Types of Forex Charts

Once you understand the basic concepts of the Forex markets, you need to learn how to make decisions about which trades to make. There are two methods that Forex traders generally use for the research and analysis of foreign currencies – fundamental analysis and technical analysis. Fundamental analysis largely revolves around examining the various factors that can influence the Forex markets and studying macroeconomics. Technical analysis involves studying historical data on price and volume to help forecast future movements in price.

Technical analysis is very common in Forex trading and is based on the belief that all factors that can affect the price of a currency are effectively taken into account at any time and reflected in the currency price. Forex traders that rely on technical analysis look for patterns and trends that can assist with predicting what will happen in the future. These patterns and trends are found by studying charts which graphically depict price movements of foreign currencies over a specific period of time. There are three main types of chart used in online fx trading (listed below) and if you are going to rely on technical analysis then it will certainly help to understand a little more about each of these types

  • Line Charts
  • Bar Charts
  • Candlestick Charts

Line Charts

Line charts are the most simple of the three main charts types used in Forex technical analysis. The X axis (along the bottom) represents time passed and the Y axis (up the side) represents the price of any given currency against another. The data points represent the price of the relevant currency pair at any given time. A line chart can plot the prices at any time, but are often produced to show the closing price. The line then connects the data points to show how the price is moving. The chart below is an example of a line chart for the currency pair GBP/USD (the British pound against the US dollar).

Line Chart

As you can see, the line chart is very clear and easy to read. It is useful for providing an overall picture of a how a particular currency pair is performing. However, line charts are somewhat limited in the information they show compared to the other types of Forex charts.

Bar Charts

Bar charts are a little more complicated than line charts, and they show more information. Bar charts are also referred to as OHLC charts. This stands for Open, High, Low, Close – which is the data that is shown in a bar chart. The X axis and the T axis are the same, but there is a vertical line for each period of time. The highest price of the currency reached during that time period is indicated by the top of the vertical line and the lowest price of the currency reached is indicated by the bottom of the vertical line. The horizontal line that is placed to the left of each vertical line represents the opening price of that period and horizontal line that is placed to the right of each vertical line represents the closing price of that period. Below is an example of bar chart for the GBP/USD currency pair. It is for the same period as the line chart above, but has the additional data displayed.

Bar Chart

You can see from the above example that a bar chart is a little harder to read than the line chart. However, it also provides more information than a line chart allowing for better analysis. Bar charts can be for any timeframe and each bar can depict any specific period of time. For each bar you can instantly see the open, high, low and close price for that period.

Candlestick Charts

Candlestick charts are widely used by Forex traders, and they are essentially very similar to bar charts. Like the bar chart, they show the open, high, low and close price for any given period of time. They offer a significant advantage to bar charts though, as they show an easy to recognise indication of which way the market is moving. The image below is an example of a candlestick chart, using the same data that was used for GBP/USD currency pair in the bar chart above.

Candlestick Chart

The candlestick charts gets in name from the fact that the chart shows images that look a little like candlesticks. You will see in the above example that the body of each candlestick is either red or green. The colour of the candlestick body indicates whether there was a rise or fall in price during the period depicted. A green body means that the price rose in that period, while a red body means the price fell during the period. Candlestick charts can also be produced in black and white, where a black body represents a falling price and a white body represents a rising price.

The lines at the top and the bottom of the body, sometimes referred to as wicks, show the high and low prices during the relevant period. The wick at the top shows the highest price reached while the wick at the bottom shows the lowest price reached. If the colour shows that there has been an upward movement, then you know that the bottom of the body is the opening price and the top of the body is the closing price. It is the other way around when there is a downward movement – the top of the body is the open and the bottom is the close. Candlestick charts are useful because you have all the information shown in a bar chart with the additional advantage of being able to instantly see market movements.

One of the most common forms of analysis in Forex trading is candlestick analysis. You can read more about this subject at Candlestick Analysis in Forex.

Using Charts Effectively

Now that you are aware of the different types of charts used in Forex trading, you need to understand how they are used. The following pages are useful for learning how to read charts and interpret the various patterns that can appear.