Forex, or foreign exchange market, helps to compare the different world currencies against each other and helps individual traders and investors take advantage by trading on those currencies. The currency charts provide a visual demonstration of the worth of a currency against other assets. If you need to read currency charts in order to get a better idea of currency values, here are some of the basic steps involved.
Knowing the Basics
- In order to read and benefit from currency charts, you’ll need to get them from a legitimate provider. Most of the smaller traders and investors who profit from Forex trading use charts that are offered by their brokerage services. New online brokerage services often include tools, like currency charts, in order to help their clients understand current pricing.
- One of the most important steps in using forex charts, is that you can set a specific time frame. The values that you view are only relevant to the specific time frames that you establish for them. The user can change the view to a specific time frame ranging between One Minute to a Month.
- Look for specific visuals in the chart to try to predict which way future prices will go.To take advantage of this make use of the candlestick charts.Candlestick charts show a range of traits for a specific trading day, with a top and bottom that illustrate price movement. Many currency charts include candlestick charting, especially online ones, and by observing these charts correctly, you can know much more about the price than just how it has changed over a period of time.
- Look for items like a Fibonacci retracement and Moving Average. A Fibonacci retracement is a specific kind of price spike or dip where a reversal can signify a general trend whereas a Moving averages tells you how the price has changed over a longer time frame.
Types of Forex Charts
There are three main types of Forex charts used by traders namely:
- Line chart
- Bar chart and
- Candlestick chart
In forex, most traders use candlestick charts. However, let’s have a look at all the three types.
- Line Chart: A line chart is made up of a series of dots connected by a line.A simple line chart draws a line from one closing price to the next closing price.When strung together with a line, we can see the general price movement of a currency pair over a period of time.
- Bar Chart: In Forex, a bar chart is made up of a series of bars. These bars show opening price, closing price, as well as the high and low for the period of the bar. A bar is simply one segment of time, whether it is one day, one week, or one hour.
The top of the bar is the highest point the price reached and the bottom shows the lowest price that bar fell. The dash on the left shows the price the bar opened and the dash on the right shows the price the bar closed. Bar charts are also known as OHCL charts (Open, High, Close, and Low).Bar charts provide much more information about a currency than Line charts.
- Candlestick Charts:Candlestick charts are similar to the bar charts. Most traders prefer the look of candlestick charts. Candlesticks have bodies unlike bar charts, where the open and close are the top and bottom of the candlesticks body. It makes it a lot easier to see where the candle opened and closed. The different colored candle bodies represent whether the candle moved up from open or down.
In candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices. If the block in the middle is filled or colored in, then the currency pair closed lower than it opened. If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled. Below are a few points on why a candlestick chart is better when compared to the line or bar chart:
- Candlesticks are easy to interpret, and are a good place for beginners to start analyzing forex charts.
- Candlesticks are easy to use. Candlesticks help to immediately capture information in the bar notation and help in better understanding.
- Candlesticks are good at identifying the market turning points, reversals from an uptrend to a downtrend or a downtrend to an uptrend.
Reading Candle Stick Charts
Candles are always born neutral. After birth they can grow to become either bearish, bullish or on rare occasions neither. When a candle is born traders do not know what it will become. They can speculate but they do not truly know what a candle is until it dies (closes).
- Bullish Candle: A Bullish Candle means there is currently more buying pressure in the market. As long as buyers maintain enough buying pressure the candles will be bullish. If buying pressure eases and selling pressure increases bullish candles will become smaller, representing decreased bull strength.Bearish Candle: A Bearish Candle means there is currently more selling pressure in the market. As long as sellers maintain enough selling pressure the candles will be bearish. If selling pressure eases and buying pressure increases, bearish candles will become smaller, representing decreased bear strength.Wicks: Wicks show the highs and lows but in certain cases reading them reveals some very useful information.
Small bearish body and larger upper wick:
This kind of candle suggests that at some point while this candle was open the bulls tried to push the price up. This is what the long upper wick tells us. However, before this candle closed the bears took over and pushed the price back down. This is shown by the bearish body close.
Large lower wick, small bullish body and small upper wick:
This candle suggests that at some point while this candle was open the bears tried to push the price down. This is what the long lower wick tells us. However, before this candle closed the bulls took over and pushed the price back up. This is shown by the bullish body close.
Reading the Bullish Candlestick Formations
- Hammer: Hammer is a Bullish Pattern, it appears after a significant downtrend. If the line occurs after a significant uptrend, it is called a Hanging Man. A small body and a long wick identify the Hammer. The body can be empty or filled in.
- The Pricing Line: It is a Bullish Pattern where the first candle is a long, Bear candle, followed by a long Bull candle. The Bull candle opens lower than the Bear’s low, but closes more than halfway above the middle of the Bear candle’s body.
- A Bullish Engulfing Line: It is a patter strongly Bullish if it occurs after a significant downtrend. It may also serve as a reversal pattern. It occurs when a small Bearish candle is engulfed by a large Bullish candle.
- The Morning Star: It is a Bullish Pattern signifying a potential bottom. The star indicates a possible reversal and the Bullish candle confirms this. The Star can be a Bullish or Bearish candle.
- Bullish Doji Star: The star indicates a reversal and a Doji indicates indecision. This pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation before trading a Doji Star.
Reading the Bearish Candlestick Formations
- A Long Bearish Candle: It occurs when prices open near the high and close lower, near the low.
- The Hanging Man pattern: Itis Bearish if it occurs after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. A Hanging Man is identified by small candle bodies and a long wick below the bodies, and can be either Bearish or Bullish.
- Dark Cloud Cover: It is a Bearish Pattern that is more significant if the second candle’s body is below the center of the previous candle’s body.
Reading the Neutral Candlestick Formations
- Spinning Tops: Itis a neutral pattern that occurs when the distance between the high and low, and the distance between the open and close, are relatively small.
- Doji: A Doji candle implies indecision. The open and close are the same.
- Double Doji:(two adjacent Doji candles) It implies that a forceful move will follow a breakout from the current indecision.
- Harami:It occurs when a candle with a small body falls within the area of a larger body.
Reading the Reversal Candlestick Formations
- Long-legged Doji: It occurs when the open and close are the same, and the range between the high and the low is relatively large.
- Dragonfly Doji: It occurs when the open and close are the same, and the low is significantly lower than the open, high and closing prices.
- Gravestone Doji: It occurs when the open, close, and low prices are the same, and the high is significantly higher than the open, close and low prices.
- Stars:A Star is a candle with a small, real body that occurs after a candle with a much larger, real body where the real bodies do not overlap. The wicks may overlap.
Thus, forex charts are commonly used by most of the traders as they reveal a wealth of data at just a glance and chart patterns are mainly used to forecast and confirm the upcoming trends.