the open, high, low, and close (or OHLC) for each time interval that collectively types a bar.

Bar charts are known as the workhorse of technical analysis, and they are the most common chart types that traders will come across. The “bar” is a vertical line where the top shows the high price of a period, and the bottom shows the lowest price.

In terms of open, it refers to the first price at which the forex trade is done in the period. The open is often the same or very close to the previous price when the market closed. However, the open can also be far from the close of the previous period, which is referred to as “gapping.”

The close refers to the last trade done within a specific timeframe, and it is a crucial data point on the bar because it summarises the final sentiment experienced in the trading period.

What are the Indicators of Forex Charts?

When forex traders refer to “forex indicators,” they typically refer to the technical indicators in the context of forex trading. Technical indicators are computerized calculations that are used by forex traders to forecast price changes in the financial markets.

These forex indicators can be used on any chart on any financial instrument, including forex charts. These calculations are based on historical market prices and even trading volume. Because forex trading is decentralized, volume data is not always accurate because there is no central exchange that records all transactions.

Forex indicators are created based on price data that is typically available on forex charts. The aim behind using forex indicators is not to be able to determine the future price movements on currencies but to identify the favorable risk/reward ratio (RR), providing traders with a statistical advantage.

Traders will start using their forex indicators when they develop a trading strategy, and once they have built a solid strategy, traders can backtest their strategy against historical market data to see whether their forex indicators are performing as intended.

Forex indicators have the following uses and benefits:

  • They can help automatize the trading strategy
  • They can help to generate trading signals
  • They indicate overbought and oversold situations
  • They help to indicate trends
  • They help to measure the strength of trends that are emerging

Forex indicators can be divided into the following:

  • Leading Indicators
  • Lagging Indicators
  • Trend Indicators
  • Volatility Indicators
  • Momentum Indicators
  • Volume Indicators

In terms of leading indicators, these are tools that anticipate upcoming price action, and they are known to confirm existing trends. For example, instead of using the 100 past candles on the chart, the leading indicators will only use 10, allowing them to react quickly to new price movements that may emerge.

In terms of lagging indicators, they help traders confirm certain trends, and they work with some form of price averaging, which means that it takes a lagging indicator longer than a leading indicator to reflect market changes.

In terms of trend indicators, these show trader's trends, especially when traders use them to generate trading signals.

In terms of volatility indicators, traders use these to show how drastically the price can change over a short period. There are many ways in which traders can calculate volatility, and it typically involves monitoring closing prices to determine how far they spread out around the typical price of a currency pair. Traders can easily use volatility indicators to generate trading signals.

In terms of momentum indicators, these tools show traders the perceived strength of trends by monitoring the rate of changes that occur in prices. They then indicate whether the trade is healthy or whether it is ending.

In terms of volume indicators, these indicators measure whether forex traders are enthusiastic about a specific currency. It is important to note that volume indicators do not have data on the entire market but only that of the volume coming through the trader’s broker.

Some of the most popular indicators for forex charts are:

  • Simple Moving Average (SMA) tracks the average of a currency pair’s price over a given period.
  • Moving Average Convergence Divergence (MACD) is a lagging trend indicator that can be used to identify a trend and to measure the strength of that specific trend.
  • Relative Strength Index (RSI) – which is a leading momentum indicator that measures both the current and previous strengths and/or weaknesses of a currency pair.
  • Stochastic Oscillator – which is a leading momentum indicator that helps traders determine where the trend may end.
  • Average True Range (ATR) – which is a lagging volatility indicator that can be used to determine the level of volatility that exists in the forex market by reading how dramatically the exchange rate fluctuates.
  • Accumulation/Distribution – which is a volume-based leading indicator that determines whether traders are buying or selling a specific currency pair.

What are the Patterns of Forex Charts?

Chart patterns in forex trading are crucial to the technical analysis as they are born out of fluctuations in the price of a currency pair. They also represent chart figures with their distinctive meaning, and each pattern indicator has its specific trading potential.

Forex chart patterns can simply be defined as geometric representations of buyers and sellers, or bulls and bears, who trade a currency pair in a certain way until one group gains control over the direction in which the currency pair goes.

There are three main types of chart patterns, namely:

  • Continuation Chart Patterns
  • Reversal Chart Patterns
  • Neutral Chart Patterns

In terms of continuation chart patterns, which are the ones that are expected to continue along with the current price trend, which causes a new impulse in the same direction. Some popular continuation chart patterns include flags, pennants, and wedges.

In terms of reversal chart patterns, these are the opposite of continuation patterns, and they typically reverse the current price trend, which causes a fresh move in the opposite direction.

Terms of neutral chart patterns are formations that signal a price move but with an unknown direction. Once the pattern has been confirmed, traders will realize the potential of the pattern and handle the situation with a respective trade.

How to Read Forex Charts?

In terms of reading candlestick charts, traders can follow these simple steps:

  1. Choose a currency pair to evaluate or test the strength of a specific forex pair by looking at several different pairs.
  2. The trader can determine the timeframe that they wish to be displayed.
  3. Traders can distinguish the bullish candles from the bearish candles – if the closing price is higher than the opening price, the candle is bullish, whereas if the opening price is higher than the closing price, the candle is bearish.
  4. Next, traders can identify the different parts of the candlestick known as the wick, which is the highest exchange rate for the currency pair in the time frame, the shadow, which is the lowest exchange rate for the currency pair in the selected timeframe.
  5. Traders can now place the patterns in context on the chart.

In terms of line charts, traders can follow these steps to learn how to read them:

  1. First, traders must select their currency pair.
  2. Traders can then set their chosen timeframe, keeping in mind that a longer timeframe is more ideal with line charts as they show the bigger picture.
  3. Traders can now determine whether they want to view the high or low opening or closing prices. 
  4. Traders can now evaluate the trend that is represented by the line.

In terms of bar charts, traders can read these carts by following these steps:

  1. Traders can start by selecting a currency pair.
  2. Traders can then select their timeframe and intervals.
  3. Next, traders can identify the high and low prices for their chosen interval.
  4. Traders can proceed to compare the opening and closing prices on the currency pair.
  5. Lastly, traders can consider the overall trends in the movement represented by the bars.

What are the Classes to Understand Forex Charts?

Some of the best courses and classes that help traders understand forex charts are:

  • My Forex Chart
  • FX Tradinger
  • MyTrading Skills

In terms of My Forex Chart (MFC), the website offers a comprehensive and in-depth overview of the basics of forex, along with explaining the fundamentals that must be known regarding forex charting.

In terms of FX Tradinger, the website offers traders a comprehensive guide on how to read forex charts like a pro by offering a full, complete guide to forex charting.

In terms of MyTrading Skills, it is yet another successful guide that explains the different forex charting types using simple explanations and visual representations to ensure that traders fully understand what the author is trying to explain.