How to Read Forex Charts

One of the first things that a Forex beginner needs to learn is how to read Forex charts. Any broker will offer some sort of charting software and few chart types that can be used.

So you may want to know what are the best Forex charts. Is any chart type better than the others? The answer is subjective as different traders have different preferences. What is definitely sure is that a successful Forex trader must be able to read a chart and incorporate this into his/her technical analysis and ultimately into his trading decisions.

Best Forex Charts Explained below will cover: basics of Forex chart reading, a short description for the most popular types of charts, how to read each type of chart with examples included,what are the advantages of using each particular chart.

Basics of Forex Charts

  • Long vs Short position in Forex – remember that in Forex markets the currency pair quotation  is a comparison between the base currency and the quote currency.
    When you BUY the currency pair, that is you are LONG in the position, it means that you expect that the price on the chart to go up – therefore the base currency to strengthen against the  quote currency. For example buying  USD/JPY – expect that the US Dollar to go up against the Japanese Yen.
    Conversely , when you SELL a currency pair, that is you are SHORT in the position, it means that you expect that the price on the chart to go down – therefore the base currency to weaken against the quote currency. In our example sell USD/JPY means that we expect the US Dollar to go down compared with the Japanese Yen.
  • Bid and Ask priceson Forex the price is always quoted with a BID (i.e. lower price) and an ASK (i.e. higher price) . The difference between the bid and ask price is called “spread” .
    When you buy, you buy at the ask price which is the higher of the 2 prices in the spread;  when you sell, you actually sell at the bid price which is the lower of the two prices.  On most Forex charts, it is the bid price rather than the ask price that’s displayed on the chart but most of the time you can customize it to show whichever price you want.
    If you use the chart price (bid price)  to determine an entry or exit you must take into consideration the spread so when you place an order to sell EUR/USD when the chart price is say 1.2750  then you must also consider the spread.
  •  Time frame – charts are showing the movement of the currency price in time so they look different dependent on the time frame chosen. Most charting software allow you to choose the time frame for your chart from 1 minute chart up to weekly or monthly charts. Most common timeframes available for selection on trading platforms are: 1 min, 5 mins, 15 min, 30 mins, 1 hour, 4 hours , daily, weekly and monthly. Ensure that the chart you’re looking at has the correct time frame for your analysis.  Each Forex systems uses a particular time frame for setting up the indicators and signals so ensure your chart is configured for the correct time frame that you need for your analysis.
  • Timezone –  you must check what is the times shown on the bottom of Forex charts. Usually the timezone is set to the particular time zone where the Forex provider’s charts are set to, be it GMT, New York time, or other time zones. 

 

Types of Forex Charts

Candlestick Chart

Candlestick charts are very popular and are now used internationally by swing traders, day traders, investors and premier financial institutions. All trading platforms that offer chart will most definitely allow you to configure your charts as ‘candlesticks’. Have a look at the below and make yourself familiar with look and feel of the chart.

Candle Charts explained

How to read candlestick charts?

As the name suggests , the shape of every bar resembles a candlestick. The candles have two distinct colors to distinguish the ‘bullish’ candle and the ‘bearish’ candle.

Bullish Candle  – when the ‘Close’ price is higher than the ‘Open’ price (the price goes up)

Bearish Candle – when the ‘ ‘Close’ price is lower than the ‘Open’ price (the price goes down)

The ‘body’ of the candlestick is the part between the open and the close price. The thin lines above and below the real body are the shadows or sometimes called candlestick wicks.

In my chart example I’ve configured my chart with green color for the bullish candles and red for the bearish candles – it is your choice and remember that you will be spending long hours in from of these charts so it is important to be colors that are easy to distinguish.

Each candle is a reading of price movement for a defined period of time and is formed by: opening price, closing price, high and low.

Why using candle chart?

A critical and powerful advantage of candlestick charts is that the size and color of the real body can send out volumes of information.

Are easy to understand: Anyone, from the person new to technical analysis to the seasoned professional trader can easily harness the power of candlestick charts

Can be used in all markets such as the stock market, forex market, or futures or commodity markets and can be a powerful trading tool for option trading

Can be used in any timeframe – scalping, day trading, swing trading, active investing and for longer term investing.

Bar Chart

Bar chart is arguable the most popular type of chart used traders, maybe in part due to its long history. It is easy to understand: Each vertical bar represents the movement of the price for the period it relates to. Opening and closing prices are represented by horizontal marks to the left and right of the vertical bar, respectively.

Spotting both patterns and the trend of a market, two of the essentials of chart reading, is often easiest using bar charts.

Bar chart explained

 

How to read bar charts?

Bar charts are made of vertical bars, each representing the movement in price for the defined period of time. . The bars are usually colored in two contrasting colors to distinguish the ‘bullish’ bars from the ‘bearish ‘ bars. The top of a bar was the highest price reached within the defined period of time and the bottom of the bar was the lowest price. Each bar also has two horizontal marks: left mark is the opening price; right mark is the closing price.

Currency trading bar charts are also called “OHLC” charts, because as explained above they show the currency trading’s open, close, high and low prices.

Bullish Candle  – when the ‘Close’ price is higher than the ‘Open’ price (the price goes up)

Bearish Candle – when the ‘ ‘Close’ price is lower than the ‘Open’ price (the price goes down)

Why using bar chart?

Same as with candlestick charts you get a lot of information condensed in one chart. However, many traders prefer bar charts because the bars are seen somehow connected as each new bar starts with the open price that follows the previous close price on the same position. For some traders it seems easier to spot patterns on the bar charts and you will find tons of material covering chart patterns where the examples are based on bar charts.

Bar charts are used in all markets: stocks, currencies, futures or commodities.

Can be used in any timeframe – scalping, day trading, swing trading, active investing and for longer term investing.

Heiki Ashi Chart

Heikin-Ashi chart looks like the candlestick chart, but the method of calculation and plotting of the candles on the Heikin-Ashi chart is different from the candlestick chart.

 

heiki ashi explained

How to read Heiki Ashi charts?

The Heiki Ashi charts are formed of ‘bullish’ and ‘bearish’ candles, usually configured with have two distinct colors to distinguish them.

Bullish Candle  – the candles have long upper shadows but no lower shadow

Bearish Candle – the candles have long lower shadows but no upper shadow

The candles of a Heikin-Ashi chart are related to each other:  the open price of each candle is calculated using the previous candle close and open prices. Also the high and low price of each candle is affected by the previous candle. This makes a Heikin-Ashi chart slower than a candlestick chart and therefore the signals in a Heikin Ashi chart are delayed, when compared with a candle chart.

Why using Heiki Ashi chart?

The slow signals on Heikin Ashi charts made this candles good indicator for volatile currency pairs. It can prevent you from rushing and making mistakes – entering or exiting a trade too soon or trading against the market.

Heikin Ashi candles are easier to read when compared to the normal candlestick charts  because they don’t have too many different patterns. It is easier to see momentum of a price trend and the signals for price reversals.

Line Chart

A line chart drawn by connecting one closing price to the next. You can set them to show open, high or low prices too, but the closing price is most popular. Most traders put a greater emphasis on the closing price of any trading instrument, so the line chart can give you a meaningful view of market movement over a period of time.

line chart explained

 

How to read line charts?

The line chart is mostly used to see the direction of the price and it can give you a good longer term perspective of the market.

Why using line charts?

The line chart looks familiar for beginner traders and it gives you a good snapshot of market direction. If you get stuck trying to work out the trend by looking at bar chart or candlestick charts, then simply change your chart type to a ‘line’ type – the trend and direction of the market will be much easier to see.