How To Read Charts In Forex

Forex charts are an important tool to help traders analyse the movement of currency prices and attempt to determine the optimum moment to buy and sell currencies. Charts evolved as an instrument of financial technical analysts, but they have found broader use over time among investors due to their quick and efficient communication of valuable information about market trends.

Most types of forex charts will look familiar to most who have completed high school- or college-level math courses that required visually graphing numerical information along x and y axes with the Cartesian coordinate system.

In forex charts, the passage of time is normally plotted along the horizontal x-axis of the chart, and the movement of currency prices is plotted along the vertical y-axis. While most charts plot movement of price over time, there are different styles of charts that can communicate more specific information about currency price trends.^[1]

Why Are Charts Important In Forex?

For technical traders, forex charts are the backbone of any successful strategy. Line charts, bar charts and candlestick charts all furnish the trader with a comprehensive view into market behaviour. Regardless of the currency pair in question, vital information such as periodic highs and lows, as well as opening and closing prices, are disclosed in a user-friendly format. Each of these data points is key in analysing price movement and integral to crafting astute forex trading decisions.

If you're interested in technical currency trading, then it's imperative that you have the skills necessary to build, customise and read forex price charts.

Types Of Price Charts In Forex

Here is a breakdown of the various price charts you may use when trading on the forex market.

Line Chart

Among the most common and simplest forex chart types is the line chart. It plots the change of currency prices in straight, diagonal lines up and down along the chart's x-axis to illustrate peaks and troughs in price movements. Line charts are customarily plotted using closing prices for each trade.

How To Read A Line Chart For Forex

Line charts are the most basic of all forex charts. Structurally, line charts consist of a single continuous line that connects a collection of distinct price points. The result is a graphical display of price movement local to a specific currency pair and data set. Visually, line charts resemble a series of peaks and valleys that move from left (historic price action) to right (recent price action).

According to some analysts and theories, the forex chart patterns revealed by the pathways to high and low price points on line charts can bring information about the collective psychology of investors in the market. This information is useful in developing forex trading strategies designed to indicate where prices will move next.

When configuring line charts, it is up to the trader to decide which pricing data is used to define the line. Common choices are opening price, closing price and bids/asks. In line charting systems on some trading platforms, both the bid/sell and ask/buy prices will be displayed simultaneously. In others, traders can alternate between bid and ask forex charts. In either case, it is important for traders to follow the ask/buy chart if they are looking to buy a currency and the bid/sell chart if they are looking to sell.

Bar Chart

The bar chart is a more complex manner of illustrating price movements that uses parallel vertical lines to show price variations over time. Each line, or bar, shows the low and high prices for a given unit of time in addition to the opening and closing prices, which are indicated by smaller horizontal lines on each side of the bar. Using this type of forex chart, traders can see the amplitude of price movements during any particular period of trading. A "tick chart" is a simplified version of the bar chart that shows only the ask and bid prices for individual trades.

How To Read A Bar Chart For Forex

OHLC bar charts are invaluable tools for active forex traders. This variety of price chart discloses four unique bits of price data: the periodic open, close, high and low (OHLC). Given this information, one is able to make consistent, timely forex trading decisions.

Understanding how to read forex charts is an integral part of being a competent technical trader. In the case of bar charts, the process is straightforward. Each periodic bar represents a trading range (high to low) and lists an opening and closing price. The trading range tells the trader how volatile price action was for a given period; the greater a periodic range, the greater the volatility.

Also, the location of the opening and closing prices is an important bullish/bearish indicator. If the open is above the close, then the bar is bearish; if the open is below the close, then the bar is bullish. Reading bar charts is as simple as that.

Candlestick Chart

One of the most popular types of forex charts is the Candlestick chart. The use of candlestick charts dates back to the Dojima Rice Exchange in Japan during the 1700s. Like bar charts, the candlestick chart reveals the open, high, low and closing prices for a given period of trading. In addition, their relative sizes are used to instantaneously determine market trends. In forex trading, the bars are often color-coded, with blue or green bars frequently indicating upward price movements and red bars indicating downward movements.

The anatomy of each candlestick bar, or "candle," consists of two elements: the body and wicks. The body of the candle is the distance between the periodic opening and closing prices. This area is typically color-coded to indicate whether the candle is bearish or bullish. Bearish candles (commonly colored red) occur when the open is above the close; bullish candles (commonly colored green) develop when the close is above the open.

In other words, the bottom of the body indicates the opening price for an upward-moving candle, or the closing price for a downward-moving candle. The top of the body indicates the opening price for a downward-moving candle or the closing price for an upward-moving candle.

Much like an actual candlestick, each candle has a body with thinner "wicks" extending from its top and bottom. The ends of the upper and lower wicks indicate the high and low prices during the period. Analysts examine the height of the body relative to the height of the wicks to determine the level of confidence the market has in the fairness of a given price range.

When using candlestick forex charts to trade, the size of the body and wicks are foundational tenets in trend analysis and pattern recognition. Wicks extending far beyond the body height are interpreted to be outlying prices. If the body of the candlestick bar is near or equal to the height of the ends of the wicks, then the market is felt to have strong confidence in the fairness of the price asked, and the bar is understood to indicate a trend in the movement of the price. But if the body height is small in relation to the height of the wicks, then the market is understood to not have strong confidence in the validity of a price asked at a given time.

How To Read A Candlestick Chart For Forex

In order to successfully trade any currency pair using candlestick charts, seasoned forex traders carefully evaluate the price data provided by each candle. Upon doing so, the information is placed within a broader context to discern if a market is consolidating, trending or pending reversal.

To read forex charts competently, one must pay attention to detail. For candlestick charts, it's important to observe the size and constitution of the candle's body and wicks. After all, it's the body and wicks that tell us exactly how a currency pair behaved during a given period.

Generally speaking, there are few rules of thumb to remember when reading candlestick charts:

1. The larger a candle's body and wicks, the greater the periodic volatility.
2. Exceedingly long wicks suggest market indecision.
3. Small bodies are a signal of consolidation.

Although these are basic observations for anyone experienced in using forex charts, they provide valuable insights into price action.

Time-Independent Charts

In addition to other types of forex charts, analysts can also use time-independent charts. Some of these styles include point-and-figure charts, Renko charts and Kagi charts. These forex charts use graphical representations such as x's and o's, bricks, and lines to focus more closely on the direction and trend of price movements. Some analysts prefer to use these charts with the view that they can more efficiently help detect price trend reversals.

Technical Indicators And Trend Lines

Along with presenting charts, some trading systems allow traders to set technical indicators on their charts, such as moving averages, that will show trend lines that more clearly delineate the direction prices are moving. When peaks or troughs seen on charts break through the trend lines, for example, forex traders can more readily detect the possibility of a trend reversal.

To learn more about how to use charts to trade your favorite currency pair or markets, check out FXCM's Live Forex Charts portal. There you'll find a collection of free forex charts and a library of technical tools, studies and indicators. If you're going to trade forex, the Live Forex Charts page is an invaluable resource.