Welcome to our forex charts guideline. We are going to explore line charts, bar charts, and candlestick charts. By the end of this guide, you will know what they are, what they look like, and how you can use them. If you are new to forex, make sure to check out for the best forex brokers from our forex broker reviews.
Forex charts are depictions of the exchange rate between two currencies. They show the exchange rate of a currency pair over time. When trading, you will encounter three types:
- The line charts
- The bar charts
- The candlestick charts
Like picking the best forex broker, you will need to know which of these is the best for you. Most people will master how to use all three with time. However, you will need to start somewhere.
We think that by understanding the way that the forex charts work, anyone can begin to know how to follow the process and glean useful data that helps make well-informed choices in the forex market.
Forex charts may not be necessary when making sound decisions on trading. However, their importance cannot be understated. They are still useful in the day-to-day activities you may undertake.
Because of the importance of forex charts, we would like to go a bit deeper and discuss them in detail so that you may be able to use them in augmenting the knowledge you use in forex analysis.
Why Are Forex Charts So Important?
As graphical representations of the currency pair’s exchange, forex charts give you an easy way to visualize and analyze past movements in the price and then be able to anticipate future changes. Technical analysis depends on this fact.
All the forex charts you will see represent the exchange rate with minor differences.
Line charts, bar charts, and candlestick charts, all have the x-axis showing time and the y-axis showing the exchange rate.
We can apply tools like channels, trendlines, and Fibonacci levels to the forex charts and be able to anticipate what the future price movements of the pair could be. Most of the time, many traders in the forex market apply technical indicators on the price chart or a separate window, to get this information.
How We Read Charts
The process of reading the forex charts is quite simple. Line charts, candlestick charts, and bar charts all have one thing in common. The vertical axis shows you the exchange rate of a pair, and the horizontal axis shows you the date and time.
All you need to look at is the trend and be able to interpret it. However, to do that, you need to know a little more about each of the forex charts.
Let’s get started.
These charts are the most basic of all the forex charts you will encounter. With it, all you see is a simple line (like a heart monitor type thing), which connects the closing prices for every trading session.
The line charts are mighty useful when you want to rapidly identify the trends of a currency pair, but not many forex traders use them. They are not very visually appealing.
Back when the forex market was still inaccessible to most, forex charts were not very commonplace. When traders tried to do technical analysis, they had a hard time conceiving the oscillators and indicators. For that reason, they focused on theories and concepts.
Then, a few traders started to realize that the most straightforward ideas worked best. That is how we got line charts with a Y and X-axis, showing exchange rates and time. That was all they needed to augment their knowledge.
How We Find Dynamic Support and Resistance Using Line charts
Because line charts display only the closing price and ignore the price action between the opening and closing prices, they reflect the true nature of the forex market. In forex charts, line charts filter out the market's noise by focusing only on one thing.
The standard method used when finding the support and resistance using line charts, is to connect two points using a trendline. However, this information by itself is not enough, which is why mastering the other forex charts is very useful.
How We Trade with Line charts
Even though the line charts may be considered too simple because they only show us the relevant price action, they work best for this straightforward reason. With it, you can tell when the market made a new low or high. You can quickly draw a trendline to find future support, if any, exists.
When using the line charts, keep these things in mind:
- Set the line chart up and look for support and resistance in bullish and bearish trends
- Draw a trendline connecting the previous two lower lows (they occur in a bearish market) and drag it to the right side of the chart
- You can then place a pending order to sell into resistance or buy into support
- Set the stop loss at the bottom of the candlestick (when there’s a bearish trend) or at the top (when there’s a bullish trend)
- Try and target the 1:3 risk-reward
You can also trade line charts with moving averages. First, you should know that the higher the moving average, the stronger the support or resistance the price will meet. The bigger the time frame, the more reliable support and resistance gets.
Line charts teach us that we can estimate trend strength with moving averages.
- Trade only the first two times when the price tests the averages.
As you will find out, the price action during the candlestick charts use, will be volatile and chaotic. To avoid this, the line charts come in handy.
In studying the bar charts, we find that they have a few more functions than the line chart does. It is also called the Western chart, and it shows the price activity for a timeframe using one vertical bar to show the high and low prices.
It also has a short horizontal bar to the left that shows the opening price. In addition to this, there us another quick bar to the right of the vertical bar, which shows the closing price.
In contrast with line charts, bar charts include more information. They are called OHLC charts for a reason. They show you the open, close, high and low prices for each single trading session you carry out.
The Anatomy of a Bar chart
A cursory look at the bar chart shows these lines. To make it extra clear what you will be looking at when using a bar chart, we are going to break down the anatomy of a bar chart utilizing this price bar above.
HIGH- The topmost vertical line shows the highest price of the period represented by the bar.
CLOSE- The horizontal line to the right is the closing price.
OPEN- The horizontal line to the left is the opening price.
LOW- The bottom of this line defines the lowest price of the period represented by the bar.
How Traders Use Bar charts
Just like with line charts, bar charts are used by the traders, who draw trendlines and find the support and resistance levels. With this information, you can do a lot to make your trades come out better.
In bar charts, the bar is simply a reference to pieces of data. On the bar chart, a bar is taken to mean a timeframe. It could be a day, a week, or an hour. So, as you use the bar charts, be sure to make sure that you know what segment of time they are referring to when they say 'bar.'
Let’s talk about trends.
Bar charts and Trends
Forex chart analysis takes the same kind of work that goes into finding the best forex broker by reading forex broker reviews. You need to know that the currencies trade in predictable patterns that repeat themselves.
With bar charts, to identify this trend, zigzags will be your primary focus. An ascending trend, for example, can be identified when you can connect at least three rising peaks in a straight line. A descending pattern is determined the same way, by plotting a line connecting three or more descending low.
Bar charts Identify Reversals, Resistance and Support
Bar charts are also handy when you want to know the end of a trend. This is the signal to buy or sell. Reversals are spotted when tops and bottoms become the inverse of each other.
As for the resistance and support, you should always make sure that you practice with paper trades until you are very good at charting before you dip your toes into the more complex world of bar charts for real-life decisions.
The Japanese candlestick chart is a close relative of the bar chart. However, it is considered the top favorite among traders. So, what makes this one the most used charts among them? Well, let’s find out.
The candlestick chart is named that way because of how it represents the price activity for every period. It resembled the shape of a candle with a wick at the top and the bottom.
The candlestick chart is old. It was used in trading rice contracts for the Japanese Exchanges back in the 1700s. They are Eastern in origin. The Western markets only got to start using the candlestick chart when Steve Nison (a prominent American Chartist), started using them.
The Anatomy of a Candlestick chart
Knowing what makes up a candlestick chart is the best way to understand how they work.
As per our representation, if the price closes higher than it opened, the candlestick is green. If it closes lower than it opened, the candlestick is red. Typically, the candlestick charts show them in black and white. The colors are customizable in several cases, and all you need to know is, what color is it when it closes lower or higher.
What Makes The Candlestick charts So Popular?
There are several reasons why candlestick charts are so popular. Let’s go through some of them.
- It is easy to interpret candlestick charts and for beginners who have just finished looking for the best forex broker from our forex broker reviews, an excellent way to learn to chart.
- Candlestick charts are easy to use, and most people report that their eyes adapt almost immediately to the information in the notation.
- Candlestick charts and patterns are given names like 'shooting star.' This is an easy way for anyone to remember which patters mean what action.
- These forex charts are especially useful when it comes to showing market turning points like reversals, downtrends, uptrends, and how they shift between each.
As you will come to find out, there is a lot about these charts that can help you become a better trader.
Something to Note About Forex charts
Here are some points that you will need to keep in mind, as you make your way into the market to trade:
- All forex charts have a vertical axis (the Y-axis) and the horizontal axis (X-axis).
- The prices of assets are plotted on the Y-axis, and the timeframes are plotted on the X-axis.
- All these three forex charts do not show the volume information. This may seem like a disadvantage (which it is). However, you can learn how to overcome this by adding indicators to show volume information on whichever of the two axes you prefer.
- Every candle or bar shows a unit of time for the timeframe forex chart you are using. So, if a chart for an hour is put up, every bar or candle represents price activity for that one hour.
- For line charts, it is impossible to single out timeframes.
As you get started with this, remember to find the best forex broker in our forex broker reviews. It helps to sign up with a broker who will provide all the tools, information, and data that you need to chart correctly.
As you have seen, line charts, candlestick charts, and bar charts essential when discussing the tools you need as a trader. For that reason, when looking through our forex broker reviews to pick the best forex broker, you should make sure that you look for one who will offer the tools you need to analyze this information.
A majority of traders use charts to scan the market and find the most valuable trades. They are the basis of technical analysis, and you should always use them whenever possible. Candlestick charts are the most popular kind you will find.