Complete Guide to Reading Forex Charts
Forex traders use a variety of tools to forecast currency pair shifts. Some traders depend on news, interest rates and economic factors while others tend to use charting methods and indicators to guide their trade decisions.
Forex trading charts are information showing the trend of different currency pairs over a given period of time. Much like any graph that shows something’s output over time, trading charts are there to inform and educate you as a trader, giving you greater chances of success from better informed choices.
Charts can be complex and informative, or they can be plain and easy to digest. Brokers also include them to help you understand their prices and allow you to make more informed choices.
Forex charts are available for different currency pairs, and are based on different time frames: from a minute through to a month. Although they can never guarantee what will happen when it comes to the results of your chosen pair, it does allow you to act on a more probable outcome.
No matter how you trade, you’ll need to learn how to read a forex chart. There’s no way around it. Fortunately, we developed this comprehensive guide to help get you started.
What is a Forex Chart ?
A forex chart graphically illustrates the historical actions of the relative price change between two currency pairs over different time frames. In essence, a forex chart helps a trader to view the past and can be an indicator of potential price change, according to technical analysts.
What are the Types of Forex Charts ?
While there are many types of forex charts, line charts, bar charts and candlestick charts are the three most used.
This chart is the simplest chart, and gives little detail. A line chart just has a line drawn from one closing price to another. So, just a sequence of closing prices is what you see in a line chart.
Even if they’re not common, traders often use these charts if they want to take a quick look at the least amount of data without all the cluttering data.
A bar chart marginally shows more detail than a line chart. In a bar chart you’ll see both closing and opening prices. A bar in a bar chart of 1 hour indicates the price it opened in that hour, and the closing price of that hour. Besides that, it also reveals the highest and lowest prices during the hour.
The top of a bar shows the highest price of the hour in a one-hour chart and the bottom of the bar shows the lowest price. The small horizontal hash on the left shows the opening price of the hour, and the horizontal hash on the right side of the bar shows the closing price of the hour.
The same can be extended to other time frames. Since each bar shows the open, close, high, and low prices of a currency, the bar charts are also known as OHLC charts.
This is the most common style of all three types of forex charts and is commonly used. Both bar charts and candlestick charts show the same information: high and low prices, and open and close prices for a given currency time span. But the space between the two horizontal hashes is replaced in the candlestick charts with a graph which looks like a candle’s body. The chart seems more appealing and easier to read.
The section between the open and the closed prices, a time period, is known as the body. The projections at the top and down outside the candle’s body are called ‘shadows.’
What are Forex Indicators ?
Before trading on the market platform, Forex traders study different data to determine how the market is doing and whether it is likely to change in the future. Traders should be able to employ more efficient trading strategies and yield higher returns with thorough market analysis.
One way to analyse market data is through the forex indicators. By analysing historical data, such as volume, currency price and market results, indicators seek to predict how the market will behave in the future and which trends are likely to be replicated.
Once traders have this knowledge, they can make more informed trading decisions and, as a result, can generate higher returns.
How do Forex Indicators Work ?
The best indicators of forex operate on the belief that past trends are likely to repeat themselves, if similar circumstances emerge. Forex measures search for trends in individual market behaviour, rather than treating the FX market as a random sequence of events.
For example, if a particular currency fell immediately after a political crisis, that could have occurred after multiple periods of political instability. If so, this information will be registered by forex indicators and used to forecast if and when the same behaviour will happen.
By accessing this data, traders can gain insight into what affects currency and market prices as a whole, and trade accordingly on their account.
Should you be Using Forex Indicators ?
Complicated forex indicators and data are not only meant for seasoned traders. In fact, indicators are a way of simplifying highly complicated and voluminous data, and the use of forex indicators can help everyone.
These metrics are part and parcel of forex traders’ everyday routine while on their account, and are an important part of the decision-making process. The better understanding you have of the market, how it operates and what factors affect it, the more knowledgeable you will be.
You will raise your returns and increase your income by making trade decisions based on past market behaviour and using recent currency trends to guide your trading strategy.
With so many indicators to choose from, when placing a trade it can be difficult to decide which indicator is the best or most important for your needs. Across most cases, a variety of indicators can be used to analyse market activity and forecast potential market events, but when you first start, you do not necessarily want to try and use every forex indicator.
By finding the best forex broker with whom to work, you will ensure you have access to a wide variety of resources, including forex signals, a forex calendar and forex indicators.
What are the Types of Forex Indicators ?
Forex indicators help traders grasp the currency changes they see on a forex chart. There are a number of different forex indicators out there, but some of the most common are:
Simple Moving Average Line
The SMA or simple moving average line is the most common forex indicator. This indicator is determined by adding the closing prices of a given period and dividing the amount within that period by the time span.
For example, if you add up the closing prices over a five-hour span, splitting that total by five will give you the simple moving average line.
Bollinger Bands test how volatile the market is. It’s called a squeeze when Bollinger Bands get close together. Traders see squeezes as a warning that increased uncertainty is on the horizon, as well as potential trading opportunities.
On the other hand, wider-divided bands signal a decrease in uncertainty and increased chances of exiting a trade.
Relative Strength Index (RSI)
Traders use the relative strength index to classify market situations that have been overbought and oversold.
Ranging from 0 to 100, a reading below 30 is a warning that the market is over-sold and a trader should consider buying. Readings over 70 suggest that the market is overbought and that a trader should look to selling.
How do you Read a Line Chart ?
A simple line chart draws a line between one closing price and the next closing price.
When pieced together with a thread, we can see the general price movement of a currency pair over a period of time.
How do you Read a Bar Chart ?
A bar chart is a little more complicated. It indicates costs for opening and closing, and the highs and lows. The bottom of the vertical bar shows the lowest price exchanged for that time span, while the top of the bar displays the highest price paid.
The vertical bar itself shows the complete range of trading for the currency pair.
The opening price is the horizontal hash on the left hand-side of the bar, and the closing price is the horizontal hash on the right.
Identify the Currency Pairing you Want
Just like with line charts, bar charts compare a single rate of exchange between two different currencies. The rate tells you the price you will theoretically buy the second currency using the first currency.
Select Your Time Period
The time period is defined by the Y-axis, which is the entire period over which the exchange rate trend is being evaluated. The interval is the time span that each bar on your chart reflects. When using a bar chart to analyse a trade, you can decide the time frame you are analysing on the chart, and choose between the available hours.
Identify the High and Low Price for the Time Period
On a bar chart the top of the vertical bar is the high price for the interval. The low interval price is described by the bottom of the vertical bar.
Compare the Opening and Closing Price Levels
The opening price is a small horizontal line which sticks out from the left side of the bar. The small horizontal line which sticks out from the right side of the bar is the closing price. You may decide whether the market was bearish or bullish during that period by contrasting their relative location on the vertical bar.
Search for General Trends in the Movement of the Bars.
Looking at your entire bar chart, over the duration you have picked, you get a sense of the overall movement for the currency pairing chosen. If your image appears to be incomplete, you may change your time to capture a larger frame.
How do you Read a Candlesticks Chart ?
Candlestick charts show the same price details as bar charts, but in a more beautiful graphic interface.
Candlestick bars also show a vertical line to indicate high-to-low range. Nevertheless, the larger block (or body) in the middle shows the difference between the prices for opening and closing in candlestick charting.
Unless the block in the middle is usually filled in or coloured in, then the currency pair closes lower than it opened.
Pick Your Currency Pair
If you have been following so far, you will have realised that forex trading happens in currency pairs. For example, if you pick a currency pair, USD/JPY, the chart you are creating will show you how many Japanese Yen you can buy for one US Dollar.
Determine the Time Period you Want to Analyse
Your chart illustrates how over time, the exchange rate between the two currencies has improved. Every candlestick in a candlestick chart accounts for a given amount of time you set. You also set the total length of time which decides how many candlesticks you have.
Distinguish the Bulls from the Bears
Two types of candlesticks usually exist: a bullish candle, and a bearish candle. The bullish candle is open or hollow on most candlestick charts while the bearish candle is filled in. The variations are as follows: you have a bullish candle when the closing price is higher than the opening price. You have a bearish candle when the opening price is higher than the closing price.
Identify the Parts of the Candlestick
The top and bottom lines of the candle themselves represent the exchange rate for opening and closing for the pairing you have selected. You learn which one is the opening and which closing is by looking at the body colour of the candle. You can then see lines running from the top and bottom of the candle, giving rise to the chart name.
The highest point is the average exchange rate for the combination for the time selected at the tip of the wick.
At the tip of the shadow, the lowest point is the lowest exchange rate for the pairing for the time chosen.
On a bullish candle the closing price will be the highest line on the candle, while the opening price will be the lowest line on the candle. The highest line for a bearish candle would be the price of the opening and the lowest line would be the closing.
Know the Names of Candlestick Patterns and What They Mean
The names given to the different patterns are part of what makes candlestick charts fun to read. When you learn to recognise certain trends, you can foresee more reliably how the market will shift for the pairing you are evaluating.
Some trends with predictive value are:
Big candles: A large candle body suggests a trend that will last for a longer time. If you see a big bullish candle, you know that the bullish trend for that pairing is continuing. A big bearish candle indicates a growing trend toward bearish. A bullish candle could signal that you are buying the pair while a bearish candle might signal that you are selling.
Doji candles: Doji candles have little or no body. This suggests the state of the market is stable or neutral. Doji candles will tell you to either buy or sell the pairing of currencies.
When you’ve learned how to classify candlestick styles, look at their relative location on the chart. This helps you to understand what that particular trend actually shows you about how the market is shifting.
What is the Difference Between a Bearish Candle and a Bullish Candle ?
If you have been following so far, you will recognise by now that there are two candles in a candlestick chart that shows you how the market is moving. Just like in the stock market where you have the bulls and the bears, in the FX market, you have either a bullish trend or a bearish trend and, on the chart, these trends are indicated by a bullish or bearish candle.
Let’s take a closer look at these two candle types.
An empty, unfilled candle means that the price to close is higher than the price to open. In other words, the price in that particular time has gone up. It is sometimes called a bullish candle. In forex, an upward trend is regarded as a bullish trend.
A filled candle essentially means the price of the opening is higher than the price of the closing. In other words, in that particular time frame, the price has gone down. It is often referred to as a bearish candle. A bearish move is also known as a downward step in the forex.
How to Use Charts and Data ?
Different charts and indicators match different tastes. What may be perfect for you may not work for anyone else. You have to figure out what makes the most sense for you and try to use it to help with your trades. Traders use indicators to help make sense of the charts, to help interpret and read the data. They cover all aspects of forex trading.
As already established, there are several types of indicators. Among the most commonly used are simple moving average, Bollinger Bands and relative strength index (RSI). Of course, all of this may sound like a foreign language to begin with, but you’ll soon get to learn all of the terminology. The main thing is to make proper use of the details. If the currency pair has a strong and clear pattern then you need to use this knowledge to do your trades.
When the market looks very volatile before you start trading, you may want to gather as much data as possible. It may be evaluating the statistics and reports from the market as well as the details provided in a chart. Start with small trades that, if you lose, do not make a major dent in your investment.
How do Forex Chart Timeframes Work ?
The time frame used to diagram a chart depends on how much we want to compress the visualised data. You can have 1 minute, 5 minutes, 10 minutes, 1 hour and 4 hours time frame etc. of intra-day trading or daily, weekly, monthly, or annual time frames.
If you want to display more information, the less compressed data will be needed. The greater compression of the data, however, the more data can be displayed on the chart.
The amount of time displayed on the chart depends on the precise timeline you choose.
What this means, is that the trading data for one day is represented by any point on the graph, whether it is a line, candle, or bar.
If you were to adjust the timeline to a 60-minute chart, then every point on the chart will now reflect trading data worth 60 minutes.
With most free forex charting software, you can choose to view timeframes up to a month from as low as 1 minute. If you are using more sophisticated charting tools, you can see lower timeframes.
How do you Decide Which is the Best Choice of Chart for you ?
This depends on how well you read the results, and your personal preference for what makes the most sense. For several traders another key factor is the time frame for trading. Some new traders spend a lot of time deciding a time frame to trade in and a lot of time and money can be lost.
Experienced traders can take much less time, because it is more of a personality thing. The same can be said for choosing your specific chart type. When you don’t want a lot of data to be analysed and are able to make decisions based on closing rates, a line chart would be enough. When you want to get as much knowledge as you can then a chart of candlesticks is the best choice.
You can always change your preference if it doesn’t give you the results you are looking for. All you need to do is choose the best provider for the chart. If you use the charts of your broker, then you can use them in conjunction with the demo account to give you the ability to practise with them.
Why do Forex Traders Love Candlestick Charts ?
Candlesticks charts are particularly informative. It’s not only the details that each chart item includes, but also constantly repeated trends that help traders see the changes that are coming.
Such trends help you see the course of the short term and forecast the bullish or bearish trend. Only one item, a candlestick, can represent several parameters, including the open, high, low, and closing prices of the market with the time unit.
The body colour shows the close result. If the candle is red or black it indicates that the closing was lower than the open. If the candle is green or white, it means the closure was higher than the open.
The long or short shadows indicate the high and the low prices within the time frame.
How to Access Live Forex Charts
You first need to be able to access them before you can learn how to read the forex charts.
Viewing live forex charts is important for making trading decisions, as they display all the action of buying and selling that is currently taking place in a market.
The MetaTrader platform is one of the popular trading services used by traders on the forex market and is a good place to access live forex charts. Many forex traders begin with MetaTrader 4, which you can download to start viewing forex charts for free.
One of the biggest benefits of those platforms is the fact that you can trade directly from the chart while analysing what you are seeing.
So, once you’re proficient in how to read forex trading charts and can recognise potential trade signals, you can easily open a live forex trading account for buying or selling a live order.
It may seem overwhelming when you first look at forex trading charts. Comprehending the price and time axis, however, helps to assess what has happened historically, which may help predict what will happen next.
All three different types of charts have unique features, with candlestick charts being the most common among traders worldwide. Identifying trends from candlestick charts-such as bearish, bullish or harami, can help traders identify possible turning points and market cycles beginning, or ending.
With the growth of online forex trading, the criteria for opening a forex account have become simpler. Opening a forex account today is basically as easy as opening a bank account.
You do, of course, need to locate a forex broker first. Every forex trade goes through and is handled by a brokerage, which could be a specialist forex broker or the same brokerage you use to trade and transact in the stock market.
You will need to fill in a short questionnaire about your financial information and intentions to trade. You’ll also have to have an ID, and your forex account institution needs the minimum deposit.
The simplest answer is that the forex is open to trading all the time, but depending on where you are in the world, it opens and closes at different hours at any given location. Greenwich Mean Time, commonly abbreviated as GMT, is the base reference time for all opening and closing times worldwide.
A forex broker serves as a middleman between you and the interbank network. If you don’t know what the interbank is, it’s a word relating to the banks’ networks that interact with each other.
A forex broker would usually provide you with a quote from the banks they have credit lines and access to forex liquidity from. Many forex brokers use multiple pricing banks, and they will be giving you the best available one.
A forex chart is a visual way of reading market movements over a given period of time. Looking at a forex chart, you can see rectangular symbols that look like candles – these signify the price of opening and the price of closing. The top is the open price, for the black ones, and the bottom is the closing price.
To forecast potential exchange-rate changes using past market data, traders need to look for trends and signals. Previous price fluctuations allow trends to appear which technical traders attempt to recognise and, if accurate, will indicate where the exchange rate is going next.
A green candlestick means that that day’s opening price was lower than that day’s closing price (i.e. the price rose during the day); a red candlestick indicates that the opening price was higher than that day’s closing price (i.e. the price fell during the day).
Strong patterns of candlesticks are at least three times more likely to resolve in the direction indicated. Reliable trends are at least twice as likely. Weak patterns are at least 1.5 times more likely to resolve in the direction indicated. That means that possibly two out of five trends would fail.
A dragonfly doji is a type of candlestick pattern which, depending on past market action, may signal a potential price reversal to the downside or upside. It is created when the prices for the assets are the same whether high, open, or closed. In both cases, the direction must be checked by the candle following the dragonfly doji.
A person can make a living trading the forex market, but the real question is whether this is likely.
Day trader success tests have shown that most will lose money in the long run. Nevertheless, some people make a good living trading currency pairs and have been doing so for years with success.
A weekly chart is the price series for a traded security where each candle, line, or bar on the chart reflects the price overview for a single trading week. The most common types of charts used by traders and investors are bar charts and candlestick charts.
The top of each bar shows the highest price of the currency during that time, while the bottom displays the lowest end of the scale. A little tick on the left side of the bar shows the opening price of the currency, while a tick on the right side represents the closing price.
No. Despite the multitude of YouTube videos and promotional advertising, it’s not easy to trade forex. When you find any place dealing in the forex market at the edge, there is a sign warning people it’s easy to lose money. The flip side is, it’s possible to make substantial sums of money when you educate yourself and control the risk by being fiscally responsible.
Fortunately, the demand in forex is only two-dimensional. It just goes up and down because decisions about buying and selling are based on one of two movements.
In reality you are not trading currency. You buy and sell predictions on pairs of currencies. When you use the EUR/USD as an example and forecast that the euro will rise against the US dollar, you will be rewarded if your prediction is correct. If your forecast is incorrect then at that point you don’t make money on that trade and may actually lose your capital.
Forex is traded through a forex broker. Traders can go online to sign up and download a trading platform (such as MetaTrader 4 or 5), onto their computer or mobile device and immediately start trading.
Pip stands for Point In Percentage. It is the slightest increase a currency pair can pass through. For instance, if the EUR/USD is going from 1.1000 to 1.1001, the increase is one pip.
Though the charts look identical, the forex market is so large that it is not controlled by anyone. Because of the nature of the stock market, the market is dominated by large companies and banks.
You make money purchasing pairs of currencies and selling them. Depending on how the market is doing, you choose whether to buy or sell a currency pair. For instance, if you are trading the EUR/USD and you believe that the Euro will benefit against the US Dollar, you buy. If you think that the euro is going to lose traction, you sell.
You just don’t. Even the most experienced pros tend to lose at trades. The forex market is extremely volatile, and can very easily shift up and down. However, you can make a well-educated guess on how the market will shift using various tools. The three tools are technical, fundamental and sentimental.
Technical research is the use of the charts to analyse price changes.
Fundamental analysis makes use of economic, social and political factors to estimate supply and demand results.
And sentimental analyses are based on gut feeling. It depends on what the trader thinks the market will do, based on previous experience.
Invest 400 dollars, and get started. You have the option of opening a demo account and pretending to trade, but since you have no cash in the game, your results will be a lot different than when you trade with your own money.
Trading with a demo account is like playing a video game, the acts don’t have any repercussions, so there’s no real motivation to learn how to trade profitably. If you have any of your own money on the table, then it becomes real. However, it is advisable first to spend some time demo trading before committing your hard-earned cash into a live trade.
You would become much more conscious of how to trade effectively, and eventually become a much stronger trader.
You can do it too if you just want to spend some money and let a skilled trader trade for you. It’s called mirror trading. Simply sign up with a broker for a forex account and then sign up with a mirror trader and you will be able to copy what he is doing.
Trading can take as little as 15 minutes a day depending on how you’re trading. You could set up your morning and evening trades and go to work in the daytime. You should also set a ‘take profit and stop loss point when you position your trade.
If your ‘take profit hits the market, the money is deposited into your account. Alternatively, monitoring the market and taking advantage of small changes may take several hours a day.
You need forex tools at the very basic level (such as MetaTrader 4 or 5), that you download from your broker. You may also want to use additional analytics software to help you assess how the forex market is likely to shift, if you want to improve your game a bit.
In the context, you can do it while you have another job. Set your morning and evening trades, and let the market trade during the day. For most brokers, you can start trading with as little as $200, but it’s suggested to start with a very low of $400. The more money you spend, the greater the profit you can earn. Losing money in this market is also very easy so the secret to success is good risk management.
Not exactly. The forex market is mainly speculative. There is no exchange of money in physical form. Similar to playing a video game, FX trades look true, but they’re just a machine entry. Nonetheless, the money gained or lost for any trade is real.
Price shifts with supply and demand. There are indicators that will tell you where the supply is higher than the demand (oversold), and where the demand is higher than the supply (overbought). As per the indicators you should take action accordingly.
Trendlines, which link a series of highs or lows are the most common way of identifying trends. You have an uptrend when you can attach a set of low points chart sloping upwards. Higher highs and higher lows also mark an uptrend.
Like businesses, national governments compete for their activities in the forex market, international exchange payments and the management of their foreign reserves. Central banks meanwhile influence the forex market by raising interest rates to manage inflation.
One factor influencing whether the value of a given currency goes up or down is the amount of circulating money, and relative inflation. For example, if a country starts printing money, the value of that currency is diminished by the inflation, and its value falls compared to other world currencies.
The short answer to this question is yes and no, Forex markets cannot crash entirely, but at any time, different currencies can crash. Forex crashes are very different from stock-market crashes in that forex crashes typically impact a common currency.
Experts advise you to concentrate on max. two or three currency pairs. Most new traders try to trade every single pair under the sun, and as a result, their skills cannot really grow.
Moving averages are one of the most common ways to recognise patterns in the market. A moving average is put on the chart and when the price is above the moving average level, it is perceived as bullish. If below, it is bearish.
The most frequently traded pairs in this forex include the euro, the Japanese Yen and the British Pound, as well as the US Dollar and the Euro.