Forex charts generally involve a graph of the movement of an exchange rate over time. Technical analysts often use forex charts in combination with technical indicators they compute. This comes from the exchange rate as well as other market observables like the open interest and traded volume for futures contracts. Learn how to you learn exactly what this means and how to read forex charts below.
Overview: What Forex Charts Tell You
Exchange rate charts allow you to observe trends and other common exchange rate patterns. These all have value in predicting future exchange rate moves.
Such classic chart patterns include:
- Head and shoulder tops and bottoms
- Double tops and bottoms
- Triple tops and bottoms
- Saucer tops and bottoms
- Flags and pennants
Forex charts also tell you exchange rate levels the market previously reversed to the upside at and below which buyers tend to place bids. These are known as support levels, since the market finds support there when attempting to head lower.
Similarly, the charts also show the exchange rates where the market previously reversed to the downside. Sellers tend to exist at and just above these so-called resistance levels since the market finds resistance there to upwards moves.
Some more advanced technical analysts also look at the overall structure of exchange rate moves in an attempt to identify wave patterns using the principles of Elliott Wave Theory.
In this market theory, prices move in 5 waves in the direction of a trend, while they typically correct that trend in three waves. Although sometimes a triangle will form that tends to resolve after completing five internal waves. Prices also tend to extend and correct trends in Fibonacci ratios that lead to the computation of Fibonacci projection and retracement levels.
How to Read the Main Types of Forex Charts
If you are just learning how to trade forex, this list should give you a good overview of how to read primary forex charts.
As the name suggests, tick charts have a data point drawn every time the market moves or ticks. This means there is no fixed time axis to a tick chart, so it lets a short term trader just focus on the price action. Support, resistance and trends all show up well on tick charts.
When you want to take a look at a tick chart on MetaTrader 4, for example, you can double-click on the relevant currency pair in the MarketWatch window.
A box will then pop up that allows you to enter trades or orders on the right, in addition to having a tick chart displayed on the left. The tick chart has a red line that shows the offer side and a blue line to indicate the bid side of the market.
Point and Figure Charts
One of the most popular types of charts used by professional forex traders is the point and figure chart. This allows them to filter exchange rate moves, identify clear support and resistance levels and even trade specific patterns.
Like the tick chart, this type of chart does not have consistent time intervals on the x-axis, so it also allows a trader to focus purely on the exchange rate action.
Point and figure charts are typically constructed on graph paper by using an X to fill a rising column of boxes and an O to fill a falling column of boxes. Each box represents a specified value that the exchange rate has to attain to justify marking an X or an O on the graph.
These charts also have a parameter called a reversal, which is usually set at three boxes. This means at least a three-box move is required to switch the present column from using the X to using the O, or vice versa. Whenever a reversal occurs, the graph also progresses one column to the right.
Line charts connect a set of single exchange rate observations taken per time period with a straight line. These charts most often use closing prices, although they could be drawn through high, low or opening prices instead.
Since line charts offer a relatively simplified picture of exchange rate movements, they can be used to identify overall trends and other large-scale patterns on charts. Unlike the tick chart, a line chart has an x-axis with fixed time intervals.
Bar charts show the high, low, open and close for each time period which together forms a bar. The high and the low are connected with a vertical line, while a small horizontal dash is shown at the open level protruding to the left. The closing level is shown by a horizontal dash to the left.
These bars are not connected to each other like the data points that make up line and tick charts are, but they do give much more information. Like line charts, bar charts also have fixed intervals on the x-axis.
Bar charts are particularly useful for identifying exchange rate gaps where the range of the first time period does not overlap that of the subsequent period. They can also be useful for ascertaining whether the market has closed above a key level in a chart pattern, which might signal a breakout.
Candlestick charts are a Japanese invention that offers even more information than a bar chart because the color of the candle’s body signifies whether the market rose or fell during the particular time period.
For example, a white body can be used to show a rising or bullish candle, while a black body shows a falling (bearish) candle.
The vertical lines between the low and the open and between the close and the high are called wicks. Some candles have long wicks, others have short wicks and this can be significant when it comes to predicting subsequent market behavior.
In fact, an entire technical analysis science has evolved regarding specific combinations of candlesticks that have predictive value and can be considered chart patterns in their own right. Many of them have colorful names like the hammer, doji, hanging man and shooting star.
Learning how to read the main forex charts can give you a huge advantage when trading, especially when you’re a beginner forex trader. You can find some of the best forex charts to use in our comprehensive guide.