If you're looking to get into forex trading, learning to read the charts is one of the first steps you'll need to master. Here are the 3 main types of FX charts and how you can trade them.
A forex (FX) chart is one of the first charts you will need to learn to read. When you trade forex, you will be trading currency pairs. For example, it could be the US/AUD pair, meaning the US dollar compared with the Australian dollar.
When it comes to forex charting, it is simply a graphical representation of how these currency pairs have moved over time. Sometimes they will just show the prices, while others will also include trading volumes.
When it comes to forex trading, you'll have 3 main types of charts:
This is probably the simplest graph, but it also shows you the least.
A line chart simply shows you the close price for a selected time period. The close prices are joined together so that they are in consecutive points to form a line.
This chart will help you see the general trend, but it won't give you the highs and lows within a given period.
For a more advanced look at the figures, traders can use bar charts.
The type of chart is a bar chart or HLOC, which stands for high, low, open and close.
It shows the following information:
Candlestick charts display pricing information in long, thin bars. The name simply comes from the fact they look like candles.
Each candlestick will show you the price movement over a specific time. You can set your candlestick for 1 minute right through to 5 years, depending on what you're trying to track.
The point of a candlestick is to give investors general price movement data at a glance.
If the candlestick is green, it suggests the price is moving upward, while a red candlestick points to a falling price.
| Response | |
|---|---|
| 0 | 39.39% |
| 1000 | 9.09% |
| 500 | 4.55% |
| 4000 | 3.03% |
| 5 | 3.03% |
| 5000 | 3.03% |
| 65 | 3.03% |
| 75 | 3.03% |
| 1 | 1.52% |
| 100 | 1.52% |
| 120 | 1.52% |
| 1200 | 1.52% |
| 200 | 1.52% |
| 2000 | 1.52% |
| 20000 | 1.52% |
| 25 | 1.52% |
| 300 | 1.52% |
| 3000 | 1.52% |
| 40 | 1.52% |
| 460 | 1.52% |
| 50 | 1.52% |
| 50000 | 1.52% |
| 550 | 1.52% |
| 650 | 1.52% |
| 67 | 1.52% |
| 670 | 1.52% |
| 76 | 1.52% |
| 90 | 1.52% |
| 9999 | 1.52% |
If you're looking to get into forex trading, you'll need a broker.
If you're looking to identify potential large movements, then you can use chart patterns.
There are many chart patterns, but we will look at a few of the most popular to start with.
In forex trading, market direction is determined by the strength of the buyers and sellers.
If you have more buyers than sellers, the price moves up. If you have more sellers than buyers, the price falls.
As such, you can use a symmetrical triangle pattern where the price's high and low form opposite sides of a slope until they appear to converge.
As the 2 slopes move closer together, this indicates that a breakout is to be expected.
However, there is no indication as to which direction the market will break out, but you can expect there will be significant movement.
To trade, you would place entry orders above and below the slopes, namely long and short respectively, so that you can catch the price as it breaks out in either direction.
A double top is a chart pattern that signifies a reversal, and it is usually formed after a strong upward movement in the market.
Think of an inverted W where the price tested the resistance level, drew back once, tried to test it again and couldn't break out, bouncing off the resistance level again.
It signifies there is a possible reversal in the uptrend because it seems that the buyers no longer outnumber the sellers.
A double bottom indicates that, in forex trading, market movement will potentially reverse from a downtrend to an uptrend, just like the double top.
A double bottom looks like a "W" and shows that selling pressure is waning and the market is likely to start climbing.
In FX trading, Bollinger bands measure the volatility of a market.
The more volatile the market, the wider the space between the bands will be. The less volatility, the smaller the gap will be.
Although the good news is you won't have to do the maths behind the bands.
In fact, they are relatively useless to traders.
However, what is important to traders is the fact that the price tends to retrace to the centre of the bands, where each band acts as a support and resistance level.
This is known as the Bollinger bounce.
If the price is touching the top band, or resistance level, it is safe to assume that it will bounce towards the middle, which would offer a good trading opportunity.
The Bollinger squeeze refers to the moment when the band's contract and the price is trending in a very narrow channel.
When the bands contract, this usually signals that a breakout is about to occur.
The narrower the channel, the stronger the breakout will be.
The exact direction of the breakout cannot be predicted, but if the price breaks through the resistance, or top band, then it is safe to assume that the market will be moving into an upward trend.
A trader could place entry orders at a set level above the resistance level or below support to catch the breakout, no matter which direction the market moves.
If you're looking to predict if a trend might end or reverse, you might want to use stochastics.
This is because a stochastic is an oscillator, or a leading indicator, that measures overbought and oversold conditions in a market.
When a market is overbought, this means that buyers have bought all they are going to for that session and the sellers will take over, driving the price down.
The same is true, but in reverse, for oversold conditions.
Stochastics are plotted as 2 lines on a scale of 0 to 100, usually on a graph below the chart.
When the lines are above 80, this signifies an overbought market and when they drop below 20, this implies an oversold market.
The idea is to sell in overbought conditions and buy in oversold market conditions.
The Relative Strength Index (RSI) also indicates overbought or oversold market conditions and is plotted in a similar fashion to stochastics.
But the main difference and its effectiveness in FX trading lies in the fact that it can also confirm the formation of a new trend.
If you feel an upward trend may be forming, you can verify this by checking whether the RSI is above 50 or below 50 for a downtrend.
In FX trading, these indicators can be used in a variety of ways, in conjunction with others or on their own, to confirm visual chart analysis.
Each trader develops their own strategy according to what works for them, and once you learn how to approach FX trading correctly, you too will be able to devise your own strategy.
When it comes to forex chart analysis, there are many different methods traders can use.
While all of them have some limitations, it is important to find a method that works for your individual trading plan.
Regardless of your strategy, you should focus on macroeconomic fundamentals that drive currencies.
Forex trading is also incredibly risky. For beginner traders, it is important they test their strategies prior to trading. This can be done through the use of demo accounts.
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