7. How to read a FOREX chart

How to read a FOREX chart

Now that you understand the basics of currency trading, it’s time to get into some tools used by the forex traders. Forex trading could be your cup of tea or coffee (whichever you prefer doesn’t matter as long as it is your cup), once you understand the way tools like charts and analysis techniques work. In this article we are going to talk about charts and its variations available today. 

We need a way to measure the value or worth of currency over time. Chart is one such tool or resource that provides a visual representation of the trend in the value change for a currency pair over a fixed amount of time. Don’t worry there. We have examples listed below that will clear all your confusions.  

Due to high leverage forex traders deal with short time frames and during such times viewing a chart can provide all the required information. There are different types of charts available today and the goal of any trader should be to use any chart they are comfortable with and identify a suitable opportunity. To use a chart, definitely you need to know how to read a chart and yes that’s what we are going to learn here. 

We are now going to talk about three types of charts and their characteristics in detail.

  • Candlestick chart

Candlestick is the default chart type used in Forex analysis. These charts provide more information when compared to line or bar charts.

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  • candlestick chart as you can see above displays a lot of information about the currency value on a specific day.

o HIGH – The highest price of the day o LOW – The lowest price of the day o OPEN – Opening Price o CLOSE – Closing Price

The wide part of the candlestick is called is called the “real body” and the wicks above and below the real body are the “shadows”. The real body shows the change between the opening and closing price of that particular day while the shadows show the highest and lowest prices. So the length of the shadow indicates how close the opening or closing price was to the highest or lowest price for a particular trading day.

The real body is black or red if the closing price is lower than the opening price and the body is white or green if the closing price is higher than the opening price. 

Thus by looking at a candlestick you can see currencies opening and closing rates, its higher and lower prices and whether it closed lower than its opening price on a specific day. And when you look at a series of candlesticks you get to know the trend for a period of time.

 

  • Line Chart

As the name suggests, in a line chart closing prices over a period of time are connected by a line. And hence these charts provide the least amount of information. But compared to other chart variations, line chart is very simple and easy to understand and traders who need to look at the closing prices only, prefer line charts over others. 

Various closing prices connected via a line indicate the trend in the price movement over a period of time.

Sample line chart:

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  • Bar Chart

A bar chart is similar to candlestick chart as it shows highs and lows along with opening and closing prices. 

A weekly bar chart provide price movements within one week period. Each bar represents single time segment and has the following characteristics:

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The four important points in a bar chart are:

  • High – The top point of the vertical bar indicating the highest price. o Low – The bottom point of the vertical bar indicating the lowest price.
  • Open – The horizontal line on the left indicates the opening price. o Close – The horizontal line to the right of the vertical bar indicates the closing price.

Now that you understand the three different types of charts, it’s up to you to find out your best fit and start analysing. As long as you are able to analyse and manage your risk you are on the right track.

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