How to read forex charts
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Forex charts are used by traders who buy and sell currency through their brokers. These charts are analysed to determine the optimum time to enter or exit the market. Our quick guide about learning Forex runs you through the three main chart types and how to use them.
What is a forex chart?
A forex chart shows the change in exchange rate of a currency pair over time. It’s a graphical illustration of price movements and works in a similar way to many other charts. On a forex chart, the vertical y-axis represents price and on its horizontal x-axis time is shown.
Charts visualise trading activity that occurs during a set period of time. These time periods can be chosen by a trader and range from one second all the way up to one year. They can be used to identify patterns in price, movements, and buying or selling levels.
The three main forex chart types
There are many chart types available to use, ranging from a simple line to more advanced point and figure charts. However, for most retail forex traders, the three most common chart types are: Line, Bar, and Candlestick. Below we’ll look into each of these in more detail, explaining what they are and how they work.
Candlestick charts are the most popular way to read a forex chart among retail traders because they are visually appealing and easier to interpret than bars or lines. Similar to bar charts, candles are usually colour coded; green bodies signal a bullish close in price, while red bodies signal a bearish close.
Candlesticks are variations of bar charts and show price changes in a similar way. They depict price movements over a time period selected by a trader. They are different to bar charts in that they show a trading range represented by a thin rectangle, known as a body.
Usually they will have a vertical line extending out from the top and bottom of the body known as wicks. Thin rectangular bodies with wicks resemble candles, which is where the name candlestick comes from.
Key features of a candlestick chart
Candlestick charts have a lot of features making them so popular. Below we have highlighted some of the top benefits of using these types of charts.
- Candlesticks are visually easier to understand than other chart types
- They play an important role in trend analysis and pattern recognition
- Large bodies with small wicks indicate buying or selling pressure
- Small bodies with large wicks indicate unsustainable buying or selling pressure
- Candlesticks help identify price reversal and continuation points
Below is an example of a candlestick chart using a 24 hour timeframe. Each candle represents one days trading activity. Traders can use candlesticks to identify patterns in price and trend analysis.
Common candlestick patterns.
Candlesticks often present themselves as patterns. These patterns can be used while analysing a currency pair. Listed below are five common candlestick patterns and their benefits.
- Pin bar. These are small bodied, long wicked candles often used as a way to identify market turning points or reversals. They resemble the shape of a pin and are sometimes called hammers or shooting stars.
- Bullish engulfing. Again, these are used as a way to identify market turning points and are usually found at the end of a downtrend. It is a two candle pattern, where the first is a small bodied red candle, followed by a larger green one which engulfs it.
- Doji. When a candle resembles a plus sign, it’s called a doji. These patterns form when the open and close are almost the same price. They’re often associated with uncertainty but can be used as reversal patterns too.
- Inside bar. This is a 2 candle pattern that can either signal a continuation in price or a reversal. It can be bullish or bearish and is easy to identify. The first candle has a large body and is either red or green. The ‘inside’ candle is the second and its high and low close within the first candle’s range.
- Tweezers. Another common 2 candle pattern which signals a reversal. A Tweezer is most effective at the end of an up or down trend. It consists of two small bodied candles with wicks of similar size that have touched the same point twice. A tweezer is a strong pattern in identifying price turning points.
Bar charts, often referred to as OHLC (open, high, low, and close) are a way for traders to see the opening and closing prices, together with the high and low prices.
Traders are able to see the price at which the bar opened and closed for a specific timeframe. Bars also show the highest and lowest prices reached in that same time. The vertical line in a bar represents the trading range and can be helpful in determining market volatility.
A large vertical line (range) indicates a volatile currency pair, while a small vertical line indicates a quieter pair. The higher you move up in the timeframe, the stronger volatility can be.
Bar charts are usually colour-coded; green for bullish and red for bearish. If the bar’s open is lower than its close, it signals a bullish bar (green). If the bar’s open is higher than its close, it signals a bearish bar (red)
Key features of bar charts
Below you will find listed some of the best features associated with bar charts.
- Bar charts show traders four important pieces of information: open, close, low, and high
- A trading periods range can easily be identified by looking at the bars vertical line
- The same patterns formed by candlesticks can be replicated on bar charts, although they are more difficult to quickly identify.
- Understanding these types of charts is helpful in identifying price turning points and continuations of trends.
These types of charts are the most basic of the three and consist of a line connecting the close prices for the time period you have selected. Line charts are the simplest way to depict price information, although they are limited in what they show.
Line charts do not show what the open, high, and low prices for the time period was. Because of this, they’re most suited to identify longer term trends and provide little information or use for short term trading.
Key features of line charts
Although line charts are pretty simple to use, they are still considered a well regarded tool for forex traders. Below we have highlighted some of their best features.
- They are the most basic type of forex chart and easy to read
- Long term trends can be seen best on line charts
- Line charts are an excellent way to to gain an overview of a currency pairs historic price movements
- These types of charts only show closing prices and are not suitable for short term trading
Compare the best place to trade forex
There are lots of brokers offering forex trading. Below we’ve selected some of the best online platforms which include the three main chart types we’ve discussed on this page. Click through to the links to learn more and register to start trading.
Forex chart time frames
Time frames are how frequently price data is plotted on a chart. These periods of time can be selected by a trader and range from one second all the way to one year. Usually forex traders will use a one hour, four hour, and 24 hour time frame. However, some intraday traders prefer one minute, five minute, and fifteen minutes.
With bar charts and candlesticks, each bar/candle represents price movements for the trader’s selected time frame. Usually, a higher period of time gives a better overview of the currency pair. Lower time frames are useful for traders looking to enter and exit the market quickly for little and often profits.
Reading a forex chart is the first step in successful trading, however it’s only part of the puzzle. Many traders use charts with other helpful tools such as price action, technical analysis, and indicators. Understanding these can be a tricky task and it’s a good idea to read expertly written courses which you can do so by clicking here.
In order to read a chart and trade the foreign exchange market you will need to open a brokerage account first. There is a lot to consider prior to using an online trading platform and you can click here to be taken to our page on well regarded, expertly selected brokers.
A quick recap of what we’ve learned
Despite there being many different types of charts each having their own use, candlestick charts are the most popular among forex traders. Their simplicity and visually appealing appearance make them great for beginners and more experienced traders alike.
Candlesticks usually form patterns which can be used to identify turning points and continuation areas. There are hundreds of candle patterns and it can be helpful to learn the most common ones.
By using a forex chart, traders can see historic price movements and current information. Although, it’s often not enough to simply look at a chart and incorporating other tools can be helpful in perfecting a trading strategy. To learn more about forex trading, or any other type of trading including stocks and crypto, click any of the links below to be taken to our courses page.
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