Is it just a passing fancy that urged you to search up on how to read Forex charts? Or are you looking to glean some basics before diving into the line of Forex trading? Whatever your reason, this article will tell you all about reading forex charts!
Forex is indeed an intriguing marketplace, visually and analytically. In essence, it is a global market where currencies get traded every second of the day. This large-scale intimidation might very well be your first hurdle to getting into the dynamics of the Forex system.
Your notions of not being able to grasp the business tactics or the technical vocabulary and jargon are staunch supporters. However, now that you have taken the first step, let’s find out more about how to read forex charts.
Tackling the basics
Forex charts are graphical representations of the currency exchange rates between any two chosen currencies. They indicate the exact exchange rate changes of the currency pair over a set period.
Before you start reading a Forex chart, you need to have two things:
- A basic understanding of a few concepts.
- A Demo Account with a leading online broker like IC Markets or XTB so you can practice what you learn.
The foremost thing to be aware of is the currency quote.
Trading in Forex is dependent on the different types of currencies that traders utilize. These trades may be small or large, as preferences align. However, the main principle is to evaluate the relative strength of one currency over the other, by pitting them against each other.
Hence, all currency quotes can be found in pairs. Take, for instance, the quote EUR/USD. This is the most popular currency quote that gets traded-in.
Here, the first currency, EUR, forms the base. The second currency, USD, is the quote. If you are trading in this currency quote, it implies you are buying the ‘base’ by selling the ‘quote.’
If EUR/USD=1.254, it means that for 1 Euro, you will be selling or you need 1.254 US dollars.
The next pointer to bear in mind is the timeframe of Forex charts.
Timeframes can be chosen by you accordingly, be they by day, minutes, or hours. The charts can even reflect longer timeframes amounting to years and months.
The longer the timeframe you choose, the more detailed is the currency exchange information you will find.
The trading data in a 1-day timeframe chart will show points by the hours, hence 24 hours. Similarly, for an hour’s timeframe, the data is represented by the minute hence a total of 60-minutes.
If you think about it rationally, a 24-hour chart will present more data than a 60-minute chart. Of course, it does not mean that you only have to stick by a 24-hour Forex chart. The need to choose different timeframes depends on specific individual requirements.
3 Popular types of Forex Charts
For now, bear these fundamentals in mind as you continue reading. The next topic we will delve into is the chart reading. There are, of course, multiple charts to read through when studying the Forex market trends. Traders tend to prefer the more convenient-to-read charts, which is what we will be discussing here.
How To Read Forex Candlestick Charts
Step 1: Choose the currency quote
There are plenty of currency quote options provided for your convenience. Simply pick the one you want to generate a chart of, say, for instance, EUR/CAD. This quote compares the strengths of the Euro vs. the Canadian dollars.
Further, check out the various pairings with the same currency to get a firm grasp on its relative trends.
Step 2: Determine the timeframe
In the candlestick chart, the selected timeframe is represented by candles. The number of candles depends on the time allotted to each. For a 24-hour timeframe, each candle represents one hour.
Further, the X-axis represents the exchange rate vs. the Y-axis that charts the time. The position of the candles on the graph varies according to the fluctuations recorded in the exchange rate.
Step 3: Differentiating the candles
You will find two types of candles shown in the graph. They are generally colored, one red and the other green, or can be colorless, one blank and the other filled. Whichever they may be, the blank one is the bullish candle, and the filled one is the bearish candle.
Alternatively, the green candle is the bullish candle, and the red one is the bearish candle. Ensure to check the key of the graph to determine which color represents which notation.
The bullish candle portrays a closing price that is higher than the opening price. The bearish candle depicts an opening price that is higher than the closing price. Hence, a bullish candle signals buying the pair while a bearing candle signals selling it.
Step 4: Identifying the segments of the candles
The rectangular candle bodies with their specific coloration will give you a clear idea of what they symbolize. The top and bottom lines depict the closing and opening exchange rates for the selected currency quote.
Further, you will find two smaller lines extending from either side of the candles, the top wick, and the lower shadow. The tip of the top wick represents the highest exchange rating, and the end of the lower shadow, the lowest exchange rating.
Thus, for a bullish candle, the wick equates to the highest closing price and the shadow, the lowest opening price. Similarly, for the bearish candle, the wick equates to the highest opening price and the shadow, the lowest closing price.
Step 5: Studying candlestick patterns
Candlestick charts are like a treasure map, indicating something valuable through a mere symbol. In a candlestick chart, you will find symbols like big candles and Doji candles that point to a definite pattern. Your trend speculation depends heavily on their understanding.
Larger candles are an indication of the continuing trend. A big bearish candle will mean a prolonged bearish trend that implies you to sell the pair. Similarly, a big bullish candle will mean a continued bullish trend that signals you to buy the currency pair.
Doji candles are symbolized by minute candles that can often have no bodies at all. Their prime indication is a neutral market that equates to putting off any trade-in that given period.
Step 6: Identifying patterns on the chart
Once you have a good grasp on candle patterns and symbolizations, apply the knowledge on the charts. You will be amazed by the number of templates you can figure out by merely getting the orientation right. There are patterns indicating uptrends, the reversal of uptrends, and even positions that are given engaging names.
How To Read Forex Line Charts
Step 1: Choose the currency quote
Line charts are simple graphs that provide limited data regarding the exchange rates of the chosen currency pair. Their prime implication lies in reflecting the market trends since they can be compared with multiple leading currencies.
Step 2: Determine the timeframe
Line charts typically represent a bigger picture; hence it is ideal to go with a longer timeframe. Also, large-scale patterns are easily visible inline charts since they compare one value at a time.
Step 3: Choose the determining price
Most services set the closing price as a default option when generating line charts. If your service provider is a modest one, you may have additional values like low, high, or open, to choose from.
One smart way of going about comparing line charts is to use different values for the same period. Unpredictable patterns are usually discovered through such comparisons. Additionally, they are beneficial for your knowledge bank if you are not able to make use of them at first.
Step 4: Evaluating trends
Line charts provide a deceptively simple outlook on the rising and falling exchange market trends. Your best bet is to utilize them in tandem with data from other charts like the candlestick and bar chart.
You hold a better chance of supplementing your chart analysis by making use of all resources at your disposal.
How To Read Forex Bar Charts
Step 1: Choose the currency quote
In a Bar chart, you have the convenience to choose from the required currency quote. Here, the graph intervals are represented by disjointed or individual bars. They are not linked as in the line chart.
Step 2: Determine the timeframe
The timeframe selection is similar to that in the candlestick and line charts. Here, each interval is represented by a bar. Thus, for a 24-hour timeframe, you will have each hour in the form of a bar.
Step 3: Differentiating the bars
The bar is merely a singular line where the top indicates the high price, and the bottom, the low price. A small horizontal line from the left side of the bar is an indication of the opening price. Similarly, a small horizontal line from the right side of the bar indicates the closing price.
Bullish and bearish bars can vary from service to service, so ensure to check the key of the graph. Accordingly, you can understand the rising or falling trends by figuring out the bar patterns.
Step 4: Comparing values
A definite comparison between the bullish and bearish bars can throw up a variety of patterns. The position of the previous bar concerning the succeeding bar shows value changes. Try identifying the higher highs and higher lows in comparison to lower highs and lower lows.
Step 5: Locating trends in the graph
Ultimately, after gathering all knowledge, putting it to use is an exhilarating experience. The bar chart may appear intimidating at first glance. However, with your new-found perspective, it may appear not-so-intimidating since you are aware of the symbolization.
You can easily chart out the uptrends and even scroll back to gain an insight into their beginning period. The bar charts are noted for the gaps that you can spot during the exchange trends.
Summary
Reading a Forex chart requires some amount of focus to memorize and understand the various interval patterns. But you may also find that it is a fun process that keeps you engaged, if not interested. Hopefully, now you have a basic idea of how to go about reading Forex charts.
Check out your knowledge by reading some forex charts available online bearing the above pointers in mind. Learn more about forex trading and open a demo account at XTB or IC Markets.