Forex charts are an important tool to help traders analyse the movement of currency prices and attempt to determine the optimum moment to buy and sell currencies. Charts evolved as an instrument of financial technical analysts, but they have found broader use over time among investors due to their quick and efficient communication of valuable information about market trends. Forex charts will look familiar to most who have completed high school- or college-level math courses that required visually graphing numerical information along x and y axes with the Cartesian coordinate system.
In forex charts, the passage of time is normally plotted along the horizontal x-axis of the chart, and the movement of currency prices is plotted along the vertical y-axis. While most charts plot movement of price over time, there are different styles of charts that can communicate more specific information about currency price trends.
One of the most common and simplest charts is the line chart. It plots the change of currency prices in straight, diagonal lines up and down along the chart's x-axis to illustrate peaks and troughs in price movements. Line charts are customarily plotted using closing prices for each trade.
According to some analysts and theories, the patterns revealed by the pathways to high and low price points on line charts can bring information about the collective psychology of investors in the market and indicate where prices will move next. In line charting systems on some trading platforms, both the bid/sell and ask/buy prices will be displayed simultaneously. In others, traders can alternate between bid and ask charts. In either case, it is important for traders to follow the ask/buy chart if they are looking to buy a currency and the bid/sell chart if they are looking to sell.
The bar chart is a more complex manner of illustrating price movements that uses parallel vertical lines to show price variations over time. Each line, or bar, shows the low and high prices for a given unit of time in addition to the opening and closing prices, which are indicated by smaller horizontal lines on each side of the bar. Using this type of chart, traders can see the amplitude of price movements during any particular period of trading. A "tick chart" is a simplified version of the bar chart that shows only the ask and bid prices for individual trades.
Candlestick charts are a type of bar chart. Their use dates back to charting by rice traders in Japan in the 1700s. Like bar charts, candlestick charts reveal the open, high, low and closing prices for a given period of trading, but their relative sizes can also be used to instantaneously determine market trends. In forex trading, the bars are often color-coded, with blue or green bars frequently indicating upward price movements and red bars indicating downward movements.
The candlestick bar, much like an actual candlestick, has a body with thinner "wicks" extending from its top and bottom. The bottom of the body indicates the opening price for a upward-moving candle, or the closing price for a downward-moving candle. The top of the body indicates the opening price for a downward-moving candle or the closing price for a upward-moving candle. The ends of the upper and lower wicks indicate the high and low prices during the period. Analysts examine the height of the body relative to the height of the wicks to determine the level of confidence the market has in the fairness of a given price range.
Wicks extending far beyond the body height are interpreted to be outlying prices. If the body of the candlestick bar is near or equal to the height of the ends of the wicks, then the market is felt to have strong confidence in the fairness of the price asked, and the bar is understood to indicate a trend in the movement of the price. But if the body height is small in relation to the height of the wicks, then the market is understood to not have strong confidence in the validity of a price asked at a given time.
In addition to more common line and bar charts, analysts can also use time-independent charts. Some of these styles include point-and-figure charts, Renko charts and Kagi charts. These charts use graphical representations such as x's and o's, bricks, and lines to focus more closely on the direction and trend of price movements. Some analysts prefer to use these charts with the view that they can more efficiently help detect price trend reversals.
Technical Indicators And Trend Lines
Along with presenting charts, some trading systems allow traders to set technical indicators on their charts, such as moving averages, that will show trend lines that more clearly delineate the direction prices are moving. When peaks or troughs seen on charts break through the trend lines, for example, analysts can detect more readily the possibility of a trend reversal.
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Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…