Knowing how to use a forex chart is crucial for the forex trader.
While the forex market is certainly driven by fundamental economic factors, commonly known as the fundamentals, most traders prefer to make their trading decisions on the basis of charts and indicators, since these are open to anybody and do not require a deep understanding of global economics, these traders are known as technical traders or chartists.
The overall style of this type of trading is technical analysis.
The first point in lining up your technical analysis tools is to ensure that you are using the type of forex chart that suits you best. All currency trading charts show price movements for a currency pair but you can change how you view them. There are three basic types of chart:
1. Line charts
Line charts simply show the closing price for each period. You could set this to show the closing price at the end of every minute, the end of every day or many different periods between. This will give one point for each period and these are joined by a line to show the direction of the price movement.
Line charts can be useful if you want a quick overview of a trend. However, they do not give much information so very few traders would base a trading system on line charts.
2. Bar charts
Bar charts give four times as much information as a line chart. As well as the closing price, given as a notch on the right of the bar, they show the opening price with a notch on the left, and the high and the low (top and bottom points of a vertical line).
Being able to see the range of movement within a period can be very useful. It can give an indication of volatility of the currency pair, and in some cases, indicate when a retracement may be about to take place.
3. Candlestick charts
Candlesticks are the most popular type of forex chart. They show the high and low for the period in the same way as a bar chart, but the open and close prices are shown by the range of the candle body. If the open is higher than the close, i.e. the price fell during the period, the candle will be shaded in a white/shaded system or red in a green/red colored system. If the close was higher than the open, i.e. the price increased during the period, the body of the candle will be white or green.
The shading or color makes it easy to see the direction of price movement at a glance. The size of the candle body makes it equally easy to see the range of movement between the open and close. This is very helpful when looking for patterns in currency price movements. It makes it simple to spot trends, choppy markets and retracements.
Whatever type of forex chart you use, you will be able to alter the time period that point, bar or candle covers. This allows you to see price movements over a longer period or focus in to view the changes every minute. Many traders will use a second time period in the chart to check that their signal is not contradicted with a different chart setting. Of course, you can also use other technical analysis tools such as indicators to verify your decision before placing an order on the basis of your forex chart reading.
