Forex Charts: Know the Types and How to Read Them

The first step towards trading is learning and understanding how to read Forex Charts. These charts are essential for traders at all levels. The forex charts' patterns present valuable market insights, providing information about price movements. Understanding and identifying the complexity of the forex charts is the key to edge in the pre-prepared forex trading strategies. Forex charts aid traders in making informed decisions before placing trades. This blog explores Forex charts, its types and how to read them.

What is a Forex Chart?

The price movements in the foreign exchange market are visually represented by patterns on forex charts. Price charts can be used to identify them. They are created due to the shifts in the prices of various currencies over time. Trading professionals can learn much from these patterns about probable market trends, reversals, and continuations.

Connecting major price points, like highs, lows, and consolidations, with lines results in a pattern on a Forex chart. Over time, these lines create repeating forms or patterns. These patterns are examined by traders to determine spot trading opportunities and make informed decisions.

Types of Forex Charts and How to Read Them?

Among many types of Forex Trading Charts, the major ones are listed as follows:

1. Line Charts

   The most basic kind of forex chart is a line chart. A set of chosen price data points are connected by line plots. The result is a single line that shows the highs and lows of the price activity by moving from left to right. Opening and closing prices are typical price points. Traders may easily view the historical pricing of a currency pair with line charts. They are not considered highly informative, but they can reveal some information about the relative pricing and patterns within the financial markets.

   

2. Candlestick Charts

   Japanese candlestick charts were created at the Dojima Rice Exchange by a merchant, Munehisa Honma, and are among the most widely used types of technical analysis available today. Candlestick charts are used by traders worldwide to enhance their analysis of forex charts.

   The candlestick chart displays the same information as a bar chart, including the trading range and attitude of a currency pair, whether it is bullish or bearish. To accomplish this, the charts make a note of the high, low, opening, and closing prices.

   Candlestick charts, expand on the analysis. It indicates where most of the trade has occurred over a specific period by displaying the "body" of each candle. A lot of currency pairs trading techniques concentrate on the local candlestick chart patterns, wicks, and bodies.

   

   A green candlestick, at first appearance, suggests that the currency pair’s price has increased during the specified period and closed higher than it opened. In contrast, a red candlestick shows that the pair's price dropped and closed below its opening value. Each candlestick additionally displays four distinct prices for the currency pair. The elements of a candlestick are as follows:

   • Open: Represents the cost at the beginning of the time frame.
   • Close: Represents the cost at the end of the time frame.
   • High: Represents the greatest price that was exchanged at the time.
   • Low: Represents the lowest trade price during that time.
   

   What are Dojis?

   A doji, a black cross, is occasionally produced when the opening and closing prices are equal or extremely near to one another. This shows that neither buyers nor sellers can exert enough control over the direction of price changes, which is suggestive of market indecision. A doji is a neutral design with minimal meaning when viewed alone. On the other hand, a doji may portend an impending reversal if it develops inside an upward or downward trend.

   

3. Bar Charts

   A bar chart is a type of forex chart that shows the periodic behaviour of a currency pair. Compared to line charts, the bar chart provides more information about the price for each interval. Because of this, bar charts are frequently referred to as OHLC (Open, High, Low, Close) charts. If the traders are viewing a five-minute chart, the opening and closing price levels for each five-minute interval are displayed in the bar chart. The greatest and lowest pricing points throughout the same period are also shown.

   Bar charts are the preferred technical indicator by a lot of forex traders. They are helpful not only for determining the direction of the market but also for a thorough analysis of regular price fluctuations. The OHLC bar chart is a good starting point if the traders need more information than a line chart can provide.

   In short, the bar chart displays the same data presented in the candlestick chart but in a different format. The bars in this chart represent the following:

   • The notch situated to the left of the vertical line signifies the open price.
   • The notch to the right of the vertical line indicates the close price.
   • The top of the vertical line represents the high price.
   • The vertical line's lowest point is the affordable pricing.

   Note that the line will turn red if the currency pair's price drops over the specified period and closes at a lower opening value and green if the pair's price increases during the specified period.

   

4. Heikin Ashi

   A variation of the candlestick chart used to identify market movements more clearly is the Heikin Ashi chart. The term "Heikin Ashi" (Japanese for "average bar") refers to the way the chart creates a smoother, more consistent trend line by utilizing average price data. Eliminating the noise and oscillations of standard candlestick charts offers a clearer picture of the current trend and reduces distractions while identifying market direction.

   In trending markets, the Heikin Ashi chart comes in handy. It assists traders in following the trend and choosing entry and exit locations with greater knowledge.

   Heikin-Ashi charts resemble candlesticks, however, instead of utilizing actual prices to construct the bars, averages are employed. The midpoint of the preceding bar represents the open price, while the current bar's average price is the close.

   By creating a smoother connection between the candlesticks, averaging can facilitate the reading of long-term trends. Since the bars do not represent actual open and close values, traders frequently pair this kind of chart with traditional candlesticks.

   

5. Renko

   Unlike most forex charts, which are constructed using price and defined time intervals, Renko charts are constructed utilizing price movement. The Japanese word for "brick," "renga," is where the word "Renko" originates. As implied by the name, price fluctuations are shown on Renko charts as brick-like patterns, with each new "brick" only appearing when the price moves by a preset amount.

   Renko charts can help show pure price movement with minimal noise because they do not take time or volume into account. Renko charts are used by traders to pinpoint important levels of support and resistance as well as to identify distinct trends, ignoring minor price fluctuations that could divert attention from the main trend.

   

Advantages of Forex Charts

Traders need to familiarize themselves with the distinct types of forex charts. Some of the advantages are listed as follows:

• Graphical Representation: Important trends and patterns can be spotted with the assistance of graphical representations of price movement.
• Entry and Exit levels: The entry and exit levels can be identified easily with the help of forex charts.
• Historical Data: Utilizing past data to offer an understanding of price swings over different periods.
• Market Sentiment: Chart patterns reflect the psychology of traders and the mood of the market, which are reflected in sharp price swings.
• Fundamental Analysis: Holds the potential to verify trade entry and exit levels when combined with fundamental analysis.

Conclusion

Technical analysis in forex trading requires the use of charts as they may assist traders in comprehending both previous and present price fluctuations. For one to trade forex, it is essential to understand how to read several types of forex charts, such as line, bar, candlestick, Heikin Ashi, and Renko charts.

From the basic patterns in line charts to the in-depth price information in candlestick charts, each type of forex chart offers a different amount of data. A trader's approach should be in line with the sort of chart they use; diverse kinds of charts work better for various trading strategies, such as long-term trend analysis or intraday scalping.