Best Charts to Use for Forex
Forex is the global foreign exchange market where foreign currencies are bought and sold. The market uses currency pairs to evaluate the relative strength of one currency against another.
What Is a Forex Chart?
A Forex Chart is a graphical depiction of the historical behaviour, across varying time frames, of the relative price movement between two currency pairs.
- A forex chart graphically depicts the historical behaviour, across varying time frames, of the relative price movement between two currency pairs.
- Essentially a forex chart allows traders to view the past, which, according to technical analysts, can be a predictor of future price movement.
- The most common types of forex charts are line, bar and candlestick charts.
Understanding Forex Charts
Most forex brokers will provide free forex charting software for their clients who have opened and funded trading accounts. Forex charts, present information useful for the technical analysis of a specific forex (FX) pair.
Forex charts are essential tools for forex traders who wish to incorporate technical analysis to determine where to invest their funds. Technical analysis is the review of past market prices and technical indicators to predict the future movements of an investment and technicians believe that short-term price movements are the result of supply and demand forces in the market.
A typical forex chart will show the time period on the x-axis and the exchange rate on the y-axis.
Forex Charting with Technical Indicators
Forex charts will have customizable settings for technical indicators, including price, volume, and open interest.
There are two basic types of technical indicators:
- Overlays: May use the same scale as prices and plot over the top of the prices on a stock chart.
- Oscillators:Technical indicators that oscillate, or change, between a local minimum and maximum, and will plot, or display, above or below a price chart.
Most charting software will have many types of technical indicators from which to choose and these indicators can, in most cases, become part of an automated trading system.
Forex Trading and the Dow Theory
Both traders and investors alike have engaged in technical analysis of investments for years, popularized by Charles Dow, the American journalist and founder of the Dow Jones Company, the Dow Jones Industrial Average (DJIA), and The Wall Street Journal.
Dow published hundreds of editorials in The Wall Street Journal and many forex traders follow his theories as they trade the foreign exchange market (FX).
When discussing Forex charts, it means that technical analysis is part of the trading decision. Technical analysis is extensive among traders and used to forecast future prices based on previous patterns.
What do Forex charts tell traders?
Exchange rate charts allow traders to observe trends and other common exchange rate patterns. These all have value in predicting future exchange rate moves.
Classic chart patterns include:
- Channels
- Ranges
- Triangles
- Head and shoulder tops and bottoms
- Double tops and bottoms
- Triple tops and bottoms
- Saucer tops and bottoms
- Flags and pennants
- Gaps
Forex charts also tells traders 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.
Which Type of Forex Charts Do I use in My Trading?
There's no sure answer to this question, and the best answer comes based on each trader's trading style. For instance, Scalpers – These traders enter and exit the market several times a day, and targets small and very small market moves.
For scalpers, tick charts or one-minute charts aren't a surprise and they use hourly timeframes to the hourly one to spot reversals, ride small trends, and so on and so forth. Usually, scalpers trade with bigger volumes, too.
A big majority of retail traders are scalpers. And, almost all retail traders use candlesticks charts.
Depending on the strategy, candlestick charts and Heiken-Ashi work best for swing traders.
Contents in this article:
- Types of Forex Charts
- Basic Chart Types
- Tick Charts
- Line Chart
- Bar Chart
- Intermediate Forex Chart Types
- Candlestick Charts
- Expert Trading Charts
- Heiken-Ashi
- Renko
- Point and Figure Charts
A wide range of Forex charts exist, mostly grouped in three different categories:
- basic chart types
- intermediate chart types
- expert charts
Forex Chart Types
This category is made up of the simplest charts possible.
Tick Charts
Quick Overview:
Forex tick charts – A tick in the context of forex tick charts is the change in price of a forex pair caused by a single trade, so instead of showing time-based charts, tick charts will only print a new candle after a number of trades have happened.
A tick chart is the closest form of charting price action and most often traders compare a tick chart with the one-minute chart. In reality, tick charts represent something different. The information included in a tick chart is not just the classic OHLC for every period, instead, a tick chart draws bars (or candlesticks, etc.), based on the number of transactions that take place on the market.
For example, a 1000 tick chart "draws" bars every thousand transactions. Therefore, the key is to be able to count the transactions in the market – which is quite hard in the Forex market.
Line Chart
Quick Overview:
Line chart is the easiest chart at Forex and represents a curve, which shows closing price for a certain period of time. Line charts can also be based on the median price, opening price, lows or highs. A line chart is the first thing, which beginners learn in the financial market.
A line chart is the most basic form to chart the currency market. Except for the basic information provided, there are some variations among line charts – it is a chart that shows merely the relevant price of the period.
The line connects the relevant prices, providing the needed information for analysing the market. There are different prices to use – Different types can use open, high, low, or close values, and variations of these prices are based on different formulas, as shown above.
Bar Chart
Quick Overview:
A bar chart is slightly more complex and shows the opening and closing prices, as well as the highs and lows. The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.
A bar chart is the closest form to the candlestick chart. Unlike the line chart, a bar chart shows all the price action within a period.
The high, low, open and close prices play an essential role in a bar chart. Basically, a bar has:
- a vertical line
- a small point on the left showing the opening level
- one small point on the right of the vertical bar, indicating the closing level
In laymen's terms, a new bar continues the price action from where the old bar left it. Bar charts are one of the oldest forms of charting.
Intermediate Forex Chart Types
All traders have heard of technical analysis and how it works.
Western technical analysis uses mostly a pattern recognition approach and chart patterns like head and shoulders, rising and falling wedges, double or triple bottoms, cup and handle, rounding tops and bottoms, ascending and descending triangles, etc. belong to this type of technical analysis.
Candlestick Charts
Similar to bar charts, candlestick charts – show the entire price action in a period: the high, low, open and close.
How to read a candlestick chart:
Pick the currency pairing you want to evaluate; currencies are always traded in pairs on Forex. When you choose a currency pair, the chart generated will show how many US dollars you can buy for one Euro.
- Traders can test the relative strength of a particular currency by looking at several different pairings.
- The various pairs available depend on the Forex service a trader uses. They can pull up charts for major pairs, such as EUR/USD. Traders also often have the option of looking at minor pairs as well, such as AUD/CAD (the relationship between the Australian Dollar and the Canadian Dollar).
Determine the time period you want to be displayed. The chart shows how the exchange rate between the two currencies changed over time. In a candlestick chart, each candlestick accounts for a specific time period set. Traders will also set the overall time period, which determines how many candlesticks they have.
- For example, traders could set their overall chart to show a 24-hour period, with each candlestick representing one hour. Each candlestick shows the opening price at the beginning of the hour and the closing price at the end of the hour, as well as the high and low price during that period. Since a trader has chosen a 24-hour period, they would have 24 candlesticks in total.
- The position of the candlesticks on the graph shows the fluctuations in the exchange rate between the two currencies over the period of time they have chosen and the time period is expressed in intervals along the Y-axis and the exchange rate is charted along the X-axis.
Distinguish bullish candles from bearish candles.
- If the closing price is higher than the opening price, you have a bullish candle.
- If the opening price is higher than the closing price, you have a bearish candle.
The coloration of bullish candles and bearish candles depends on the service generating the chart and some use different colours. Check the key of the chart to understand what the colours mean.
Identify the parts of the candlestick. The top and bottom lines of the candle itself display the opening and closing exchange rate for the pairing chosen, by the coloration of the candle body traders will know which one is the opening and which is the closing. Traders will then see lines extending from the top and bottom of the candle, giving rise to the name of the chart.
- The highest point, at the tip of thewick, is the highest exchange rate for the pairing for the selected period.
- The lowest point, at the tip of the shadow, is the lowest exchange rate for the pairing for the selected period.
- On a bullish candle, the highest line of the candle will be the closing price, while the lowest line of the candle will be the opening price.
- For a bearish candle, the highest line would be the opening price and the lowest line would be the closing.
Learn the names of candlestick patterns with predictive value.
- Big candles: A big candle body indicates a trend that is continuing for a long period of time.
- A large bullish candle: Trend is continuing for that pairing.
- A large bearish candle: Indicates a continuing bearish trend.
- A bullish candle might: Signals traders to buy that pairing, while a bearish candle would signal them to sell.
- Doji candles: Doji candles have little to no candle body and indicates that the market condition is neutral or tentative. Doji candles can tell traders to hold off on either buying or selling that currency pairing.
Place the patterns in context on the chart. Once traders know how to identify types of candlesticks, look at their relative position on the chart.
Bearish Candle
A filled candle, means that the opening price is higher than the closing price. So in other words, the price has come down in that specific time period. This is also known as a bearish candle. A downward movement in the Forex is also known as a bearish move.
Bullish candle
A hollow, unfilled candle means that the closing price is higher than the opening price in other words, the price has gone up in that specific period – also known as the bullish candle. An upward movement in the Forex is known as a bullish move.
A candlestick has two main elements- body and shadows.
- The body – the price action between the opening and the closing prices, it typically has red colour (on bearish trading days) and green (on bullish ones).
- The shadows – A candlestick has an upper shadow, lower shadow or both.
Together, the body with the shadows of a candlestick are critical elements in defining relevant patterns.
Here are some of the most famous candlestick chart patterns:
- morning and evening star
- doji
- southern doji
- northern doji
- gravestone doji
- bullish and bearish engulfing
- hammer and shooting star
- piercing and dark-cloud cover
Expert Trading Charts
For traders who want to go the extra mile, expert trading charts exist – Heiken-Ashi, Renko and point and figure charts. These kinds of charts are used to spot false market moves, or to better ride the main trends. Two of the Forex chart types in this category come from Japan.
Heiken-Ashi
Meaning "average bar" in Japanese,Heiken-Ashi charts make trend spotting easier. Also called a "better candlestick" than the classic candlestick, the Heiken-Ashi uses a mathematical formula to average the open, low, high and close prices for the current and previous candlesticks using no less than four different criteria.
Renko
Meaning "brick" in Japanese, theRenko chart type measures the price movement of a currency pair and a Renko chart only adds a new "brick" to the chart if price moves a certain, predefined distance – which is the key to Renko charting.
Point and Figure Charts
Point and figure charts resemble Renko charts, their purpose – to filter the time when the market consolidates and only to display relevant candles when the market is on the move.
Trading with chart patterns in Forex is familiar to every retail trader and technical analysis has existed for centuries. Market efficiency has been subject to strong discussions for years, with technical analysts arguing that a profit can be made as markets are irrational. This irrationality comes from the erratic behaviour of the masses. This is the main substance of technical analysis.
We will be covering –
- Trading with Chart Patterns in Forex – What Every Trader Must Know
- Triangles – The Most Powerful Chart Patterns in Forex
- Wedges
- Head and Shoulders
- Triple Tops and Bottoms
- Diamond Formations
- Patterns Within Patterns
- The Hammer
- The Doji Candlestick
- Morning and Evening Stars
- Conclusion
Irrationality and Chart Patterns
Trading with chart patterns is an essential component of every technical analyst, because a chart records every price level through time. This helps traders interpret the data through reading chart patterns.
Triangles
When trading with chart patterns, it is said that the trader has a pattern recognition approach, which means that the trader focuses more on price action and what the pattern shows, rather than particularities of a specific market. Therefore, one of the most common chart patterns in Forex, are triangles. Triangular patterns come in many types and shapes.
Ascending and Descending Triangles
"Ascending" and "Descending" triangles have one thing in common: they reveal powerful price action, the price builds energy to break higher (in the case of an ascending triangle) or lower (in the case of a descending triangle). The catch? The price action revolves around a horizontal base, and if there's not a horizontal base, the pattern falls into a different category.
An ascending triangle: First, make sure there's a horizontal base in place. Second, the dips don't break the series of higher lows.
Other Triangles include:
- Symmetrical Triangles
- Limiting Triangles
- Non-Limiting Triangles
- Running Triangles
Special Types of Triangles
Wedges
Popular chart patterns in Forex, wedges appear everywhere. Two types of wedges exist:
- rising
- falling
Rising and Falling
Some particularities of rising and falling wedges exist, known as reversal patterns.
Head and Shoulders
The head and shoulders pattern reverses trends.
And Many More!
The chart patterns in Forex evolved in time and they will continue to do so as markets evolve. As shown, reversal patterns might act as continuation ones, too. In most of the chart patterns in Forex, using proper risk-reward ratios is mandatory.
Regardless of the Forex chart types used in trading, one factor will always stay valid: with PC's becoming more and more powerful, technical analysis as we know it today will evolve too.
Therefore, the chances that new types of charts will appear are high. For today's retail trader, the candlesticks chart is the number one choice.
Frequently Asked Questions
Why use forex charts?
Traders use forex charts as a tool because it present them with useful information for the technical analysis of a specific forex pair
Why are forex charts different?
The difference is found in the individual price and quotes therefore a broker will have charts that differ slightly for respective users.
What are the best charts to trade forex?
Here are the 7 Top Forex Charts every Trader must Master to be Successful
Do all Brokers provide Forex charts?
Not all of them, but most of them do.
How long does it take to learn Forex?
The theoretical side of forex takes about 3-6 months depending on how fast you learn. The practical side can take about one year.
Featured SA Shares Writer and Forex Analyst.
Source: https://sashares.co.za/forex-charts/
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