When you first start your forex or FX trading journey, charts are your best friend. These charts tell you everything you need to know about what you are trading, from its price to sales, dips, and rises.
However, these charts can be a bit tricky to understand, especially if you have never looked at them before. Here is everything you need to know about forex charts, including the types of charts and how to read them.
A line chart is one of the most recognizable types of charts as it is used in more spheres than just forex. It is a line that will move up and down, allowing you to see when prices go up or when they go down.
As mentioned, they are easy to spot; you’re just looking for a moving and unbroken line set on a graph that has a time and a price axis.
A bar chart is slightly more complex, but therefore it is also more useful. A bar chart will show the opening and closing prices of a currency pair, with the bottom of the bar showing the lowest traded price and the top showing the highest.
Bar charts are helpful as each bar is a complete set of data. Combining the hundreds of bars you see will give you a more holistic understanding of what you are trading.
A candlestick chart is almost identical to a bar chart but with easier-to-read graphics. A candle will have a body and two tails; the top tail shows the high, with the bottom tail showing the low. The top and bottom of the body indicate the opening and closing prices.
Candlesticks will also be either red or green; red indicates the price closed lower than the opening, with green indicating the price closed higher than the opening. Traders love candlestick charts as the information is easy to read, and you can look at many different charts at a glance.
On a graph, there will be a continuous line that moves with the bars, lines, or candlesticks. This is the “average line;” it does exactly what you’re assuming; it shows the average price and movement over a period of time. It is another useful tool to quickly see how a currency pair is trading.
Bollinger bands work with the average lines on a graph to indicate volatility. If the band stays an average size, it indicates that the markets are relatively stable; if it tightens, it indicates that there will be a sharp price rise or drop.
If the band widens more than usual, this indicates increased volatility, and there is an increased chance of current trends ending.
Relative Strength Index
A relative strength index is a tool used to compare the strength of a currency on days its price went up and days its price went down. Traders can use this with price action to determine how a pair will perform.
Price & Time
On a chart, one of the most vital pieces of information is the price and time axes. Price and time aren’t enough for expert traders, but for beginners, it is a good way to get a quick idea of how a currency pair is trading.
On a chart, you are able to filter for different time periods; hourly, daily, weekly, and monthly. This is vital depending on the type of trader you are.
For example, if you are a scalp trader, you want something that shows you minute-by-minute movements. If you are a position trader, you will be more interested in long-term movements and, therefore, would prefer a monthly or even yearly overview.
Keep it Simple
Finally, a mistake that many new traders make in technical analysis is that they flood their charts with indicators and information and then just end up confused. It is important to note that not every indicator and tool is needed to be successful.
As mentioned, if you are a long-term position trader, you don’t need much more than the average line and a monthly or yearly performance filter. Keep your charts simple and easy to read, and only add indicators and tools if and when necessary.