How to Read Charts

Forex Charts Defined

Forex charts are simply graphical depictions of a currency pair’s exchange rate. It shows the movement of the pair’s exchange rate over a given period of time.
You can plot forex trading charts for a wide variety of currency pairs – from the major pairs like GBP/USD and EUR/USD to the minor pairs like NZD/JPY and AUD/CAD.

How Forex Chart Timeframes Work

The period of time depicted on the chart is contingent on your selected timeframe. Usually, the default timeframe is daily or one day. This simply means that every point on the graph – whether it is a candle, bar, or line graph – pertains to trading data for 1 day.

Now, if you change your timeframe to 60 minutes, every point on the chart would represent trading data for 60 minutes. Most free tools for forex charting available today allow you to display various timeframes. It can be as short as one minute to as long as one month. A more advanced charting software would allow you to view even lower timeframes.

Different Types of Forex Charts

The need to represent trading data in various forms prompted experienced traders to develop several different types of forex charts. There are, however, three main types of charts, and these are forex bar charts, candlesticks, and line charts.

Among the three chart types, candlesticks seem to be the top choice for many forex traders, and for good reason. Unlike line charts that only show the price from close to close, candlesticks depict as much as 4 times the amount of data. It displays the price’s close, open, high, and low during a given period of time.

The additional information will allow you to make a deeper analysis of the price movements over a given period of time. This is much better and more helpful than just knowing the point where the price closed.

The candlestick’s body is represented by the green and red portions. The body depicts the price movement from opening to closing for a specified period of time.

If the candle’s opening price is lower than its closing price, the body color of the candle is green. In case the opposite is true, and the price at opening is higher than at closing, then the color of the candle’s body is red.

The black lines on top and under the candles are known as “shadows” or “wicks.” Wicks represent the lowest and highest points that the currency’s price reached during the specified period of time.

Forex Indicators Overview

Forex charts live help investors analyze the behavior of the market, and determine the direction that the currency price will take in the future. The need to make sense of the movements of currency prices shown on a chart is what prompted traders to develop various visual guides to help them achieve their goals. These visual guides are called indicators.

Today hundreds of different trading indicator types exist, and all of them were developed to address all aspects of forex trading – from following trends to mean reversion.

Following are a few of the more popular indicators that forex traders use today:

  • Bollinger Bands – A technical analysis tool developed in the 1980s by John Bollinger, Bollinger Bands evolved from the trading bands concept. The bands as well as the related indicators and bandwidth are used to measure the price’s highness or lowness in relation to previous trades. The bands narrow with decreased volatility, and widen during periods of rising volatility.

Traditionally, the bands are utilized to highlight overbought and oversold areas. To cite an example, when a price movement reaches the upper band, it would be reasonable to expect that the price would return to the mean.

  • Relative Strength Index – RSI or Relative Strength Index is a momentum oscillator that records the velocity and direction of price moves. The indicator makes a comparison of the upward price moves in the closing price versus the downward price movements in the closing price over given periods of time. As suggested by Wilder, the default timeframe is 14 periods.
  • Simple Moving Average – Also commonly known as SMS, Simple Moving Average is among the most commonly-seen indicators plotted in forex charts. The moving averages are applied to help smoothen price fluctuations over a specific period, helping provide traders with a clearer view of the price movement’s direction