Forex traders rely heavily on Forex trading charts to understand currency prices and trends, and identify buying/selling opportunities. There are various types of charts used by both experts and novice traders; here we explore each chart’s construction process before exploring its interpretation through technical/fundamental analysis.
Trading charts provide visual representation of the pricing of financial instruments over time. This could include currency pairs in the Forex market or any other asset like stocks indices or precious metals. Information displayed includes open, high, low and closing prices as well as graphs representing price movement over that specific time frame.
There are various chart formats, and your choice will depend on your trading style or method of analysis. Line, bar and Japanese candlestick charts are popular choices.
Line charts are among the easiest charts to comprehend, showing only one period’s closing price through a continuous curved line. When closing higher than it opened or lower than it opened respectively, green will indicate this fact while red indicates otherwise. Furthermore, two small horizontal lines extending out from either end of this vertical line denote opening prices while another indicates closing prices respectively.
Bar charts present information in an easier-to-understand format than line charts do, while still providing useful data. A vertical bar with open and closed ends, separated by an invisible shadow called wick, depicting high and low prices during that period. Colored bars reflect their meaning: green bars would signify currency pair increases while red ones show decreases.
Candlestick charts are among the most widely-used and are similar to bar charts in that they use consistent colours for their candles, and may use one color per currency pair when drawing their charts. Their body displays open and closing prices while their wick demonstrates highs and lows from that period.
Point-and-figure charts offer another form of chart, which displays similar information but in an even simpler format. Points represent each trade that was executed during a given period while lines indicate price movements; when executed at or close to displayed prices they add points; otherwise a line is drawn if executed higher or lower than expected.