Charts are an important part of financial trading. Technological era has made charts highly precise and vastly accessible. But did you know that charts were handwritten prior to the technological revolution? For instance, rice traders in Japan were using handwritten candlesticks to plan their traders. That was way before the charting method was popularized in the rest of the world.
There are various charting methods and each of them can be highly valuable for certain traders. If your goal is to get a better understanding of how charting methods work and why they matter, this guide is for you. Each method offers unique advantages and disadvantages. Learning about different charts can make you a better trader. They might seem complicated at the first glance, but you’ll get brilliant at reading the charts with sufficient time and experience.
Why is understanding Forex charts important?
Before we start learning about different Forex charts and how to read them, first let’s make it clear why it is important to read FX charts in trading.
Charts show past and current performance of given trading instruments. What’s great about using forex charts is that they are highly useful in predicting future prices. Yes, you can use economic and political news to predict currency valuation, but when it comes to technical analysis, charts are essential.
Technicians study price patterns and reactions to certain events on charts that help planning trades better. There are various charting methods developed in financial trading to make technical analysis easier. And we’ll discuss the most popular ones below.
Technical traders use indicators, patterns, and support and resistance levels to make predictions. And therefore, they are highly dependent on charts, and choosing a proper charting method is vital for them. On the other hand, fundamental traders focus on market news, changes in policy, interest rate decisions, inflation, unemployment, building permits, etc. to make price analyses. However, charts are highly important for fundamental traders too. Yes, they make predictions based on what they read or watch on the news, which helps them predict the trade direction, but they use charts for finding the best entries and exits. In summary, understanding Forex charts is important for any type of trading.
General information about Forex charts
When trading in the Forex market, we will see different types of charts, but these charts are not completely different from each other, and they have many things in common.
First, let’s look at what charts are in general. Forex charts are charts that show the price movements of given assets. In the modern world, prices are updated automatically in real time. But when the technology was non-existent, traders were drawing charts by hand. Depending on the chart type, charts can give us valuable information on a given asset. Some widely used methods such as candlesticks and bar charts can give us information about open, close, high and low prices within a given timeframe. Which enables traders to better understand the battleground between buyers and sellers.
Now let’s look at the general information that is the same for each chart. Forex charts are represented on the X and Y axis, and each axis gives us different information. The X-axis is where we can see the dates/hours/minutes (the only exception is a Tick chart that doesn’t have a time dimension). On the other end, the Y-axis is where we can see the price of an asset. Both X and Y create a two dimensional map that displays and saves price performance.
Types of Forex charts
Now that we have a clear idea of what charts are, let’s see the different variations of them and learn to read forex charts.
The most simple and easiest charts to learn and read are the line charts. These charts show traders just the closing price of an asset and nothing else. The reason it is called a line chart is that it is just a connection of closing prices of a given asset with simple lines.
Line charts are simple and they do not give much information compared to other charting methods. However, some traders that do not care about market psychology and chart patterns, might find them useful. In addition, these types of charts are not actively used in Forex. It’s worth mentioning that lines are very common in indicators as they are simple to read.
Another variation of a line chart is the Mountain chart. It is pretty much the same as the line chart as it only shows the closing prices of an asset. But Mountain charts have different shades and colors beneath the line, which gives them the look of a mountain. Mountain charts are usually better for combining different assets on one chart and comparing them, as here it is much easier to visualize the information provided.
The Mountain charts are ideal for quick analysis and price comparisons. Line and mountain charts can be used for displaying correlated assets better. In addition, they can be useful for creating simple indicators.
How to do it? It’s easy: Some currencies are highly correlated with other currencies while others are correlated with commodity prices. For example, Canada is a large producer of Oil. Changes in oil prices affect the valuation of the Canadian Dollar greatly. When trading a currency pair that includes CAD, you can open a window of Oil in line charts and keep an eye on developing trends there.
The most popular charting method in financial trading is Candlesticks. These types of charts provide us with a good deal of information on a given asset in a highly efficient way. The method is called a candlestick chart as the prices are displayed in figures that resemble a candle shape. Each candle represents a certain time frame. In trading, you will come across minute, hourly, daily, weekly and monthly timeframes. In the case of the Candlestick charts, if you set an hourly timeframe on your trading platform, each passing hour will create a new candle on your chart. What’s great about candles is that they show us open, close, high, and low prices within a candle which makes analyzing the performance of bulls and bears much easier. There are lots of candlestick patterns discovered using candles that are highly popular among traders. It’s recommended for every trader learn how candlesticks charts work when starting out the trading journey.
Candles have two parts: bodies and shadows. And each presents different information. A candle’s body is a thick line that shows us the price movement between the closing and opening price of an asset within the candle. The shadows are continuations of these bodies and go either at the top, bottom or both. They are thin lines and represent the highs and lows of the asset in the given time period. The upper shadow shows us the high of an asset, while the lower shadow shows us the lowest price point of an asset. The main way we can differentiate these candles and find out if prices fell or rose is to look at the color of the candle. In general, these candles are white and black, or green and red.
White and green candles are created when the closing price of the candle is greater than the open price. In other words, the overall price was increased within the candle.
Black and red candles appear when the closing price is lower than the candle’s open price. Which means that the price of an asset decreased within the candle.
Charts that show asset’s High, Low, Open and Close prices are referred to as HLOC charts. Candlesticks and Bars are both categorized as HLOC. However, candles are more popular and display information visually better. Which can explain why there are so many popular candlestick patterns and so few bar chart patterns.
Bars were dominant charting methods before the appearance of candlesticks. As already mentioned, they both display the same information, however, Instead of real bodies, bars have notches on vertical lines. The notch on the left side of the bar represents the opening price of an asset, while the notch on the right tells us the closing price. The highest point of the bar tells us the highest price mark of an asset in a given time period, and the lowest end of a bar shows us the lowest price the asset reached within a given candle. Colors work similarly to candlesticks as well. White and Green represent rise in price within a given time frame and Red and Black represent decline in price.
FAQs on reading Forex trading charts
How do you read charts on Forex?
There are various chart types available for traders in Forex. Each type of chart gives us different information about price performance. Line charts are simple to read as they show us just the closing price of an asset. Candlestick charts are highly informative as each candle shows open, close, high and low prices within the candle. Reading candlestick charts requires more skills, however, they show market psychology.
Which is the best chart for Forex trading?
The best charting method is the one that best suits your trading style. Every trader is different and has a unique trading style. However, it’s worth mentioning that candlesticks are dominant and highly useful charting methods in financial trading. Unlike line charts, candlesticks display open, close, high and low prices within a given candle, which makes it possible for traders to analyze the performance of bulls and bears better. What’s more, there are various candlestick patterns for traders to use in technical analysis.