How to Read a Chart
When it comes to trading the forex market the forex chart is the basic trading tool used by all traders. The forex chart will show information about a currency pair - the forex chart will show the general direction of prices, the chart will also show the current exchange rate of a currency pair and the chart will also show historical movement of chart prices.
Traders will use these charts to determine where to place trades. From the chart the trader will analyze the market movements using technical indicators so as to determine the direction of the market and determine the trade to open.
Traders must therefore learn how to use forex charts before they can start transacting in the online forex market.
The following are the various things that a trader will need to know about forex charts.
Types of Charts
There are three types of forex charts
Line Chart - this charting method draws a continuous line that connects the closing prices. For example if a trader is using the 5 minutes chart then this line chart will plot a continuous line that connects closing price of the market after every 5 minutes.
Bar Chart - This chart use bars to represent price movements, and plots OHCL - Opening price, High, Low, & Closing price for that period, for example if the period used is 5 minutes, the bar will represent the price data and the OHCL points for the 5 minutes.
Candlestick Charts - The are the most popular chart types as they are the most visually appealing and they represent the price movements in an easily identifiable way which clearly show when a market moves up or when it moves down using different colors to differentiate the direction. These candlestick chart look like a candle and they have a body that resembles the wax part of a candle and an upper and a lower poking line that resembles the wick of a candle.
Forex Chart Periods - Chart Timeframes
A forex chart will plot charts based on different time periods - these are 1 minute, 5 minute, 15 minute, 1 hour, 4 hour, 1 day, 1week and 1 month. The period used to plot chart data is also known as a chart time frame, for example the 5 minute chart period is commonly referred to as the 5 minute chart by trader. This 5 minute chart time frame will represent data for the five minutes of trading, after those five minutes another set of data will be used to plot another chart representation. For examples if a trader is using candle sticks chart, data of one candlestick will plot data of that five minutes, after those five minute another candle will be plotted using price data of the next five minutes - when these candles are combined they then make a graph representation that shows the general direction of prices commonly known as the trend. Traders can then use this information to make trading decisions.
Because the most commonly used charts are candlesticks charts we shall discuss how to read forex charts specifically candlestick charts.
How to Use Candlestick Charts
The candlestick charts uses candle that have different colors to represent different price moves, blue candles show prices closed higher than they opened, red candlesticks show prices closed lower than they opened. This color representation is then used by traders to determine when price has moved up or down.
The candles also show OHCL:
O - Opening Price
H - Highest Price
C - Closing Price
L - Lowest Price
These price points are represented using a formation which looks like a candle, the distance between the opening price and closing price is represented by what is referred to as the body, this part resembles the wax part of a candlestick. High price is represented by a poking line protruding upward, this line resembles the wick of a candle, the low price is represented by a poking line protruding downward and it also resembles a candlestick wick facing down.
Technical Analysis of Candles
A trader can also add a forex indicator on the forex chart so that they can interpret the chart market using these indicators. Traders will need to place indicators on the forex so that they can get additional information about a forex trend & therefore be in a better position to make a more informed trading decision. These technical indicators can be used to predict the likely market direction that the market is likely to keep moving in whether up or down.
A trader can use indicators such as the moving averages and Bollinger to determine the trend. Traders can also use other indicators such as the RSI and stochastic oscillators to determine when to open trades.
Trend lines are also used to determine the direction of the candlestick charts trends and these lines can plotted on the charts to show this direction. A upwards trend will be shown by a trend line is moving up while a forex trend that is moving down will b e shown a trendline which is heading downward.
To learn how to draw a forex trend line & how to trade using technical analysis a trader can learn about the trend line lesson under the learn forex lessons section of this website, for indicators a trader can learn about forex indicators & their technical analysis on the forex indicators section of this site.
