What are the Forex trading charts
What are Forex trading charts for? Forex Trading Charts will basically show you the sum of what’s happening in the market as a chart or graph of the prices of a Forex pair over a fixed period of time. Forex trading chart is actually a visualized representation of currency price movements. It is the result of any activity that goes on between buyers and sellers in the currency market.
Forex trading charts can give you a clear picture of whether a currency pair is getting stronger or weaker so that you can make your trade likewise. A chart of currency pair EUR/USD of the day can offer much insight in terms of price levels and general market trends. Therefore it is one of the most important tools for any currency trader for doing Forex market analysis.
Types of Forex Trading Charts
There are three different types of charts available in you platform, you can classify them as:
- Line Chart
- Bar charts,
- candlestick charts
Let us analyzing each of these charts and how to read them:
1. Line chart
A line chart of a currency pair has a line that connects different closing prices. These connected prices show the price trend of a particular currency over a specific time frame. As it simply connects the closing price with a line, just glance at the line chart and you get a feel of the market.
Below is an example of a line chart for a currency pair:
The base line of the chart gives the timeline. The right-hand side of the chart shows the currency values that generally run from a little below to a little above the lowest and highest prices reached during the time period specified.
In the EUR/USD chart shown above you can see how the US dollar and Euro have moved against one another during the period for which the chart is plotted. Similarly a forex chart can be created for any single currency pair like the EUR/USD, USD/JPY and so on plotted over a period of time.
Before Reading a line chart, at first you have to select the time frame for the chart as for example a short time scale can help you discern minor trends while a long time scale can help you to see long term trends. When doing Forex trading it is best to refer to the charts as published in the trader’s platform.
But, there are some problems with the line chart. One of the problems with line charts is as for example if the market were to move abruptly/drastically all the line chart shows is the close, which means you could miss out on vital information that is crucial to either making or losing money as a trader. In other words line charts only measure the overall direction of long-term trends (by measuring closing price for a series of periods), and hence are of limited use.
A Bar chart of a currency pair gives a bit more information than a line chart in that it gives you the open, close, high, and low of the market for a particular currency pair. In effect it gives you more data about the price changes that happen during the bar, not just at one point in time.
Some analysts also refer Bar charts to as OHLC charts. In OHLC the individual letters denotes Open, High, Low and Close for that particular currency pair.
Have a look at this example of a price bar:
OPEN: The horizontal line on the left stands for the opening price of the currency
HIGH: The top point of the vertical line shows the highest price of the currency during that time period
LOW: The bottom point of the vertical line shows the lowest price of the currency during that time period
CLOSE: The horizontal line on the right shows the closing price of the currency.
Essentially, a bar chart basically conveys four key pieces of information for any given time frame. They are the opening price during that time frame; the closing price; the high price; and the low price. As bar charts can be used for all time frames, it could summarize price activity, say over the past minute, hour, day or over the past month. Looking at the chart for example you can figure out when exactly the markets moved quickly.
Japanese people have a great contribution to evolution of current forex trading analysis system. One of the contributions is Candlestick charts. It was invented by the Japanese in the 1700s to study the movements in the price of rice on Japanese commodity exchanges. Candlestick charts show the same information as a bar chart but in a graphically attractive way.
Bars in the Candlestick Chart indicate the high-to-low range with a vertical line as in any bar chart. But in candlestick charts, the larger block in the middle indicates the currency price range between the opening and closing prices.
Now, let us consider this candlestick bar:
The red or green portion of the candlestick is called the real body. The real body of the candlestick represents the range between the opening price and the closing price for a particular time frame. Real bodies can be either long or short.
The center position of the bar on the left side is green in color and the center of the bar on the right side is red in color. What this means is, if the currency close price was lower than it opened; the candlestick would be red in color. On the contrary if the currency closed price was higher than it opened the candlestick would be green in color. But in a situation where the closing price is higher than the opening price, the middle block is green in color.
The thin line above and below the candlestick are called shadows and is where the price dipped or rose to reach a price, albeit transiently although it did not stay at that price. Shadows can be long or short. If the upper shadow on a green candlestick is short it indicates that the close was near the high.
The Bottom Line: Forex Trading Charts
As we all know that you must learn the functions of a platform before starting analyzing the market. So, if you are relatively new in Forex Trading arena, we would like to recommend you to read these articles:
|Chapter 4||Forex Trading Analysis|
|Lesson 1||Forex Trading Analysis|
|Lesson 2||Forex trading charts|
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