How to Read Forex Charts
Modern forex trading offers users an enormous variety of instruments for following trends of currency pairs. It is no secret that the most trusted option is the following charts. Technical traders usually use these. Charts show them accurate information, indicators allow identifying trends that are at their peak, and price points show the best time on entering and exiting markets.
There also is another type of traders that use other sources of information for their work. These are called fundamental traders. These prefer using news on the economy, employment, politics, interest rates, and other information that might influence the markets.
Maxitrade will teach you how to use forex price charts and predict their accuracy. We shall give you some important tips that will help you with your newfound trading career.
Of course, the first thing a trader needs to know is what a chart is. In a nutshell, a chart is a graph that represents the exchange rates at a specific period. This is done between two or more financial instruments. Why do you need to be able to read charts? It simple. Charts allow users to track their current trades and see new trends for other pairs as a potential future addition to the portfolio.
When you use the chart instrument and see that a group of data is moving in a general direction, you can be sure that you know the overall movement direction. This can help you figure out a trend.
There are different charts. Some of them will be easy to use, while with others, there will be trouble in deciphering the information they give. Generally, trend movements can be described as a series of highs and lows. You can point out two types of trends according to their movement. These are Bullish trends, which consist of growing highs and lows, and Bearish trends, which consist of falling highs and lows.
This is not the only kind of trend classification. There is another one that is had different names: sideways, flat, or horizontal. These trends appear when supply and demand reach an equal level. This creates a flat line in the charts.
One more classification of trends is by their time duration. They can be long-, short-term, or intermediate. All of these coexist and can even have opposite movement directions.
Types of Trading Charts
Knowing how to use charts and what do they show is crucial for a successful trader. In online trading, three main types of trading charts that have a different style of showing information exist. Some are more specific but complicated; some give less information but are simpler.
The easiest charts that can be used are line charts. Newcomers usually use them. Line charts only depict closing prices for specific periods. It is no secret that closing prices are essential in the trading analysis. A line chart connects all closing prices over a particular frame of time. The only problem is the absence of any additional visual information, including highs, lows, etc.
The next type, bar charts, is more detailed than line charts. They include some additional info, including highs, lows, both opening, and closing prices. They depict information by using vertical lines for everything but the prices: these are shown by a horizontal line that is smaller than the vertical one.
Both sides of a bar chart have different lines with their information. Thus, the left dash represents an open price, while the opposite, meaning the right horizontal line, shows a closing price. It is quite comfortable once you get used to it.
In a nutshell, if the open price has a position that is lower than the position of the closing price, the bar changes its color. It can be become green, black, or other colors depending on the brokerage service. This will mean that a price increase and value gain has occurred. If the value decreases, the bar turns red.
The highest level out of these three types of charts is the candlestick chart. It has some similarities with bar charts, so it will be simpler for you to use if you have completely learned the way the previous types of charts work. The vertical lines show the price ranges of a specified trading period. Finally, market changes of a specified period in this kind of chart are shown in the body of the candle.
Information On Candlestick Charts
The first usage of technical analysis was used by Japanese people to trade rice in the 17th century. The version does differ from the one created in the USA in 1990, but both of them have a similar style of working.
Different information is shown by candlestick charts: highs, lows, open and close prices. All this information is important for any trader. It helps in making decisions and maximizes trading efficiency.
“Hollow” or “colored” parts of a candlestick are called the body of the chart. Over and under it, there are thin lines that show high or low ranges. People also call them “tails”, “shadows”, and others. If these “tails” are at the top of the chart body, then they show high and close prices. If they are at the bottom, they show low and close prices.
Every broker uses different colors in candlesticks. They can be green, blue, showing growth in value, or red, black, showing a fall in price. There also are “hollows,” which show that the close price is positioned higher than the open price. When there is such a situation on the market, this means that traders should buy. If colored candlesticks have a close price that is lower than the open price, traders should sell.
There also are long and short bodies. In this case, if you see charts with short bodies, you should understand that the price movement is minimum. Such patterns are also called Doji.
Doji patterns provide traders with various data according to specific patterns. They appear if the close and open prices are almost at an equal position (they don’t have to be completely equal). Doji patterns show the decrease in buying pressure after long white (green) candlesticks or the decrease in selling pressure after long black candlesticks. At this point, supply and demand rates usually become equal.
When it comes to graphical analysis, most traders prefer using the head and shoulders pattern, which is a reversal pattern. This means that if it has appeared at a trend, then this trend will soon be reversed. It helps traders prevent significant losses and make high profits. This pattern has two types:
- Top: it is usually formed at the peak of an uptrend and shows that after the pattern is complete, the asset will fall in value.
- Bottom: it is usually formed in downtrends and shows that the asset is going to grow in value.
These two types have similarities in their visual arrangement. The main part is the presence of 4 details: two shoulders, a head, and a neckline. The neckline represents support and resistance areas. When a neckline is broken, a pattern is formed, and a second shoulder appears. Peaks and valleys form heads and shoulders. There are hundreds of patterns in online trading that would need a few other articles to be explained completely. It is really hard to find a trader that knows at least 80% of all existing patterns.
Technical Analysis and Charts Combined
As only you get used to using charts for analysis, you might want to start using some new tools that would enhance the analysis results. One of the most efficient tools for technical analysis are tools that are capable of measuring value changes and volatility levels. It could help you find some interesting information on stocks that people claim to be oversold or overbought. Who knows, maybe these can still bring profits, and you will be the one to get them?
So, as you could have already understood, various trading tools are great for getting a clear picture of the situation on the market. Using them, you will be able to see when to expect the nearest trends, when it is best to open or close a trade, etc.
We hope that this short guide was useful to you and now you understand the way Forex charts work better.