By now you have an arsenal of weapons to use for when it’s time to battle the market. You’ll need all of them!
The forex is a dynamic atmosphere that challenges even the most astute traders. To succeed, it’s imperative that you are up to speed on both fundamental and technical analysis. After all, winning is equal parts preparation, dedication, and competency. And, in the forex, being able to scrutinize each price movement is one key to success.
Now, you will add yet another weapon to your collection: forex trading charts.
Think of forex charts as being land mine detectors – they help you avoid disaster and stay on a healthy path. Once you finish this blog, you will be able to use several types of forex charts and spot explosions in the market before they happen. If you are able to hone your forex charts analysis skills, you can potentially make LOTS of money in the process.
But, first things first. In order to study how the price of a currency pair moves, you need some sort of way to look at its historical and current price behavior. Enter technical analysis and the forex chart.
A forex chart, or more specifically, a price chart, is a visual representation of currency quotes over a period of time. Essentially, the forex chart tracks the price movement of a currency pair or currency pairs.
Forex charts are extremely important for technical traders, as they reveal how currency pairs have performed over a set period of time (whether it’s 10 minutes, 4 hours, a day, or a week). By examining the past performance of price action, it’s possible to project future market behavior. This concept is the crux of technical analysis.
No matter your preferred trading method, you’ll need to know how to read forex charts – there really is no escaping it. Whether you are using a bar chart, candlestick chart, or line chart, the task is the same: identity positive expectation trade setups and cash in on the action.
Although charts may seem to be rocket science at first glance, they’re really not that bad. They are user-friendly and it’s pretty easy to understand how each price movement is presented over time. It’s all visual; there’s no heavy calculus or quantum physics to contend with.
Before pulling up a chart on your forex trading platform, it helps to understand a few basics. Here are the foundational elements of any forex chart:
No matter if you are referencing a bar chart, candlestick chart, or a line chart, these elements remain constant. All charts are simply visualizations of price action over a specified period.
Fun Fact: Back in the day, forex charts were drawn by HAND! One of the most common “old school” visualizations of price was the point and figure chart.
Perhaps the most difficult task that active traders must deal with is timing the market. That’s why many participants focus on trading forex charts above all else to decide when to enter and exit the market.
Chart formations can help us spot conditions where the market is ready to break out, consolidate, reverse, or extend the trend. And, that’s the whole point; to spot big movements before they happen so that we can ride them out and rake in the cash.
After all, who doesn’t want to have a pool of cash to swim in? A profitability matrix that is a vertical line? Complete and total financial independence?
Before we dig deeper into more advanced aspects of technical analysis, let’s look at the three most popular types of price charts: line charts, bar charts, and candlestick charts.
A line chart is the simplest type of forex chart. Basically, line charts connect a series of selected price data points. The end product is a single line that moves from left to right, illustrating the peaks and troughs of price action. Common price points are opening and closing prices.
Line charts give us an easy-to-use representation of the past pricing of a currency pair. While they are not overly sophisticated, they can shed some light on a market’s state in regards to trends and relative pricing.
A bar chart is a type of forex chart that depicts the periodic behavior of a currency pair. In contrast to line charts, the bar chart includes four price points: the opening price (O), high (H), low (L), and closing price (C). Given this information, bar charts are often referred to as OHLC charts.
For many forex traders, bar charts are a go-to technical device. Not only can they be used to discern market direction, but they also work well for a detailed study of periodic price movements. If you want a bit more detail than a line chart, the OHLC bar chart isn’t a bad place to begin.
Developed at the Dojima Rice Exchange by merchant Munehisa Honma, Japanese candlestick charts are among the most popular forms of technical analysis in use today. Traders from around the world rely on candlestick charts to further their forex chart analysis.
Basically, the candlestick chart shows everything that a bar chart shows: a currency pair’s trading range as well as the bullish or bearish sentiment. This is done by noting the opening price, closing price, high, and low.
However, candlestick charts take the analysis a bit further. By illustrating the “body” of each candle, it shows where the bulk of trade has taken place for a given period. In fact, many forex trading strategies rely on the bodies, wicks, and patterns local to candlestick charts.
If you’re interested in trading forex charts, the choice on which type of chart to use is yours. However, it’s important to make sure that you use a chart complementary to your strategy. After all, it helps immensely to put price movements into a useful context.
What do I mean by that? Let’s look at a quick example. Assume that you are an intraday scalper, looking to take small pips off the EUR/USD. In this case, a monthly EUR/USD line chart isn’t going to do you much good. A better choice would be either a 5-minute bar chart or a 30-minute candlestick chart.
Remember, choosing the right chart for the job hinges on the type of information that you need to trade. If you’re investing in long-term trends, then a monthly or yearly line chart may work just fine. If you’re an intraday trader, then a one-hour or 30-minute candlestick chart is a solid choice.
On to the next lesson!