Forex trading is almost impossible without the use of a chart. In this article, we’re going to cover the basics of understanding and reading any Forex chart. A Forex chart is merely a graphical demonstration of the currency exchange rates and it really shows how a specific currency exchange rate has performed over any given period of time. The purpose of using a Forex chart is primarily to identify tradable patterns and apply technical analysis. Most Forex brokers will provide you with professional Forex charting software free of charge. A charting software or a trading platform will allow a trader to observe historical currency exchange rates that will help you make an informed trading decision very quickly.
Type of Forex Charts
There are different types of charts and the most popular type of charts are the candlestick charts but we want to introduce you to some of the other charts you might be able to use for different purposes. The most widespread types of Forex charts are as follows:
- Line charts;
- Bar Charts;
- Candlestick Charts;
These should give you a very simple grasp of price charts so that you can get a good sense of how the markets really move and particularly how professional Forex traders use those Forex charts. As a short-term trader, learning to read a Forex chart is imperative to your success as a trader and as we go through this you’re going to learn how these different Forex charts can help you to time your entries and your exits.
Line Forex Charts
A line chart shows you the exact same information as your candlestick chart but it shows it represented by a line. The line actually correlates to the closing distance of each of the closing price of each one of the candles that you have. A line chart is best used for drawing clear support and resistance levels and identifying chart patterns. The main advantage of a line chart is offered by its simplicity and the fact that it clears up a lot of the market noise.
Bar Forex Charts
Then, we have our bar charts which are similar to candles but they don’t have the fat body part. They show you where the price opens for that time frame and where it closes on that time frame but it also displays the high and low of the respective time frame. Simply put a bar chart is an open, high, low and close bar chart or OHLC in the Forex terminology.
The open of a bar chart is the beginning of the trading day, the low is the bottom of the bar chart and is the lowest price of which the transaction occurred throughout the day, the high is the highest price that was transacted throughout the day, and the close is the price at the end of the day or any specific time frame.
Candlestick Forex Charts
A candlestick chart is the most common type of chart traders use. A green candle typically indicates that prices moved up during that particular period while a red candle indicates that prices moved to the downside during that period of time. When we’re looking to identify the direction of the market we should focus simply on the color of the candle and ask “which one is dominating”?
The size of the candle also gives us clues as to how strong the momentum may be, also the shape of the candles can give us lots of information in terms of the momentum shifts in the market as well as identifying repeatable price patterns.
We’re not limited to just these three forms of charting as there are other types of Forex charts like the Tick Chart, Range Bar Chart, Point & Figure Chart, Renko Chart and many others.
A Forex chart is like a whole new language that you need to learn how to read. You also have to understand that chart analysis is part science in that we’re looking at a history of price data repeating itself but it’s also part art and that you might draw you chart lines and patterns differently than the trader next to you. You’ll get more confident with the skill set of charting as you move forward and get more experience.