- 1 Understanding Forex Charts
Understanding Forex Charts
Analyzing the Forex market can be done in two ways: through fundamental and technical analysis. The technical analysis focuses on using the visualized price movements or the Forex charts. However, some traders find it hard to understand how these charts work entirely since there are many of them.
In this article, we will tackle various Forex charts and how they work.
What Are Forex Charts?
Forex charts are graphical models that show how a currency pair’s price changes over time. The vertical axis represents the price, while the horizontal axis represents the time. These charts make price movements more apparent and easier to observe.
Each type of chart is critical for its characteristics, usage, and even calculations. For example, a Heiken-Ashi calculation differs from a Renko chart calculation. The Heikin-Ashi is based on two periods’ average, while Renko focuses on the chart’s movements. Similarly, if you compare any other two types, you’ll find distinct differences that will affect your trading.
Generally, Forex charts can also depict price behaviors together with technical indicators and patterns. In trading, reading and understanding Forex charts is an essential skill to help with technical analysis.
Basic Types of Forex Charts
The main types of Forex charts are as follows.
It’s the most basic and most straightforward type of chart ideal for beginners. This chart focuses on closing prices over a period of time. A line is drawn connecting a closing price to the next one over a specific time frame you select. Each price and point is connected, forming a line in the chart.
This is one of the oldest forms of charts. It’s also called the HLOC chart or “high, low, open, close” chart. It involves a sequence of vertical lines connected by horizontal ones. A bar chart shows every price action over a specific duration of time. It’s composed of:
- A vertical line that shows the highest and lowest prices during that period;
- A dash or horizontal line on the left represents the opening price;
- A dash or horizontal line on the right shows the closing price.
This can be considered an intermediate chart type since it’s like an advanced bar chart version. The candlestick chart also shows all the price actions for a certain period of time – high, low, open, and close prices. However, unlike the bar chart, a candlestick chart uses a block as the body with two lines on the top and bottom part, and not simply a vertical line,
The topmost part of the block or body shows the price movement between opening and closing prices, while the vertical lines represent highs and lows. A red body indicates bearish trading, while a green one shows bullish trading.
However, you may also encounter hollow and colored bodies. A hollow implies a buy signal and indicates that the closing price is higher than the opening price, while a colored one signals the opposite.
Expert Types of Forex Charts
Like we’ve mentioned, aside from the three basic types of charts, there are also certain ones that expert or professional traders mostly use.
This looks like a classic candlestick, and its name literally means “average bar” in Japanese. It uses a specific and modified mathematical formula for averaging open, close, high, and low prices. Most traders use this to spot trends and predict future prices of currency pairs in the market.
Point and Figure Chart
This has a similar purpose to a Renko chart – filtering time and showing only relevant candles when the market is moving. The main difference is that a point and figure chart compresses time more than Renko does. Moreover, it uses Xs and Os instead of candlesticks.
This chart uses bars or candlesticks, or lines solely based on the transactions that happened in the market. For a set amount of transactions, every time they’re executed, a new bar is created. There’s no fixed time axis. Many traders use this chart to reduce market noise.
Forex patterns can provide you clues on when to place a trade on the market. Among various patterns, there are two common and most popular patterns.
Head and Shoulders (H&S)
This is a reversal pattern and is primarily seen in uptrends but can sometimes be in downtrends. This pattern is formed with the first peak or shoulder, followed by a much higher peak, the head, and then a lower peak again for another shoulder. The pattern is only complete when the neckline or trendline is broken. It’s a line that connects the lowest points of both shoulders.
These can come in three variations: symmetrical, descending, and ascending. Triangles are more common on short-term time frames and occur during price convergence with highs and lows, narrowing into a much tighter price area. Traders use these patterns mostly to gain insight into future price movement on the market and the possible continuation of existing trends.
There are more Forex charts and patterns you can use when trading aside from the ones mentioned above. But, you need to properly know how to identify and read charts and patterns to use them to your advantage. Once you fully understand how they work, you can develop your own trading strategies.